The pre-action protocol for debt claims comes into effect on 1st October 2017 and has far-reaching implications for businesses who deal with individual debtors – such as in business to consumer or business to business environments where the customer is an individual.
The golden rule at the start of the relationship is to get a credit application form or proof of business entity documentation. Know who you are dealing with from the off and monitor it – check any payments that are coming in or letterhead/order forms.
The detail of the protocol
The protocol encourages parties to engage early on and resolve their differences without going to the courts. It is designed to encourage mutual exchanges of information and a dialogue.
The protocol is very precise in what is needed when it applies. Gone will be the 2-page letter of claim setting out the sums due and the 7 or 14 days period (or less with some firms). This will transform the document into something of around 10 pages in length and gives a period of at least 30 days for a response. That will have cashflow implications for businesses who are basically frozen out of doing anything for that period.
People will need to read the protocol carefully but in general the letter of claims needs to contain the following:
- Amount of the debt
- Whether interest charges are continuing
- If the debt arises from an oral agreement – who made the agreement, what was agreed, and when and where it was agreed
- If the debt arises from a written agreement – the date of the agreement, the parties and the fact that a written copy can be requested from the creditor
- Statement of account for the debt, including the amount of interest and any other charges imposed since the debt was incurred
- If the debt has been assigned then details of the original debt and creditor, when it was assigned and to whom
- If the debt is currently being paid on behalf of or by the debtor – an explanation of why these payments are not acceptable and why proceedings are being considered
- Details of how the debt can be paid and what the debtor can do if it wishes to discuss payment options
- Enclose the Information Sheet and Reply Form as set out in annexe 1 of the Protocol
- Enclose a financial statement for the debtor to complete – an example of which is set out at annexe 2 of the Protocol.
The letter should be posted on the day it was written or, if not reasonably possible, the following day. It also states that the letter should be sent by post unless the debtor has made an explicit request that it should not be sent by post and has provided alternative contact details.
If the debtor does not reply to the letter of claim within 30 days of the date on the top of it then court proceedings can begin provided that the debtor has been given 14 days’ notice of the intention to commence proceedings. Clearly that needs to be included within the initial letter but if a reply is received and an agreement not reached then a separate 14 days’ notice of intention to start proceedings will be needed.
Savvy debtors could drag the process out
More worrying for creditors is the fact that if the debtor responds by, for example, requesting copy documents, then the creditor should not start court proceedings for at least 30 days from receipt of the completed Reply form or 30 days from the creditor supplying any documents requested by the debtor, whichever is later.
There is the potential for a savvy debtor to drag this out and then argue failure to comply in front of the court. Also, if the debtor indicates that they wish to seek legal advice then the creditor must allow a reasonable time for that the happen – I am guessing that will be more than 30 days!
The parties also need to consider the use of alternative dispute resolution. If a settlement is reached and then breached the whole process starts all over again with the time limits.
Not surprisingly the courts will expect compliance with the protocol when giving directions to timetable the matter going forward. We may see a number of cases being fought on technical breaches of the protocol just to try and avoid paying interest, court and other costs by some debtors.
What may happen once the protocol comes into effect?
Firstly, those who simply could not handle the whole issue of being in debt burying their head even more in the sand and being overwhelmed by it all. It will not aid dialogue – a 10-page bundle will simply phase them.
Secondly you will get those debtors who play the system – by replying at day 30, asking for documents, relying on 30 days to think about them, saying they are going to get legal advice, then saying they cannot get it and seeking to enter into a dialogue to reach an agreement to pay a nominal sum, then defaulting and saying they are trying to get more legal advice and then simply going to ground.
I do think that the pendulum has swung too far – it is clearly designed to catch the second or third tier recovery organisations with the hard to recover assigned debts but in so doing is catching legitimate businesses who are trying to survive and move forward to keep the business and jobs for their staff. Sadly, these are the types of business who will have given credit to individuals and are themselves most vulnerable to market pressures and failure to pay.
For individual sole trader businesses, continuing to trade is going to get harder. They will be squeezed if they trade with individuals like themselves and yet will not be able to get credit from their suppliers. Big business will not wish to trade with them on credit for the reasons mentioned above.
Money up front or on delivery seems to be the way forward until this levels out and the requirements relax.