Helping businesses comply with the pre-action protocol for debt claims

Whatever the size of your business – and this includes sole traders and public bodies – you need to be aware that the Pre-Action Protocol for Debt Claims (the ‘Debt Protocol’) applies if you are seeking to recover payment of a debt from an individual (including sole traders). We understand that it isn’t always straightforward to get all of the technicalities right in order to avoid a costly business dispute, so we have put together this handy guide to help you through the key points about the Debt Protocol and compliance with it.

What is the Pre-Action Protocol for Debt Claims (the ‘Debt Protocol’)?

The Debt Protocol describes the way your business (the creditor) and the individual you are seeking to recover a debt from (the debtor) are expected to behave, and the actions that should be taken, before any court claim is started.

History of the Debt Protocol

The Debt Protocol came into force on 1^st October 2017. It came about after an initial concern about the huge number of debt claims the courts were dealing with was raised by Lord Justice Jackson in 2010, and so the Protocol was implemented seven years later after a lengthy consultation process.

What are the aims of the Debt Protocol?

The aims of the Protocol include the following:

• Encouraging early communication between the parties in order to identify the issues in dispute. This includes (but is not limited to) sharing information about the debt at an early stage.
• Providing a means by which parties can hopefully avoid the need to resort to court proceedings, in order to reduce costs for both parties. Settlement before matters reach that stage is encouraged by the Debt Protocol, as are considering options such as your business agreeing to a structured repayment plan to enable the debtor to make affordable, regular payments, for example.
• In cases where agreement cannot be reached, the Debt Protocol promotes the need for parties to act in a reasonable and proportionate manner, to assist with the efficient management of any court proceedings.

In what instances does the Debt Protocol apply?

As touched upon above, the Protocol applies to businesses of all sizes, including sole traders and public bodies, claiming payment of a debt from an individual. It is important to be aware that, as the Debt Protocol is designed to complement any existing regulatory regime that your business may be subject to, any regulatory obligations will take precedence if there are inconsistencies between that and the Protocol.

Exclusions and exemptions

The Debt Protocol does not apply to business-to-business debts, unless the debtor is a sole trader. It is also important to note that there are some specific exemptions and regulatory obligations that take precedence over the Protocol, as touched upon above. Generally speaking, these mainly concern claims where there exists another applicable Pre-Action Protocol, for example, when there is a construction dispute, instances where a lender is pursuing the recovery of mortgage arrears and also in cases where HMRC is seeking to recover taxes and duties.

The importance of complying with the Debt Protocol

Adherence to the Protocol can be crucial to the success of your claim, because significant non-compliance can have negative ramifications for the chances of your business recovering the money that it is owed from the creditor, along with increasing the risk of cost sanctions being imposed by the court.

Following the Debt Protocol is expected by the court before you take action by way of issuing a claim, which you would be able to do if the debtor refuses to engage with the initial attempts to resolve the matter. As outlined in more detail below, the debtor is afforded ample opportunity to try and resolve matters with you – this is because the Protocol is effectively designed to try and prevent the need for – and the expense of – court action, if at all possible.

Steps to take to ensure compliance with the Debt Protocol

Each of the key components of the Debt Protocol is summarised below.

Letter of Claim

A Letter of Claim (‘LOC’) should always be sent to the debtor before any court proceedings are started. The information that ought to be included in this letter is as follows:

• The amount of the debt.
• Whether any interest or charges are accruing.
• In cases where the debt arises from an oralagreement, it should be specified:
  • who made the agreement,
  • what exactly was agreed, and
  • where and when the agreement was made.
• In cases where the debt arises from a written agreement, it should be specified:
  • the date of the agreement,
  • identify the parties to the same, and
  • it should stipulate that a copy of the agreement can be obtained from the creditor (N.B. it is good practice to include a copy with the LOC in any event).
• In instances where the debt has been assigned, the LOC ought to set out details of the original debt and creditor, when and it was assigned and to whom.
• An explanation as to why any offer of repayments or any repayments currently being made are insufficient, and the reasons why a court claim is still being considered.
• Details of how the debt can be repaid (don’t forget to specify what method(s) of payment can be used and give the relevant bank details/address details if cheques are preferred).
• Details of how the debtor can easily contact you, should the debtor wish to discuss repayment options.
• The address where the debtor can send their completed Reply Form (further details about the Reply Form are below).

Documents to be sent with the LOC

• An up-to-date statement of account for the debt, clearly setting out details of any interest and other charges that may be accruing.
• The most recent statement of account, with an additional statement explaining the amount of interest incurred and any administrative/other charges imposed since the date of issue of that statement, sufficient to bring it up to date.
• In the absence of any statement of account being provided, there needs to be a statement setting out details of any interest and/or charges imposed since the debt was incurred.
• A copy of the Information Sheet and Reply Form at Annex 1 to the Protocol.
• A Financial Statement form (a statement of means), as provided in Annex 2 to the Protocol.
• As stated above, it is a good idea to include a copy of the written agreement in cases where the debt arises from that.

Other points to note on the LOC

• Ensure that the date is prominently displayed towards the top of the page on the LOC. Post the letter on the same day, or the following day if that’s not reasonably possible.
• Post should be the default method of sending the LOC to the debtor. In addition (but not instead of), you can send a copy via email if you have the debtor’s email address.
• If the debtor has explicitly stated that they should not be contacted by post and has provided alternative contact details, the LOC should be sent via the alternative method specified.

Debtor's response

The debtor should – by no later than 30 days from the date set out on the LOC – take the following action:

• Complete and return the Reply Form.
• Make a request for any documentation they wish to see.
• Make a request for any documentation they wish to see.

You will be able to see from the Reply Form whether the debtor admits all or part of the debt, or whether it is disputed in full. If an offer to pay by instalments is made, the debtor ought to include a completed statement of means which should show how the amount offered for repayment has been calculated. If the debtor is intending to seek advice, they should make this clear in the relevant section of the Reply Form and indicate how long they expect this to take. You would then be expected to allow 'reasonable extra time' where it is 'reasonable to do so in the circumstances' for this advice to be sought.

How long is 'reasonable extra time'?

The Protocol does not define this, but common sense should prevail: for example, it is arguable that in a straightforward matter the debtor should be afforded another 14 days to seek advice, whereas in a complex matter a maximum of three months would be more appropriate.

What if the debtor requests time to pay?

If this is requested on the Reply Form, you should have regard to the details on the statement of means form (for example, the debtor’s income and expenditure) when seeking to reach an agreement with the debtor for payment by instalments, and when these should/can commence.

What if I do not wish to agree to the debtor’s proposals?

Any refusal to accept a payment proposal should be communicated to the debtor in writing.

What if the Reply Form is incomplete?

In these circumstances, you should assume that there is a willingness on the part of the debtor to try and resolve the matter and then contact them to discuss further.

What if the debtor does not reply to the LOC?

If the relevant 30 day period has passed (with sensible consideration given to the fact that the debtor may have posted their Reply toward the end of this time), then you are within your rights to commence court proceedings to recover the debt.

Disclosure of documents

Early disclosure of documents and key information is actively encouraged by the Protocol, for the purposes of clarity and the possible resolution of any matters in dispute.

If the debtor makes a request for information from you, then you are obliged to do one of the following within 30 days of the request being made:

• Provide the document or information.
• Explain why the document or information is unavailable if that is the case.

ADR options

ADR (alternative dispute resolution) is also strongly encouraged by the Protocol to try and resolve matters without commencing court proceedings. ADR should be considered when there is an area of disagreement between the parties, i.e. about the amount, existence, enforceability or any other aspect of the debt.

The following are listed by the Protocol as suggested forms of ADR:

• A simple discussion or negotiation.
• Where the dispute relates to consumer credit or a debt regulated under the Consumer Credit Act 1974, a more formal process such as a complaint to the Financial Ombudsman may be appropriate.
• Mediation, particularly in cases such as where the debt is large. The potential costs of mediation ought to be weighed up against the amount of the debt.

Additional points to consider

What if the debtor responds to the LOC, but no agreement is reached?

In these circumstances, you should give the debtor at least 14 days’ notice of your intention to start proceedings. An exception to this would be where limitation is about to expire, for example.

What if a repayment agreement is reached with the debtor, but they subsequently breach it?

In this instance, you must issue a fresh, updated LOC and start from scratch with taking the steps required by the Protocol once again. If more than six months have passed since the original LOC was sent, any documents that were sent with it need to be sent out again with the new LOC.

Why businesses should consult business dispute solicitors for support

It is vital for your business for you to get the right support from business dispute experts to guide you through the pre-action steps before pursuing the recovery of a debt. There are technical legal concepts to take into consideration (for example, the various forms of legal privilege) which, if not dealt with properly and with due care at the outset, may have a detrimental effect on the prospects of recovering the money you are owed. Getting the right support also includes assistance with drafting the documents referred to in this article, and assistance with navigating the various options for ADR.

It is crucial that you follow the guidelines set out in the Debt Protocol if you are seeking to recover money from an individual, which includes sole traders, in order to maximise the chances of a successful recovery. Our experienced team of business dispute solicitors are waiting to provide their specialist guidance, bespoke to the needs of your business.