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New pre-action rules for debt claims

New pre-action rules for debt claims
Monday 15th May 2017

A new Pre-Action Protocol for Debt Claims (“the Protocol”) will come into force on 1 October 2017. The Protocol, of which a final draft was published at the end of March 2017, contains provisions relating to the steps the court will expect business creditors to take before issuing proceedings against individuals for the recovery of debts.


Debt claims constitute a large proportion of UK court proceedings, and many such claims result in default judgment when debtors fail to file any defence to the proceedings.


The Protocol states that its purposes are to encourage communication between parties, to enable resolution without court proceedings, to encourage parties to act in a reasonable and proportionate manner, and to support the efficient management of proceedings where such proceedings cannot be avoided.


In practice, however, the Protocol may simply act as a safety net or buffer for debtors who are either struggling, or unwilling, to pay their debts.


The Protocol places a significant burden on creditors to provide extensive information to debtors (even in the simplest of cases), and to allow debtors increased time to respond to pre-action correspondence. Whilst compliance with the pre-action protocols is not mandatory, the courts are entitled (and indeed likely) to impose sanctions on parties that fail to comply with such provisions without good reason.


The additional time granted to debtors under the Protocol may be considered by some to be akin to an obligatory extended credit period.


The Protocol will apply to all businesses (including sole traders and public bodies) seeking to claim payment of debts from an individual (also including a sole trader). Therefore, with the exception of sole trader debtors, the Protocol will not apply to business-to-business debts.


The Protocol provides for a comprehensive Letter of Claim which should include, among other things, full details of the contract, debt, interest and any ongoing or proposed offers or payment plans. There are also a number of standard form enclosures to be attached to the Letter of Claim, such as a Reply Form and financial statements, which provide debtors with information to help them respond accordingly. The level of detail required in this initial correspondence is similar to that which the Court would expect upon the issue of a claim.


Under the Protocol, a creditor should allow at least 30 days for the debtor to reply to the Letter of Claim before commencing court proceedings. If the debtor does respond, the creditor should not commence proceedings until 30 days after receipt of the Reply Form.


A debtor, upon receipt of a letter of claim, may also request the disclosure of documents or information by the creditor. If such a request is made, the creditor should provide the documents or information (or an explanation as to why they are not being provided) within 30 days, and should not commence proceedings until 30 days after they have provided their response.


Further, if a debtor responds to the letter of claim, but no agreement is reached between the parties, the creditor should wait another 14 days before commencing proceedings.


On the one hand, these provisions could go a long way towards protecting individual consumers from rigorous debt collection by large companies. The Protocol will ensure that debtors are provided with all of the information they need about the relevant processes, and that they are given enough time to consider that information and make an informed decision about their next steps.


On the other hand, however, from October it will easily be possible for a debtor to delay payment by several months, simply by responding to correspondence at the latest possible date and requesting documents or information from the creditor. In the case of a simple contractual debt where there is no real justification for non-payment, this could prove harmful to some creditors – particularly small and start-up businesses, for which predictable cash flow may be vital.


It remains to be seen how well the Protocol will be received when it comes into force in October, and what impact it will have on small businesses. If you have concerns about the new provisions, or how they may affect your business, our commercial litigation team can advise you on dealing with debtors and guide you through the process.