New pre-action protocol on debt recovery

Posted: Thursday, 6 April 2017 @ 11:01

On 21 March 2017 the Ministry of Justice published the new and long anticipated Pre-Action Protocol (“PAP”) on debt recovery . It will come into force on 1 October 2017.

So what will this mean in practice? It has long been the requirement of the Civil Procedure Rules that parties should follow a Pre-Action Protocol before issuing court proceedings. The underlying principle of the pre-action protocols is that parties should be provided with sufficient information including key documents, time to consider this information, and the opportunity of resolving any dispute by such processes as alternative dispute resolution, before court proceedings are issued.

If they fail to follow the requirements of the pre-action protocols and court proceedings are issued the proceedings may be put on hold or sanctions imposed which may include costs penalties or an award of higher interest or disallowing interest or reducing it. This could also mean an order denying them their costs or part of their costs or even requiring them to pay the losing party’s costs, even if they themselves are successful in their claim.

If there is a specific Pre-Action Protocol covering the type of dispute involved, then that Pre-Action Protocol must be followed. If there is no specific protocol then the general  provisions  in the Practice Direction on Pre-Action Protocols must be followed, which are pretty basic. Until now a number of Protocols were in place examples of which are:

  • Pre-Action Protocol for Possession Claims based on Mortgage or Home Purchase Plan Arrears in Respect of Residential Property
  • Pre-Action Protocol for the Construction and Engineering Disputes
  • Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy.

But the majority of claims in the courts involve disputes which relate to debt and do not fall within the protocols. So now there is a new protocol for debt which will have a significant effect on how claims are pursued and defended.

Who does it apply to? What should I be doing about it?

The PAP is a 17 page document which can be viewed here.

Who does it apply to? It applies to any business including sole traders and public bodies who are claiming payment of money (a debt or alleged debt) from an individual. But individuals for the purposes of the PAP include sole traders, so it applies to claims by a sole trader against another sole trader, as well of course a claim by any other business against a sole trader. Otherwise it does not apply to business to business claims. It also does not apply to HMRC claims for the recovery of tax.

Debt includes any claim for money not otherwise caught by the other pre-action protocols listed above. So it will also include claims such as creditors seeking to recover from those who have given personal guarantees for debts of others such as their company or other individuals.

What should I be doing about it now? Whilst there is 6 months to go before the PAP comes into force, all businesses should be looking at their debt recovery processes and adopting them so that they comply with the PAP. Indeed there is nothing to stop them introducing the PAP procedure before 1 October. Although the courts will undoubtedly be more sympathetic to any failures to follow a voluntary PAP, it would be in the spirit of the pre-action protocols and would certainly benefit users.

So what does the PAP contain? The first requirement is that a Letter of Claim should be sent by the creditor to the debtor. It must contain the prescribed information, which includes details of how the debt arose, how it is calculated, and enclosing a copy of any agreement relied upon or stating that a copy can be requested. It must enclose an up to date statement of account including details of interest or other charges added. It must also enclose the Information and Reply Form which is set out in Annex 1 of the PAP and a Financial Statement Form as set out in Annex 2 of the PAP.

The Letter of Claim must be clearly dated at the top of the first page and must be posted on the day it is dated, or if that is not reasonably possibly the next day. If the debtor does not reply within 30 days the creditor may start court proceedings. The debtor should respond using the Reply Form and request copies of any documents they wish to see.

If the debtor states that they are seeking legal advice the creditor must allow the debtor a reasonable time to obtain that advice and must not start court proceedings within 30 days of receiving the Reply Form of or providing the requested documents, whichever is the later.

The creditor must also allow the debtor reasonable extra time if they are seeking debt advice. Where the creditor and debtor cannot agree about the existence enforceability amount or other aspect of the debt they should consider the use of ADR.

Where the debtor has responded to the Letter of Claim, and subject to the above, the creditor should give the debtor 14 days notice of their intention to start court proceedings unless there are exceptional circumstances in which urgent action is required.      

So if you are a creditor or debtor and the PAP applies, be sure to know what you are required to do and avoid possible penalties. And remember the date the PAP comes into force is 1 October 2017. If in doubt seek advice.

For free advice on this topic please call us on 0845 003 5639.

This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.


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