John Schmitt sets out and discusses the newly in force Pre-Action Protocol for Debt Claims

The Pre-Action Protocol for Debt Claims (“The Protocol”) has very recently come into force on 1^st October 2017. As you might expect, its aims are to encourage early engagement and communication between the parties, to enable the parties to resolve the matter without the need to start court proceedings, to encourage the parties to act in a reasonable and proportionate manner, and to support the efficient management of proceedings that cannot be avoided.

Scope

This Protocol does not apply to business-to-business debts unless the debtor is a sole trader. But otherwise the scope is wide: it applies to any business (including sole traders and public bodies) claiming payment of a debt from an individual.

The Protocol does not apply where the debt is covered by another Pre-Action Protocol such as Construction and Engineering or Mortgage Arrears; or to claims issued by Her Majesty’s Revenue and Customs that are governed by Practice Direction 7D (Claims For The Recovery Of Taxes And Duties).

Creditor’s Initial Information

The creditor should send a Letter of Claim to the debtor before proceedings are started. The Letter of Claim should now contain an enhanced range of information and should be sent by post (unless the debtor has explicitly expressed otherwise).

Here is a summary of what the Letter of Claim should include:

• the amount of the debt;
• whether interest or other charges are continuing;
• the details regarding any oral agreement;
• the date of and parties to any written agreement, and that a copy of the written agreement can be requested from the creditor;
• the details regarding any assignment;
• if regular instalments are currently being offered/paid, an explanation of why the offer is not acceptable and why a court claim is still being considered;
• the details regarding how the debt can be paid and how to proceed if the debtor wishes to discuss payment options;
• the address to which the completed Reply Form should be sent.

The creditor should also do the following:

• enclose an up-to-date / most recent statement of account for the debt, which should include details of any interest and administrative or other charges added;
• enclose a copy of the Information Sheet and the Reply Form at Annex 1; and
• enclose a Financial Statement form (example provided in Annex 2).

If the debtor does not reply to the Letter of Claim within 30 days of the date at the top of the letter, the creditor may start court proceedings.

Debtor’s Response

The debtor should use the Reply Form in Annex 1 for their response.

If the debtor indicates that they are seeking debt advice, the creditor must allow the debtor a reasonable period for the advice to be obtained. In any event, the creditor should not start court proceedings less than 30 days from receipt of the completed Reply Form or 30 days from the creditor providing any documents requested by the debtor, whichever is the later.

If the debtor needs more than 30 days to get debt advice they can ask for it and the creditor should allow extra time if reasonable in the circumstances.

Where a debtor indicates in the Reply Form that they require time to pay, the creditor and debtor should try to reach an agreement for the debt to be paid by instalments.

Even an only partially completed Reply Form should be taken by the creditor as an attempt by the debtor to engage with the matter, meaning the creditor should contact the debtor to obtain further information.

Disclosure

If the debtor requests a document or information, the creditor must:

• provide the document or information; or
• explain why the document or information is unavailable,

within 30 days of receipt of the request.

Alternative Dispute Resolution (ADR)

Discussion, negotiation, and mediation are all contemplated. Where the parties reach an agreement concerning the repayment, the creditor should not start court proceedings while the debtor complies with it. Should the creditor wish to start court proceedings at a later date, they must send an updated Letter of Claim and comply with this Protocol afresh. If documentation was sent with a Letter of Claim in the preceding 6 months, that documentation need not be sent again unless it requires updating.

Taking Stock

Where the debtor has responded to the Letter of Claim but an agreement has not been reached, the creditor should give the debtor at least 14 days’ notice of their intention to start court proceedings, unless there are exceptional circumstances.

If a matter proceeds to litigation, the court will expect the parties to have complied with this Protocol.

The Annexes

The Annexes to the Protocol concern what must be provided with the Letter of Claim, namely:

• Annex 1: the Information sheet and Reply Form;
• Annex 2: an example standard financial statement.

Discussion

The Protocol has the laudable intention to protect debtors, especially from creditors’ claims where insufficient information is provided about a debt, but creditors are likely to groan at the requirements placed upon them, particularly where only low-value debts are being pursued.

First, creditors are immediately faced with implementation costs in adhering to the Protocol. The emphasis in the Protocol of sending out a Letter of Claim by post and asking debtors to handwrite a lengthy form in reply seems strangely at odds with the established electronic world. Secondly, this Protocol provides a new regime in which creditors face more onerous duties pre-issue in their provision of the Letter of Claim and face potentially long delays in dealing with a debtor who engages with the Protocol, particularly one who does so tactically.

For example, a debtor could wait 30 days to respond to the Letter of Claim and then request information to be provided in another 30 days. The creditor must then wait another 30 days after providing such information before issuing proceedings.

There’s also the lengthy scenario of the debtor who engages with ADR and thereafter begins to pay a debt by instalments, but then subsequently misses payments; in this case, compliance with the Protocol may need to recommence.

Creditors may also be faced with increased legal costs and/or the staying of legal proceedings in order to remedy any non-compliance with the Protocol.

The wide scope of the Protocol is also troublesome. For example, it would appear to apply to a claim for, say, payment of rent arrears which customarily forms part of a claim for possession. This cannot likely have an intended result.

There is no doubt the new Protocol will likely affect the cash flow of businesses but the Ministry of Justice has decided this a price to pay for the implementation of greater consumer protection. 

John’s profile is available here.