In light of the manifold issues that businesses, sole traders and industry professionals are currently facing with regards to credit control and recoupment of monies owed by clients, customers and those that may be owed to the supply chain; now is the time to peer into the protocol for debt recovery. What do the courts expect of parties claiming or defending debt disputes under a contract before they engage in the battle of litigation for monies owed? There are rules of engagement, you know…
The Pre-Action Rules of Engagement begin with the Debt Protocol…
The Debt Protocol came in force from 1 October 2017, it provides strict guidance for creditors and debtors to follow in a debt claim.
Who Does It Apply To?
The Protocol applies to any business, including sole traders and public bodies (creditor), claiming payment of a debt from an individual, including a sole trader (debtor). It does not apply to business-to-business debts unless the debtor is a sole trader.
What If There Is A Conflict Between the Pre-action Debt Protocol and Other Pre-action Protocols?
The Debt Protocol is aimed to complement any existing regulatory regime to which the creditor is subject. If there are any inconsistencies between the Debt Protocol and a specific regulatory obligation, that regulatory obligation will take precedence.
The Debt Protocol will therefore not apply if the debt is covered by another pre-action protocol (for example, construction and engineering or mortgage arrears). It can not be relied upon if the claim is covered by Practice Direction 7D – these claims are concerned with the recovery of taxes and duties issued by HMRC.
What is the Reason for introducing the Debt Protocol?
The purpose of the protocol is to promote early communication between the parties, including early exchange of information about the debt, to assist with identifying the issues in dispute. This approach undoubtably allows the parties to resolve their dispute in a cost-effective way without the need for court proceedings, the structure of the protocol does encourage the parties to consider a repayment plan or consider an alternative method of resolving the dispute, rather than issuing proceedings. The strictness of the protocol coupled with the court’s sanctions, encourages the parties to act reasonably and in a proportionate manner and to support the efficient management of proceedings that cannot be avoided.
To What Extent do parties need to comply with the protocol?
The court expects parties to whom the Debt Protocol applies to have complied with its provisions, and it will consider non-compliance when giving directions for the management of proceedings. The parties are required to have complied in substance with the terms of the Debt Protocol, and the court is not likely to be concerned with minor or technical infringements, especially where the matter is urgent.
Sanctions imposed by the Court
In the event of non-compliance with the pre-action protocol and depending of seriousness, the court may (i) order that the parties are relieved of the obligation to comply or further comply with the pre-action protocol (ii) stay proceedings while particular steps have been taken are taken to comply. (iii) apply cost sanctions.
What are the Creditors Responsibilities Under the Debt Protocol?
The Protocol places a heavier burden on the creditor to provide detailed information regarding the debt, this includes a complete breakdown of the exact amount sought in addition to how the debt arose.
The Creditor begins the process by sending a Letter of Claim which must contain the following information:
- The amount of the debt.
- Whether interest or other charges are accruing.
- Where the debt arises from an oral agreement:
- who made the agreement;
- what was agreed (including, as far as possible, what words were used); and
- when and where the agreement was made.
4. Where the debt arises from a written agreement:
- the date of the agreement;
- the parties to the agreement; and
- the fact that a copy of the agreement can be requested from the creditor. (It is prudent to enclose a copy of the agreement with the Letter of Claim.
5. Where the debt has been assigned, the details of the original debt and creditor, when it was assigned and to whom it was assigned.
6. If regular instalments are currently being offered by or on behalf of the debtor, or are being paid, an explanation as to why the offer or current instalments being paid are not acceptable and the reasons why a court claim is still being considered.
7. Details of how the debt can be paid (including, for instance, the method of payment and the address for payment).
8. Details of how to proceed if the debtor wishes to discuss payment options.
9. The address to which the completed Reply Form should be sent.
Documents to include with the Letter of Claim
The following documents should be enclosed with the Letter of Claim:
- An up-to-date statement of account for the debt. This should include details of any interest and other additional charges added.
- The most recent statement of account for the debt, together with a statement explaining 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
- Where no statements have been provided for the debt, a statement explaining the amount of interest incurred and any other administrative or other charges imposed since the debt was incurred
- A copy of the Information Sheet and Reply Form
- A Financial Statement form.
- Any written written agreement.
What are the Debtors Responsibilities Under the Debt Protocol?
A debtor will have 30 days from the date of the Letter of Claim to reply, after which if no reply is received from a debtor; a creditor may start court proceedings.
In response, the debtor can request a further 30-day period and indicate to the creditor that they are seeking debt advice. The debtor will then have to respond by either accepting the debt or disputing it wholly or partly. It must be noted that the debtor can request further documentation from the Creditor before or after seeking advice and should such request be made the Debtor will have 30 days to respond to the claim from the date the creditor provided the requested documents.
Points of Caution
The debtor should take care about making any admissions in the Reply Form, indicating that the debt is owed, especially if they are unsure or wish to dispute the debt or part of the debt later.
The parties should also exercise caution to avoid waiving privilege when providing documents.