EXECUTIVE REPORT
Chasing the debt
A customer, personal or trade, is not paying and you find yourself considering the law. However, Adam Bernstein suggests you now might have to take more steps before you can see them in court.
Business creditors dealing with a debt claim involving an individual, as opposed to a business, currently have to follow the Practice Direction for Pre-Action Conduct and Protocols. It presently contains no specific pre-action protocol (rules) for debt claims. However, from 1 October 2017, the new Pre-Action Protocol for Debt Claims (also known as the Debt Claims Protocol) will apply.
Sarah Carlton, an associate at Fox Williams LLP, says it is important to note that the new Protocol only applies to businesses - including sole traders and public bodies - claiming payment of a debt from individuals and sole traders, and that “the Debt Claims Protocol will not apply to debts from a business owed to another business (except where a sole trader is involved), and nor will it apply to claims issued by HMRC.”
Currently, a business creditor will issue a Letter Before Claim to the debtor, giving them a chance to settle before court proceedings. The Debt Claims Protocol seeks to formalise the process even before a Letter is issued. Sarah Carlton says that, in practice, “this will likely mean more work will need to be undertaken before even a simple debt claim is issued.” Failure to comply with the new rules will result in case management directions, where the court gives instructions to the parties on how to manage the case, and possibly cost penalties if the matter proceeds to litigation.
The Protocol requires that a standardised Letter Before Claim be sent to a debtor and that it contains particular information:
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The amount of the debt, any interest and/or other charges claimed by the creditor
The date of the agreement following which the money is owed and the parties to it
Where the debt has been transferred/sold to a different creditor, details of the original debt and creditor and the assignment
If the debtor has offered to pay, an explanation of why the offer or payments are not acceptable to the creditor and why a court claim is still being considered
Details of how the debt can be paid and how to proceed if the debtor wishes to discuss payment options with the creditor
An up-to-date Statement of Account for the debt (including charges and interest claimed), an Information Sheet, a Reply Form and a Financial Statement Form
The address to which the Reply Form should be sent. 37
Sarah Carlton says, “A Letter Before Claim requires much effort on the creditor’s behalf. Everything has to be sent by post unless the debtor has made an explicit request to the creditor that correspondence should be sent by some other means for which alternative contact details have been provided.” In terms of process, the debtor will have 30 days to reply. If the debtor fails to pay, another letter must be issued from the creditor, giving a further 14 days to respond.
The Government’s Justice website at
www.justice.gov.uk offers guidance on the new system.
If the debtor responds, they should use the Reply Form and enclose any documents requested by the creditor; or the creditor can use it to request documents from the debtor. If the debtor asks for further documents to assist or help them understand their position, the creditor should send these within 30 days.
Aiming to reach agreement
Where the debtor sends a reply stating that they are taking legal advice, the creditor then has to allow them a ‘reasonable’ period for this. If the debtor requests time to pay, both parties should aim to reach agreement on repayment terms based on the debtors’ means. If they cannot agree, they should take steps to resolve the dispute without starting court proceedings. Here, Sarah Carlton says they should consider other forms of Alternative Dispute Resolution (ADR), for example a without prejudice meeting or mediation. “Again,” she explains, “the obligation remains on creditors to consider the cost against the benefits when deciding whether to proceed with ADR.” Unfortunately, if the parties do reach an agreement and the debtor later defaults, the whole process must be restarted and a new Letter Before Claim sent.
It appears that the Debt Claims Protocol allows what may seem generous time allowances at each stage. Sarah Carlton says only time will tell whether individuals will use the new rules to frustrate collection actions against creditors, and whether the front-loading of costs onto the creditor pre-hearing may prevent creditors from pursuing all their debt actions.
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