By Victoria Radford

On 1 October 2017, a new pre-action protocol for debt claims came in to force. The new protocol can be found here.

A protocol is simply the Court’s expectation of how parties should conduct themselves before resorting to Court. The purpose of the Protocol is to encourage parties to communicate at an early stage in an attempt to avoid the need for Court proceedings in the first place.

The Protocol applies to business creditors seeking to recover a debt from an individual or a sole trader. It does not apply to other business-to-business debts. The Protocol significantly increases formalities prior to issuing a claim and it is important to consider this before embarking on the litigation process.

The New Procedure

The new Debt Claims Protocol requires a creditor to issue a letter of claim to the debtor before any legal proceedings are commenced. The letter must provide certain mandatory information; a large number of detailed requirements must now be included in the initial letter, and failure to comply can have cost penalties when the matter comes before the Court.

The following are examples of what should be included. Please note that this is not an exhaustive list and legal advice should be sought prior to a letter before claim being sent.

  1. where the debt arises from an oral agreement, who made the agreement, what was agreed (including, as far as possible, what words were used) and when and where it was agreed;
  2. where the debt has been assigned, the details of the original debt and creditor, when it was assigned and to whom;
  3. if regular instalments are currently being offered by or on behalf of the debtor, or are being paid, an explanation of why the offer is not acceptable and why a court claim is still being considered.

The letter of claim must be posted on the day on which it is dated and signed or if not reasonably possible, the following working day.

Response to claim

The debtor should respond within 30 days (an increase on the 14 days previously allowed). Again there are detailed requirements for what should be included. Where parties have been unable to reach an agreement, the creditor should then give the debtor at least 14 days’ notice of their intention to issue court proceedings.

Sanctions for non-compliance

If a party fails to comply with the Protocol and proceedings are issued, the Court can take this into consideration when giving directions. The Court has the discretion to impose cost sanctions against non-complying parties.

What do these changes mean for creditors?

The letter of claim is likely to have to be longer and include more detailed information than before. It is good practice for the letter of claim to be sent by post even if the creditor has additional contact details for the debtor, such as an email address.

The time lapse from the letter before claim to the issue of proceedings is likely to double. If the debtor seeks legal advice, this could delay issue for up to 3 months.

The Courts may not be overly concerned with minor breaches of the Protocol, especially in cases involving urgency, but they will have the power to consider breaches and impose sanctions so compliance is advisable at all times!

Our Observations

It appears that the changes will put a greater burden on a creditor prior to issuing a claim, specifically the requirement to provide historical credit information.

Creditors (or those who wish to avoid becoming creditors!) should take steps to tighten up their internal processes so that;

  1. greater consideration is given before an individual is given credit in the first place; and
  2. the information required by the Protocol is readily available and complete in the event of a dispute.

Whilst the aim of the Protocol is undoubtedly an attempt to reduce the amount of litigation and provide extra protection for consumers, the practical implications are material.

The increasing complexity of the Court procedure and the ability of the Court to impose financial penalties even if your claim is successful, means that it is more important than ever for specific legal advice to be sought prior to embarking on litigation. Sometimes this may not be cost effective, so prevention is better than cure!

If you are considering legal action against a debtor or if you receive a letter before claim from a creditor, please contact Victoria Radford on 01604 887452 to discuss the position further.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought from our litigation team before acting on any of the information given in this article.