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New protocol for debt claims from 1 October 2017

On 1 October 2017 a new Pre-Action Protocol, specifically for debt claims, must be used (the Protocol). Who will this impact and how it will affect parties' pre-issue conduct?

Current position

There is no specific Pre-Action Protocol for debt claims, although parties are expected to comply with the existing Practice Direction for Pre-Action Conduct (the Practice Direction).

When will the Protocol apply?

The Protocol applies to 'any business (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader)'. It does not apply to business to business debts, so will not apply where a creditor is seeking to recover liabilities from a company or LLP. However, it will apply where a creditor seeks to recover a debt due under a guarantee from an individual.

The key changes

The Protocol's aims are broadly similar to the Practice Direction:

  • to encourage early engagement between the parties;
  • to enable the parties to resolve the matter without the need to start court proceedings;
  • to encourage parties to act in a reasonable and proportionate manner; and
  • to support efficient case management.

However, there are a number of key changes to be aware of:

Content of the Letter of Claim

Full details of what should be included are at paragraph 3.1 of the Protocol (scroll to the bottom of the page to download the full Protocol) . This will include:

  • details of the debt, to include the amount, any interest or charges and how the debt has arisen;
  • if repayment by instalments are being offered/paid by the debtor, an explanation of why the payments are  not acceptable and why proceedings are being considered;
  • details of how the debt can be paid; and
  • the address to which the completed Reply Form should be sent.

The Letter of Claim should also include either documents or information which explain the outstanding balance and provide details of all interest and administrative charges which have been charged (see paragraph 3.1(b)).

Where the debt arises from a written agreement, the Letter of Claim should also say the debtor can ask for a copy of that agreement. If the agreement cannot be provided, a creditor will need to provide as much information as possible to evidence the debt is due and owing and the terms and conditions that apply. 

New forms

When sending out the Letter of Claim, creditors will be expected to include:

  1. an Information Sheet and Reply Form – the suggested format is attached to the Protocol. It is expected that debtors will use the Reply Form to respond to the Letter of Claim; and
  2. a Financial Statement – (and many creditors already do this).

Provision of documents

The Protocol encourages early disclosure of documents before issuing proceedings.

If a debtor asks for a document, the creditor should, within 30 days of such a request, either provide the document, or explain why it is unavailable.

Timescales

Under the Protocol, a creditor should not issue proceedings until 30 days after the date:

  • at the top of the Letter of Claim. This is to allow a debtor time to complete and return the Reply Form, and to encourage negotiations. ;
  • of receipt of the Reply Form from the debtor. This includes the return of a partially completed Reply Form; or
  • on which the creditor provides documents requested by the debtor (or an explanation as to why they are not available).

A creditor must also allow a reasonable period of time for a debtor to seek legal advice.

If, following discussions, no agreement is reached, the creditor may give the debtor at least 14 days' notice of their intention to start proceedings, unless there are exceptional circumstances (like the expiry of a limitation period) which means the creditor cannot wait.

Comments

When the Protocol comes into force on 1 October 2017, parties will need to ensure that they are compliant. Failure to comply may well have cost consequences if proceedings are later issued.

The Protocol emphasises the need for parties to make every effort to resolve cases without the need to need for proceedings. This is reflected in the Protocol's aims, the timescales for responses and the provision of information and documents.

However, the effect of the Protocol is that timescales before issuing proceedings will no doubt increase.  There is a risk that debtors will use these extended timescales to delay meaning creditors could need to wait more than 30 days from the date of the Letter of Claim before proceedings are issued.

In situations where time is of the essence (for example the creditor is seeking to secure the debt before an insolvency situation arises) the creditor will need to bear in mind the impact of the Protocol and weigh up the risks of not complying with it.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.


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