In Focus Collections
How to make the pre-action debt protocol work for you
The new protocol does provide opportunities for debtors to delay payment, but you can strengthen your position
Peter Mair Recovery and litigation manager, Homes for Haringey
peter.mair @
homesforharingey.org
As you are likely to be aware, the Ministry of Justice’s Pre-Action Protocol (PAP) for Debt Claims came into effect on 1 October 2017. The PAP is designed to support early
engagement and communication between creditor and debtor, and to encourage them to act in a reasonable and proportionate manner. If possible, it should help the parties in resolving the matter without court proceedings, and, where unavoidable support the efficient management of proceedings.
Who is affected? The PAP applies to any business, including sole traders and public bodies – claiming payment of a debt from an individual or sole trader. If you extend credit to sole traders or individuals, you will need to comply with the protocol.
Exceptions The only circumstances in which the PAP does not apply, is where a debt is covered by another protocol, such as construction and engineering, or mortgage arrears, or claims issued by HMRC for taxes and duties.
Key changes and recommend actions Under the protocol, the debtor has 30 days to respond to the letter of claim. You (or your legal representative) cannot generally start legal proceedings until the 30 days have expired, and no response has been received. Previously, a typical debt-recovery process
required payment within seven to 14 days of the letter of claim, so the protocol effectively extends the time to issue court proceedings by a minimum of two to three weeks.
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If you extend credit to sole traders or individuals, you will need to comply with the protocol
Some unscrupulous customers may see
this as an easy way to effectively ‘extend’ their credit terms. As a mitigating action to protect your cashflow position, you may consider shortening your credit-control timeline, chasing late payers more quickly, or issuing any letter of claim sooner.
Impact on creditors The PAP places a significant burden on creditors in relation to providing addition- al information, a statement of account and reply form must be sent as a minimum, and considerably extends the length of the pre- action process. For example: l You must allow a further 30 days to provide a reply form. l Even if a debtor only confirms they are seeking debt advice on day 30, a further 30 days will need to be provided. l If no response at the end of this additional period the creditor still needs to serve a 14-day notice before the letter of claim. So it is possible 104 days may elapse from initial letter of credit to issue of claim.
Benefits The PAP will encourage further pre-action engagement between creditor and debtor,
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which if handled correctly, could lead to early settlement and an amicable resolution. It is likely to encourage creditors to review and improve their processes.
Failure to comply Failure to comply with the PAP may result in a claim being stayed or sanctions being imposed, such as a costs order against a party, or the removal of the right of a party to recover interest and costs.
Summary Many businesses are impacted by the protocol. If you have not yet taken action to ensure your business complies with its requirements, you should do so now. Check the legal status of the customers
to whom you extend credit. Be particularly careful to distinguish between sole traders and partnerships. If you currently deal with sole traders, or
individuals, or plan to do so in the future, review your credit-control process. Make any changes necessary to comply with the new protocol, whilst maintaining your ability to recover monies owed to you quickly and effectively recover monies owed to you. The courts will expect all parties to comply
with the PAP and will take into account any non-compliance when giving directions for the management of proceedings. However, provided that the parties have
complied in substance with the terms of the protocol, the court is unlikely to be worried about minor or technical infringements, especially when the matter is urgent. CCR
March 2018
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