A new debt collection process by Paul Taylor and Sarah Carlton

May 30, 2017

A client is not paying their bill and despite several polite requests you find yourself in a position where you’re getting nowhere and the debt remains outstanding. Your thoughts turn to considering the law. But what steps do you need to take before you can “see them in court”? Well, as it turns out, more than you may have thought.

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 (for ease here called the ‘Debt Claims Protocol’) will apply and businesses will need to ensure that they have complied with it when trying to collect debts owed. The Debt Claims Protocol will be used alongside any other regulatory regime to which the creditor may also be subject.

Background

The large numbers of general debt claims in the courts led Lord Justice Jackson, back in January 2010, to recommend that a new debt protocol be introduced. A previous draft version of the Debt Claims Protocol was released by the Civil Procedure Rule Committee. This was not particularly supported by the credit industry because of the disproportionate obligations placed on creditors to provide detailed information when pursuing a claim. The final version of the Debt Claims Protocol was released on 21 March 2017 and a number of the more onerous requirements that were originally included were dropped. These included the requirement to provide a full copy of the Debt Claims Protocol to each debtor, and an actual copy of any written agreement on which the debt was based. Opinion is still divided as to whether the burden on creditors remains disproportionate and unnecessarily cumbersome on creditors. 

It’s important to note that the new Debt Claims Protocol only applies to businesses (including sole traders and public bodies) claiming payment of a debt from an individual which also includes someone in business as a ‘sole trader’. 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.

The present regime

The current position for debt claims is that a business creditor, or its legal adviser, will issue a ‘Letter Before Claim’ to the debtor, in order to give them chance for the matter to be settled before court proceedings. The Debt Claims Protocol seeks to formalise the process even before a Letter Before Claim is issued. In practice, this will likely mean more work will need to be undertaken before even a simple debt claim is issued, the intention being that the parties try to settle the matter without the need for court proceedings while protecting debtors facing prospective legal proceedings from creditors. Where a firm, or its legal adviser, intends to send a Letter Before Claim over an unpaid debt, the Debt Claims Protocol aims to encourage early communication between the creditor and debtor without having to involve court proceedings.

Failure to comply with the new Debt Claims Protocol will result in case management directions and possibly cost penalties if the matter proceeds to litigation. It is worth pointing out that the Debt Claims Protocol specifically says that courts are not likely to be concerned with minor or technical breaches. But what the courts will look at is whether the ‘substance’ of the Debt Claims Protocol has been followed.

The new Debt Claims Protocol process

The Debt Claims Protocol requires that a standardised Letter Before Claim be sent to a debtor that contains particular information:

  1. The amount of the debt, any interest and/or other charges claimed by the creditor
  2. The date of the agreement following which the money is owed and the parties to it (whether made by written or oral agreement)
  3. Where the debt has been transferred to a different creditor (i.e. ‘assigned’) details of the original debt and creditor and details of the assignment
  4. If the debtor has offered to pay, an explanation of why the offer or payments from the debtor are not acceptable to the creditor and why a court claim is still being considered
  5. Details of how the debt can be paid and details of how to proceed if the debtor wishes to discuss payment options with the creditor
  6. 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 (as annexed to the Debt Claims Protocol) 
  7. The address to which the Reply Form should be sent


As can be seen from the list above, a Letter Before Claim will contain much paperwork and require 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 (i.e. not included in a creditors standard terms and conditions) that correspondence should not be sent by post, but by some other means for which alternative contact details have been provided. If this is the case, the creditor should use those details when sending the Letter Before Claim. Creditors who regularly have claim money from individual debtors, will have to start considering whether the preparation work now required makes the claim worth pursuing.

In terms of process, from the Letter Before Claim being sent (by post) to the debtor they will have 30 days to respond. If the debtor fails to pay the claimed debt, another letter must be issued from the creditor giving a further 14 days for the debtor to respond. It’s clear that requiring the Letter Before Claim (including all accompanying documentation) to be sent by post seems to represent a technological backward step by the courts.

If the debtor sends a reply, they should use the Reply Form and enclose any documents requested by the creditor or use it to request documents from the debtor. If the debtor does ask for further documents to assist or help them understand their position, the creditor should send these within 30 days of the request.

Where the debtor sends a reply stating that they are taking legal advice, the creditor then has to allow them a ‘reasonable’ period to seek this advice. If the debtor sends a reply requiring time to pay, the creditor and debtor should aim to reach agreement on repayment terms based on the debtors’ means (as set out in the Financial Statement Form).

The thrust of the process is that creditors should seek to take ‘pro-active’ steps to engage with debtors whatever their response to a Letter Before Claim, even if the Reply Form has only been partially completed. The creditor should attempt to make further contact with the debtor and obtain any further information that is required to appreciate the position of the debtor.

Of course, the parties may not be able to reach an agreement or resolve the debt repayment, in which case both should take steps to resolve the dispute without starting court proceedings. They should consider other forms of Alternative Dispute Resolution (ADR), for example ‘a without prejudice meeting’ or mediation. Again, the obligation remains on creditors to consider the cost against the benefits when deciding whether proceed with ADR – it may be the case that the amount of debt claimed does not justify such a process. If parties do reach an agreement and the debtor later defaults, the whole process must be restarted and a new Letter Before Claim will need to be sent to the debtor.

It does appear that the Debt Claims Protocol allows what may seem generous time allowances at each stage. 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 of their debt actions.

Action points

It is recommended that every business which may need to make debt recovery claims take stock of this new Debt Claims Protocol and revise their internal procedures according to avoid potential non-compliance. Updates to ‘template’ letters should be considered as well as any relevant policies and procedures. Staff training could also be organised in anticipation of the introduction of the new Debt Claims Protocol.

Businesses that may be trying to enforce a debt due to their own cash-flow issues may need to think about the time that a debt recovery process may take with the new Debts Claims Protocol in force.

It may also be worth seeking legal advice in the first instance to determine whether pursuing a court action, and therefore following the Debt Claims Protocol, is appropriate in the circumstances from a cost/benefit perspective. Alternatives include proceeding straight to ADR, a statutory demand or even better still, making sure that payment is received in advance.

Paul Taylor and Sarah Carlton


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Paul Taylor
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Sarah Carlton
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scarlton@foxwilliams.com

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