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Author: Albina Khad
Is your company’s balance sheet affected by aging debt and you are looking to recover it from your debtor? If so, prior to commencing court proceedings, you will now be expected to comply with the new Pre-Action Protocol for Debt Claims (the “Protocol”), which comes into force on 1 October 2017. It can be located on the Ministry of Justice website and will apply to a business (including sole traders and public bodies) (the “Creditor”) claiming payment of a debt from an individual (including a sole trader) (the “Debtor”). The Protocol does not apply to “business to business” debts unless the Debtor is a sole trader. Failure to follow the Protocol will put you at risk of costs sanctions being imposed against you by the court. It’s aim is to encourage communication and resolution without the need to issue proceedings.
As per the Protocol, the first step towards debt recovery is for the Creditor to send a Letter of Claim to the Debtor. Although the content of a Letter of Claim is not onerous, the Protocol sets out the type of information it should contain i.e the amount of debt, whether interest is applicable and details of the agreement giving rise to the debt, together with a prescribed Information Sheet, template Reply Form and Financial Statement.
By way of reply, the Debtor should use the Reply Form enclosed with the Letter of Claim. The Protocol sets out timescales which should be followed i.e. 30 days or longer where the Debtor indicates that debt advice is being sought or requests further documentation. Where the Debtor requires time to pay, then the parties should attempt to agree payment by instalments, having regard to the provisions of the Financial Statement, if appropriate.
The Protocol aims to encourage engagement and communication between the parties at an early stage. Therefore, documents and information should be exchanged at the outset so that each can understand the other’s position.
To avoid court proceedings, use of an appropriate form of Alternative Dispute Resolution is encouraged e.g. mediation. However, the Protocol is clear that where no reply is received from the Debtor within 30 days of the date of a Letter of Claim, then the Creditor may commence court proceedings on giving prior notice of such intention.
In view of the above, it is advisable to follow the Protocol to avoid costs sanctions. It may also be advantageous as agreement may be achieved without the need to engage in costly litigation.
The Protocol does not apply where the debt is covered by another Pre-Action Protocol nor to claims issued by Her Majesty’s Revenue and Customs.
The full version of the Pre-Action Protocol for Debt Claims can be found here.
Contact a member of our Dispute Resolution team if you have any queries or require assistance with the Protocol whether you are the Creditor or the Debtor.