Pre-Action Protocol for Debt Claims
Following an extensive consultation process since 2009 the final version of the Pre-Action Protocol for Debt Claims as dictated by the Ministry of Justice will come into force on 1 October 2017.
The Protocol applies to any business (including sole traders) claiming payment of a debt from an individual. This includes consumers, sole traders and members of a partnership unless it is a Limited Liability Partnership.
The Protocol is intended to complement any existing regulatory regime to which the creditor is subject, including for example the requirement to serve default notices under section 87 of the Consumer Credit Act 1974. If there are any inconsistencies with a specific regulatory obligation, that obligation will take precedence but normally creditors will have to ensure that the requirements of the Protocol are built into their debt recovery systems in conjunction with any existing requirements.
Aims of the Protocol
The aims of the Protocol are to encourage early communication between the parties and avoid court proceedings, by agreeing a repayment plan or considering using a form of alternative dispute resolution (“ADR”). This is consistent with the approach of the Government over the last decade or so in significantly increasing court fees to the point where the civil courts now operate as a profit centre.
The Protocol also encourages parties to act reasonably and proportionately to the size of the debt, and to support each other in the efficient management of proceedings that cannot be avoided.
Initial information to be provided by the creditor
The creditor is required to send a letter of claim to the debtor, which should contain the following information:
- The amount of the debt
- Whether interest or other 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 that agreement, the parties and the fact that a written copy can be requested from the creditor
- Where the debt has been assigned, 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
In addition, the following standardised information must be provided with the letter: –
- A Statement of account for the debt, including the amount of interest and any other charges imposed since the debt was incurred
- The Information Sheet and Reply Form at Annex 1 of the Protocol
- A Standardised Financial Statement for the Debtor to complete, an example of which as provided by the Money Advice Service can be found at Annex 2 of the Protocol.
The creditor should post the letter either on the day it is dated or, if that is not reasonably possible, the following day. The Protocol 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. Email may therefore only be used if the debtor has made an explicit request, so creditors will not be able to rely on notice provisions to this effect in their standard terms and conditions.
If the debtor does not reply to the letter of claim within 30 days of its date, the creditor may start court proceedings (provided that it has given 14 days’ notice to the debtor of its intention to do so).
Response by the debtor
The debtor should use the Reply Form to respond. The debtor can request copies of any documents from the creditor, and enclose documents it considers to be relevant. 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 later.
If the debtor indicates that he is seeking legal advice, the creditor must allow the debtor “a reasonable period of time” to do so.
Provision of documents
The parties should exchange and disclose documents as early as possible, to help them understand each other’s position. The creditor must provide documents or information (or otherwise explain why the documents or information requested are not available) within 30 days of any request.
Taking steps to resolve the matter and ADR
If the parties cannot come to an agreement about the repayment of the debt, they should consider using an appropriate form of ADR.
If the parties reach an agreement for repayment of the debt, which the debtor subsequently breaches, the creditor must send an updated letter of claim and comply with the Protocol afresh before issuing court proceedings.
Compliance with the Protocol
The court will expect the parties to have complied with the Protocol if the matter proceeds to litigation, and will consider any non-compliance when giving directions for case management.
Non-compliance will also be relevant when questions of interest and costs come to be decided.
If the debtor responds to the letter of claim but an agreement is not reached, the creditor should give the debtor at least 14 days’ notice of its intention to start court proceedings (unless urgent action is required, for instance, the limitation period is about to expire or an injunction is required).
The main reason why the Protocol has had such a long gestation period arises from the determined opposition of most of the trade bodies representing creditors. It is fair to say that some of the more draconian provisions in earlier drafts of the Protocol have not survived into the final version, but on any view the Protocol imposes significant burdens on creditors enforcing business debts against individuals, and is likely to mark something of a culture shift in this type of litigation going forward.
A number of points are worth making: –
- The best way of mitigating against the extended periods of inactivity provided for in the Protocol may involve creditors instructing specialist lawyers almost immediately upon any default; otherwise streetwise debtors may find it quite easy to in effect regularly extend payment terms;
- it is likely that asset financiers and others with contractual terms entitling them to commercial rates of interest on default and recovery of costs of enforcement will wish to take full advantage of such terms and highlight these to debtors as soon as the enforcement process begins;
- the Protocol says nothing about a creditor’s ability to serve a statutory demand in advance of a bankruptcy petition; whilst of course the courts have for many years criticised the use of insolvency processes in relation to genuinely disputed debts, the Protocol does nothing to dilute creditors’ rights to so proceed where there really is no dispute that a debt is fully due and payable; and
- the Government has announced an ambitious scheme to set up an online court by 2020 for money claims not exceeding £25K and has indicated that the Protocol will not apply to such claims.
The full text of the Protocol and attachments can be found here.