In March 2017, a new Pre-Action Protocol for Debt Claims was published by the Ministry of Justice (MoJ) and will come into effect on 1 October 2017. It has taken some time to finalise, with drafters seeking to balance the need for processes not to be overly burdensome on creditors against the protection of consumers.
The purpose of pre-action protocols is to encourage the engagement of and communication between the parties, to allow information to be exchanged at an early stage and issues identified. By the parties engaging in the procedure, it is hoped that it will be possible to avoid commencing legal proceedings, and that costs can be kept reasonable and proportionate to the amounts involved.
What does the new pre-action protocol cover?
This new pre-action protocol applies to any debt being claimed by a business (including sole traders and public bodies) against an individual. It does not include “business-to-business” commercial debts. However, there are some exceptions:
- If both the creditor and debtor are sole traders, this pre-action protocol should be used.
- Where the debt is covered by another pre-action protocol (that is, the Pre-Action Protocol for Construction and Engineering Disputes, or Possession Claims based on Mortgage Arrears) that pre-action protocol should be used.
- Claims by HM Revenue and Customs (HMRC) for the recovery of taxes and duties are excluded from this protocol, as they are governed by Practice Direction (PD) 7D.
The procedure
Stage one: letter of claim
Before any proceedings are issued, the creditor must send a letter of claim to the debtor (paragraph 3). However, the pre-action protocol requires that the letter of claim includes information which creditors may not routinely be providing at the moment, such as:
- How the debt arose:
- if by an oral agreement, then the creditor must provide details of whom the agreement was made between, what words were used (as far as they are able) and the place, time and date the agreement was made;
- if there is a written agreement, then the creditor must confirm the date of the agreement, and the fact that a copy can be provided on request; and
- if the debt has been assigned, the details of the original debt and original creditor, and details of the assignment, should be provided.
- If the debtor is already making regular installments (or has proposed to do so), the creditor must explain why this is not acceptable and why they continue to consider issuing proceedings.
- Either:
- an up-to-date statement of account for the debt;
- the most recent statement of account, and state the amount of any additional interest or other charges that have been applied since that statement was produced; or
- if there are no statements, the creditor must state the amount of interest and other charges applied since the debt was incurred.
- Enclose an information sheet and reply form (in the prescribed form at Annex 1 to the pre-action protocol).
- Enclose a financial statement form (example at Annex 2 of the pre-action protocol).
One requirement, which may prove problematic for a number of creditors, is the need for the letter of claim to be posted on the day it is dated, or “if that is not reasonably possible, the following day”. Often, letters by creditors (for example, utility companies) are not received for 10 to 14 days after they are dated. Such creditors will need to improve their systems so that letters are sent out on the day that they are prepared.
If a debtor has explicitly informed a creditor not to post correspondence to them, and provided alternative contact details, then the letter of claim can be sent using those alternative details. However, creditors should note that a condition in a creditor’s standard conditions allowing contact by a method other than post will not be sufficient to justify sending a letter of claim other than by post. The debtor’s consent must be explicit, otherwise the letter of claim should be sent by post.
Stage two: debtor’s reply
Creditors need to enclose a reply form with the letter of claim, which debtors can use to respond (paragraph 4). The debtor’s reply should be sent within 30 days.
There are various options for the debtor to respond, from agreeing the whole sum claimed and paying in full, to disputing the entire sum. There is provision for the debtor to make a proposal to make payments by installments.
A debtor can also indicate that they are seeking advice, and creditors must allow a reasonable period of time for advice to be obtained. The advice sought could be legal advice seeking to challenge the claim, or debt advice. If a debtor indicates they are seeking advice but have been unable to obtain it within 30 days, then the creditor should allow reasonable extra time for this.
In these circumstances, the creditor must not commence proceedings within 30 days following either:
- The receipt of the completed reply form.
- From the provision of any documents the debtor may have requested.
If a debtor admits the debt but requires time to pay, the parties should seek to reach an agreement for the debt to be settled, based on the debtor’s income and expenditure. If a creditor refuses a debtor’s proposal to repay the debt, then the creditor must provide reasons for refusing the proposal.
Stage three: attempts to settle the manner
The parties are under an obligation to take steps to try to resolve matters without court proceedings, and should consider alternative dispute resolution (ADR) (paragraph 6). Where a large debt is at issue, it may be more appropriate for more formal ADR, such as mediation. However, this will probably not be suitable in the majority of cases, where individuals are being pursued by a creditor.
Stage four: take stock
Where the parties have followed the procedure in the protocol but are unable to reach an agreement, they should review their respective positions to see if court proceedings can be avoided or, at least, to narrow the disputed issues (paragraph 8). The creditor should give the debtor at least 14 days’ notice of their intention to commence proceedings, unless there are exceptional circumstances where urgent action is require, for instance, limitation is due to expire.
Sanctions for not complying with the pre-action protocol
The pre-action protocol sets out the conduct that the court expects the parties (and particularly creditors) to have adhered to before proceedings are issued (paragraph 7). When considering the parties’ conduct, the court will be looking at the substance of the engagement with the protocol, rather than minor or technical infringements. Indeed, there is a specific reference providing for creditors to allow a few extra days for a reply towards the end of the 30 day period.
If a party has failed to comply with the substance of the protocol, the court can take this into account when giving directions for the management of the case. This could result in a stay in proceedings to allow parties a further opportunity to engage and seek to resolve matters. In the worst cases, a court may impose costs sanctions against a non-complying party.
Does this new pre-action protocol really change anything?
The pre-action protocol appears to be aimed at larger commercial unsecured lenders and creditors (such as utility providers). As such, most of the burden for complying with the pre-action protocol falls on the business creditor rather than the individual debtor.
These creditors need to adapt their own internal debt collection procedures to meet the requirements, and any changes that need to be made need to be put in place by 1 October 2017. There is, of course, no reason why they could not be adopted sooner, as there is currently no formal Pre-Action Protocol for Debt Claims, and the new requirements go beyond the requirements of the PD for Pre-Action Conduct and Protocols.
The letter of claim is likely to be longer and include more detail than those to which creditors have previously been accustomed. In addition, as the letter must state which documents are available, there is likely to be an increase in requests for documentation. This will add to the costs and likely cause delay to creditors seeking to recover sums that are owed.
However, given the additional burdens on creditors, it could result in parties seeking legal advice at an earlier stage, as well as increasing the charges and interest applied by creditors to cover the additional costs incurred. Alternatively, some creditors may consider other methods of recovering debts, such as serving a statutory demand, particularly if more urgent action is required.
It does, however, offer another level of protection to consumers and for those advising them. It will be easier for those people advising debtors to understand the situation. It will also be easier in relation to creditors’ claims if all the relevant information is included with a simple letter of claim, as opposed to piecemeal disclosure of documents.
Overall, I suspect that it will not have much of an impact on the number of debt claims being issued. If anything, if a creditor has already incurred the costs of complying with the pre-action protocol, they may be more motivated to continue litigating than writing it off as a bad debt.
