DEBT COLLECTION – Becoming more burdensome for the Creditor?

The Pre-action Protocol for debt claims comes into force on 1 October 2017 and will potentially have a burdensome impact on a business if it has outstanding debts due from individuals bringing in a more pro-active obligation on the creditor to engage with the debtor, giving the debtor longer to respond before court proceedings can be issued and encouraging negotiations and ADR to be exhausted before proceedings can be issued.

The Protocol will apply to any business when claiming payment of a debt from an individual (which is defined to also include a sole trader). The Protocol does not apply to business-to-business debts. It describes the conduct the court will normally expect of parties prior to court proceedings being commenced. The Protocol does not apply if the matter is covered by another pre-action protocol such as construction and engineering or mortgage arrears.

 

What does the creditor have to do?

A creditor will have to include with its letter before claim a template information sheet and a reply form in all cases. The letter before claim has to contain the following information:

1. the amount of the debt;
2. whether interest or other charges are continuing;
3. where the debt arises from an oral agreement, who made the agreement, what was agreed and when and where it was agreed;
4. where the debt arises from a written agreement, the date of the agreement, the parties to it and the fact that a copy of the written agreement can be requested from the creditor;
5. where the debt has been assigned, the details of the original debt and creditor, when it was assigned and to who;
6. 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;
7. details of how the debt can be paid and details of how to proceed if the debtor wishes to discuss payment options; and
8. the address to which the completed reply form should be sent.

The creditor should also do one of the following:-

1. enclose an up-to-date statement of account for the debt, which should include details of any interest and administrative or other charges added; or
2. enclose the most recent statement of account for the debt and state in the letter of claim the amount of interest incurred and any administrative or other charges imposed since that statement of account was issued, sufficient to bring it up to date; or
3. where no statements have been provided for the debt, state the amount of interest incurred and any administrative or other charges imposed since the debt was incurred.

If the debtor does not reply to the letter before claim within 30 days, the creditor may commence court proceedings.

 

What does the Protocol mean for business creditors?

It appears that the process of recovery of debts will be more cumbersome for creditors as there is more of an onus on them. They are required to provide a list of information to the debtor in the Letter before Action including enclosing documents in order to comply with the Protocol. Creditors must also be more pro-active with chasing debtors for the information and engage with them in discussions regarding repayment proposals and any dispute relating to the debt.

A creditor will now need to give a minimum of 30 days for response to a Letter before Action before they are able to commence court proceedings.

There can be potential further costs if ADR is used that will need to be considered.

 

What happens if creditors fail to comply with the Protocol?

Clearly no creditor will want to be found to have failed to comply with the Protocol as it appears this will cost them either in legal costs or in how much they will actually recover.

Business will need to implement procedures in readiness for the Protocol coming into force in October 2017 to ensure that they comply with the Protocol.

 

Summary

The Protocol puts the onus on the creditor to give the debtor firstly more information in the Letter before Claim and also 30 days to respond before court proceedings can be issued. The Protocol allows the debtor to potential delay payment for up to 90 days. It encourages negotiations to take place and agreements to be reached if possible either between the parties or by using ADR. The cost implication of using a third party mediator will need to be considered against the size of the debt.

For businesses that deal with individuals on a regular basis they will now need to consider what procedures can be put in place to minimise debt needing to be collected. They will also need to consider the length of time that it could take to recover debt owed due to the lengthier process that will be involved.