After much consultation and debate, the Ministry of Justice has published the final version of the Pre-Action Protocol for Debt Claims (the Protocol), which is due to come into force on 1 October 2017. The Protocol is available on the Ministry of Justice website.
Following the general trend of civil procedure in the UK, the Protocol aims to encourage early engagement, reasonableness and, where possible, resolution between individual debtors and their creditors. The intention is to render court proceedings an option of last resort. The Protocol applies to any business claiming payment of a debt from an individual (including a sole trader). It does not apply to business-to-business debts (unless the debtor is a sole trader). The remit of the Protocol as currently drafted also appears to extend to debts owed by an individual under a guarantee.
The Protocol is explicitly intended to complement, but not take precedence over, existing regulatory obligations (such as those contained in the FCA Handbook) and will not apply where the debt is covered by another Pre-Action Protocol.
The Protocol envisages a pre-action discourse between debtor and creditor. This will comprise a Letter of Claim, response, early disclosure and a consideration of alternatives to litigation.
Letter of Claim
As is common for any Pre-Action Protocol, the Protocol requires the creditor to send a Letter of Claim to the debtor before proceedings are commenced. Paragraphs 3.1 to 3.3 of the Protocol set out the required contents of such a letter (including, inter alia, full details of the amount and basis of the debt), certain enclosures and method of delivery. If the debtor fails to respond to the Letter of Claim within 30 days, the creditor may start court proceedings (subject to any regulatory obligations).
Response and Early Disclosure
A template Reply Form for use by the debtor is provided at Annex 1 of the Protocol along with guidance for completion. The creditor must pay due regard to the information included in the Reply Form as it may trigger obligations under paragraphs 4.1 to 4.5 of the Protocol. Obligations that may be triggered include (among others) a requirement that the creditor provides the debtor with:
- a reasonable period in which to obtain debt advice;
- written reasons for rejection of any proposed repayment plan; and/or
- documents or information requested by the debtor.
Both the creditor and the debtor should exchange information and disclose documents relevant to their position as early as possible in order to facilitate resolution discussions.
In any event, the creditor should not start court proceedings less than 30 days from, the later of, receipt of the completed Reply Form or the provision of documents by the creditor. If the parties are unable to reach a resolution on the basis of the above steps (and any concurrent discussions), they should consider using an appropriate form of Alternative Dispute Resolution (ADR) such as negotiation or mediation.
If the parties are unable to reach a resolution on the basis of the above steps (and any concurrent discussions), they should consider using an appropriate form of Alternative Dispute Resolution (ADR) such as negotiation or mediation.
After observing the requirements of the Protocol, if a creditor has nonetheless decided to take legal action, it must provide the debtor with 14 days’ notice of its intention to do so, in addition to complying with the time limits detailed above.
Consequences of Non-Compliance
Creditors should note that if a matter does proceed to litigation, the court will take into account any non-compliance with the Protocol when giving directions for proceedings. This could therefore have an effect on (among other things) costs orders made.
Businesses which transact with individual debtors (including sole traders) should consider taking the following steps to align their internal procedures with the Protocol:
- revising standard form letters of demand to assess whether these could be expanded to comply with the Protocol;
- updating debt collection policies and providing internal training on the same;
- tailoring litigation strategies to include a more conciliatory approach to the initial phases of handling debt actions; and
- particularly for businesses which enter into agreements supported by personal guarantees, noting that actions to recover under the guarantee should be handled in accordance with the Protocol.