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A new pre-action protocol for debt claims, “the Protocol”, will be in force from 1 October 2017.  It will apply to any business (in limited form, partnerships, sole traders and public bodies) claiming payment of a debt from an individual (also including sole traders).  Business creditors will need to comply with significantly increased obligations prior to commencing a claim.

The aims of the new protocol are:

• To encourage early communication and exchange of information between parties
• To resolve the matter without the need for court proceedings
• To encourage the parties to act reasonably and proportionately

Compliance with the new protocol will be essential if proceedings are issued and either party wants to recover a contribution towards their costs from the other side.

The principal steps under the new protocol will be as follows.

Letter of claim

The creditor must send a letter of claim including;

1. The agreement under which the debt arose, details of any installments that have been offered or paid along with an explanation as to why they are not acceptable and details about how the debt can be paid
2. Information about the debt – the amount and whether there is any interest or admin charges
3. Up to date statement of account
4. An information sheet template
5. Reply form and address of where it should be sent
6. Financial statement for the debtor to complete showing their financial situation.

Response by the debtor

The debtor should complete the reply form sent by the creditor.

The creditor will no longer be able to decide how long to give a debtor to reply: the creditor cannot commence proceedings until  30 days from receipt of the completed reply form or provision of any information that the debtor may request, whichever is the latest.  The period may be extended if the debtor indicates that they are seeking debt advice.

The parties are required to try and reach agreement for payment by instalments based on the debtor’s income and expenditure and the financial information from which the debtor completes.

Disclosure of documents

The debtor is asked on the reply form to send any relevant documents to the creditor with its reply but the debtor may request the creditor to supply documents or information which will enable them to understand each other’s position.

The creditor must supply the information or documentation within 30 days or explain why it is not available.

Consider alternative dispute resolution (ADR)

If no agreement can be reached, the parties are encouraged to consider ADR procedures but are warned to take into account the potential costs of mediation (if this is the method which the parties choose) compared to the amount of the debt.  If agreement is reached, the creditor should not commence proceedings while the agreement is being complied with.  If the debtor breaches the agreement and proceedings become necessary at a later date, an updated letter of claim must be sent and the new protocol complied with again.

Taking stock

This is an entirely new obligation and requires the parties to “undertake a review of their respective positions to see if proceedings can be avoided and, at the least, to narrow the issues between them”.  Where the parties have exchanged a letter of claim and a reply but no agreement has been reached the creditor must give the debtor at least 14 days’ notice of its intention to commence proceedings unless there are exceptional circumstances which justify the earlier commencement of proceedings.

Compliance with the new protocol

If proceedings are commenced, the court will have regard to any non-compliance with the new protocol.

Comment: The new protocol imposes more burdens on creditors to provide information and comply with requests for information from debtors.  No longer will creditors be able to send a “seven day letter” and immediately commence proceedings if they want to avoid the court imposing sanctions for failure to comply with the new protocol (which could include the imposition of a stay of the proceedings until the new protocol has been complied with).

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.