When does it apply?
The new debt recovery protocol came into force on 1 October 2017 and applies to any business claiming a debt from an individual. It will not apply to business-to-business debts unless the debtor is a sole trader. Neither will it apply if another protocol applies to the debt, for example the construction and engineering protocol.
The aim of the new protocol is to ‘encourage early engagement and communication between the parties’. This includes early exchange of sufficient information about the matter, thus, avoiding court proceedings wherever possible.
Under the new protocol the Creditor must send out a comprehensive letter of claim which amongst other points must set out: -
- Interest rate charged on the outstanding debt; and
- Details of how the debt arose and the type of agreement it relates to.
The initial letter will also need to enclose a statement of account, reply form and information sheet for completion by the debtor, together with a financial statement.
The debtor will have thirty days to reply, during which time proceedings should not be issued. If the debtor responds stating that they require more time to pay, the parties are to try and reach an agreement to pay instalments based on the debtor’s income and expenditure.
Should the debtor return only a partially completed reply form this should be taken as attempt by the debtor to engage with the matter and the creditor should attempt to discuss further with them.
As with any protocol the Court will expect compliance failing, which the Creditor risks possible costs consequences once proceedings have been commenced.
Potential Benefits and Pitfalls
Introducing a set amount of time for the parties to correspond prior to issuing proceedings is beneficial. It allows for time to negotiate and attempt settlement (with the benefit of clarity as to each party’s position). This helps to avoid the need to issue court proceedings.
However, whilst the new protocol encourages early settlement (by encouraging early disclosure of documents and consideration of alternative dispute resolution) there are issues for creditors where the debt falls under the £10,000.00 limit.
Firstly, such claims fall within the small claims track limit where costs are generally not recoverable bar fixed costs and disbursements. It follows that the associated costs in complying with the new pre-action protocol for claims under £10,000.00 are unlikely to be recoverable.
Secondly, the need for creditors to comply with the time frame set down in the protocol may in certain circumstances mean that debtor’s use the additional time to delay making payment.
For these reasons, it is likely that we will see an increase in the issue of bankruptcy proceedings and the use of the Insolvency Act 1968 for undisputed debts of £5,000.00 and more as an alternative to complying with the new protocol. However, only time will tell.
Author, Rachel Upton, is a Solicitor in the Civil Litigation department at Duncan Lewis’ Harrow branch. Rachel has extensive experience in debt recovery, insolvency and enforcement as well as in contractual disputes.
Duncan Lewis Civil Litigation Solicitors
Duncan Lewis is one of the leading solicitors in England and Wales offering expert litigation and alternative dispute resolution services offering expertise in ADR & Mediation, Bankruptcy, Banking & Finance, Company & Commercial, Contentious Probate, Defamation, Debt Recovery, Fraud, International, Property and Professional Negligence.
The firm regularly handle claims at the County Court as well as high-value claims at the High Court, the Commercial Court and the Court of Appeal.
If you have a litigation issue which you wish to discuss in confidence, please do not hesitate to call us on 0333 772 0409.