Pre-Action Protocol for Debt Claims: Creditor Obligations & Impact

On 1st October 2017, a Pre-Action Protocol (PAP) for debt claims will come into effect. The PAP will apply to all forms of businesses, including sole traders, seeking to recover debt from an individual. The PAP will however not apply to business-to-business debts unless the debtor is a sole trader.

There is currently no specific pre-action protocol for debt claims, however, the Civil Procedure Rules (CPR) contain a number of pre- action protocols which require parties to undertake certain steps prior to issuing court proceedings, to enable parties to resolve disputes; involving courts should be a last resort.

What is the aim of the PAP?

The Ministry of Justice states that the aim of the PAP is to:

1. Promote an early engagement and communication between both parties.
2. Enable both parties to resolve the matter without the need to commence court proceedings.
3. Encourage both parties to act in a reasonable and proportionate manner in dealing with one another.

Ultimately, the aim of the PAP is to provide the debtor with all the information in relation to the debt due, to enable them to make a decision, and respond regarding payment or raise any issues with the creditor to allow both parties to resolve the matter without the need to involve courts.

The Letter of Claim

The creditor’s Letter of Claim should contain the following information:

• The amount of the debt, together with any interest or other charges accruing.
• Details of your agreement with the debtor. If the debt arises from an oral agreement, this should include full details of what was agreed, when and where it was agreed. If the debt arises from a written agreement, this should include the date and the parties.
• If the debt was assigned to the creditor, details of the original debt, the original creditor and when it was assigned. If the debt was assigned multiple times it should include information relating to all assignments.
• If regular instalments are currently being offered by the debtor, or are being paid, an explanation as to why these payments are not acceptable and why court proceedings are being considered by the creditor.
• Details of how the debt can be paid, for example the method and address for payment.

The following documents must be enclosed with a Letter of Claim:

• An up-to-date statement of account for the debt; the most recent statement of account for the debt and state the amount of interest and/or other charges incurred to bring it up to date; or where no statements have been provided for the debt, state the amount of interest and/or other charges incurred since the debt was incurred.
• The Information Sheet at Annex 1 of the PAP. This sets out the debtor’s rights and obligations under the PAP, in plain English.
• The Reply Form at Annex 1 of the PAP.
• The Financial Statement at Annex 2 of the PAP.
• Any other documents which will help the debtor to understand your position. The PAP states that you can wait for the debtor to request copies of these documents in their Reply Form, however not providing these additional documents at this initial stage will simply protract the delay in payment of the debt.

The debtor’s reply to the Letter of Claim

The debtor has 30 days from the date of the Letter of Claim to respond to the creditor by completing and returning the Reply Form provided therein. This time period should provide the debtor with adequate time to obtain independent legal advice.

The debtor can reply in the following manner:

• Request copies of any documents they wish to see.
• Indicate that they are seeking debt advice. If the debtor indicates that wish to seek advice but cannot do so within the 30-day period, you must allow reasonable extra time for this to be obtained.
• Indicate that they require time to pay. The creditor and debtor should try to reach agreement for the debt to be paid by instalments, based on the debtor’s income and expenditure. If you do not accept the debtor’s proposals for repayment, you should give reasons in writing.

If the debtor does not reply to the Letter of Claim within 30 days of the date at the top of the letter, the creditor may start court proceedings against them.

The PAP places a significant burden on creditors in relation to the additional information which now is required to be included within the Letter of Claim. It also potentially considerably extends the length of the pre-action process.

Failure to comply with the PAP

Failure to comply with the PAP may result in a claim being stayed, i.e. put on hold, to allow a period for parties to comply, and/or sanctions being imposed, for example, a costs order against a party or the removal of the right of a party to recover interest and/or costs.

Commentary:  Brendan Udokoro, Trainee Solicitor, Defended Litigation teamAlthough many have highlighted the various additional burdens that PAP has created for creditors it is important not to forget the potential benefits. If PAP works as intended it could create further pre-action engagement between creditor and debtor. If that engagement is handled correctly it could lead to early settlement and amicable resolution in cases where a debtor has a genuine interest in resolving the matter. For creditors the key will be to ensure those they instruct to deal with the pre-action protocol process or their own internal teams have the expertise to convert engagement from a willing or at least responsive debtor into the successful resolution of the case.Proper strategic planning about the pre-action approach to take which is dependant on the debt type and the party being pursued is key to ensuring the new protocol process becomes more than just a hindrance for creditors.There remains the real possibility that rather than achieving further engagement from debtors the new process with the additional and lengthy documentation which it requires creditors to send to debtors, will serve to put some debtors off and or will lead to no positive increase in engagement. Should this occur it may not all be a waste, if a creditor properly complies with the process one would hope the courts would recognise that a debtor who saw fit to ignore the process and not to engage should equally face the potential sanctions for non-compliance as a creditor would if it decided not to comply. This might make arguments over costs and interest much easier for creditors to succeed with.Whatever the case the coming months will no doubt prove to be interesting and challenging in equal measure. Between now and implementation on 1 October 2017, further changes to the draft PAP may be made.

The Litigation team at Judge & Priestley can assist you to not only recovery your debts but also to assist in developing amendments to your current recovery processes which ensure that you do not fall foul of the new rules. If you would like to speak with a member of the team, please contact our Business Development Manager Andrew Lloyd on 0208 290 7096

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