The Ministry of Justice released the final version of the new pre-action protocol (“PAP”) on the 21 March 2017. The protocol applies where a business is claiming payment of an unpaid debt from an individual (including a sole trader). The protocol does not apply to business to business debts, with the exception of the debtor business being a sole trader.
The protocol describes the conduct the court will usually expect to see prior to the issue of a claim.
Enhanced letter of claim
The protocol requires an enhanced letter of claim which should include:
- A detailed basis for the claim
- Details of any written contract together with the dates and the parties to the contract
- Whether the contract was oral, details of the words spoken and when and where the conversation took place
- Confirmation if the debt has been assigned. Details of when and who to and state if the original contract (if applicable) is available upon request.
The Letter of Claim will need to include the following supporting documents up to date statement of account:
- Information sheet signposting the process
- Reply form
- Financial statement
- State if the original agreement is available upon request.
Responding to the letter of claim
The protocol allows 30 days for a response to be made to the Letter of Claim. Respondents are likely to:
- Admit or deny the debt
- State they have no knowledge
- Make payment
- Request time to pay
- Request further documents
- Request time to take debt advice.
The Court will expect increased efforts from creditors to engage with debtors on any response received, even if the reply is only received partly completed. This includes consideration being given to requests for time to pay and any request for additional time to seek debt advice. When dealing with individuals it is often the case that responses will not be received until the time limit is almost due to expire, therefore replies are likely to be received at the end of the 30 day period. In the event the debtor does respond and no satisfactory agreement is reached, the creditor must send a further letter advising of their intention to issue proceedings. This letter must give a further 14 before proceedings are issued.
Sanctions for failure to comply
Whilst the court initially may excuse a minor breach, sanctions may be imposed for failure to comply such as:
- A stay of proceedings (claim put on hold) to allow compliance of the PAP
- Cost penalties such as disallowing costs on all or part of the clam
- Disallowing or reducing interest claimed.
The new process will have a significant effect on how claims are pursued and result in the initial Letter of Claim running to several pages. The PAP is likely to generate increased requests for documents resulting in a greater cost burden for the creditors and delays in claiming debts. The PAP will allow the savvy debtor an effective extension of credit days, potentially opening the floodgates for an abuse of the process. The new PAP may see companies looking to review the credit terms offered which are often 30 days. If a company has 30 day credit terms the new PAP will mean a company is unable to issue proceedings until at least 60 days have passed. Often issues surrounding debt claims are routine. However the new PAP places a significant burden on creditors to start the PAP clock ticking as soon as the invoices are overdue. Companies may consider reducing their credit control cycles and refer earlier to legal representatives to manage the process. Companies may also consider bankruptcy if the debt is over £5,000 as an alternative debt collection tool. It appears at this stage that PAP is not intended to apply to bankruptcy petitions which are ultimately governed by the Insolvency Rules.
If you have any questions on the new PAP or require a consultancy service to review your credit control cycle and process we are happy to assist you.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.