New debt recovery rules from October
Businesses need to review their approach to collecting debts.
Debt recovery is a fact of life for businesses: most have debt recovery systems in place to ensure prompt payment and make full use of the courts if debtors do not pay. However, court procedures for recovering debts from individuals will change soon. These changes, which encourage settlement of debts and the avoidance of court proceedings, will take effect in October 2017 and are likely to make the process slower and potentially harder for businesses to recover debts. All businesses need to review their approach to debt recovery - and soon.
What are the changes?
The court system is undergoing a period of reform and there is increasing pressure on parties to try and sort out their disputes using alternative dispute resolution (ADR) procedures such as negotiation and mediation.
To encourage creditors and debtors to settle and avoid court proceedings, a new 'Pre-Action Protocol for debt claims' (Protocol) was published in March and will come into effect on 1 October 2017. As the name implies, a pre-action protocol sets out action to be carried out by the parties before they start court proceedings.
Key provisions of the Pre-action Protocol for debt claims
The Protocol sets out what the court will normally expect the creditor and the debtor to do before starting court proceedings. It includes a template Information Sheet and Reply Form for the creditor to give to the debtor.
The aim of the Protocol is to:
- resolve the dispute without starting court proceedings,
- encourage the parties to engage and communicate with each other;
- encourage the parties to exchange information about the debt and to act in a reasonable and proportionate manner with each other;
- ensure the parties each have sufficient information to clarify any issues in dispute;
- to agree a reasonable payment plan or use ADR;
- finally, if agreement cannot be reached, to support the efficient management of court proceedings.
When will the Protocol apply?
- applies to creditors (limited companies, partnerships or public bodies) who are claiming payment of a debt from an individual (including a sole trader);
- does not apply to business-to-business debts unless the debtor is a sole trader; and
- does not apply to HMRC claims to recover tax.
The Protocol will work alongside any other regulatory debt recovery process to which the creditor is subject (for example, those set out in the Financial Conduct Authority).
There are other court pre-action protocols, including for construction and engineering claims and mortgage arrears claims. If one of these specific protocols applies to the debt, they take precedence over the Protocol.
What action needs to be taken?
You can access the Protocol for the full detail here, but, in summary, the following procedure must be followed:
- The creditor sends a letter of claim to the debtor setting out specific prescribed information - his claim, what is due and how it became due and how it can be paid. The letter must be posted on the day the letter is dated. A copy of the agreement, if any, and other relevant information should be included. The creditor should also supply other financial information including an up-to-date statement of account of the debt and the completed Information Sheet in template form and the Reply Form.
- The debtor should use the Reply Form to reply and can request more information and documents. The creditor should supply the requested material or explain why not.
- If the debtor does not reply within 30 days, the creditor can start proceedings.
- If the debtor advises the creditor that they are seeking debt advice, the creditor must allow a reasonable period for the advice to be obtained - but should not start court proceedings until 30 days have elapsed since the debtor returned the Reply Form - or since further information was provided.
- If the debtor requests time to pay, the debtor and the creditor should try and reach agreement on how. If the creditor does not agree, reasons should be given.
- If the debtor does not return the Reply Form or returns it only partially complete, it is for the creditor to contact the debtor to find out if any further information is needed and to better understand the debtor's position.
- If the parties still cannot agree on a solution, they should seek an alternative to court such as negotiation or mediation.
- If carrying out the Protocol requirements does not result in agreement, the parties should take stock of the situation to see if proceedings can be avoided or the issues narrowed.
- Failing that, the creditor must give the debtor 14 days notice that it intends to start court proceedings.
What happens if the parties do not comply with the Protocol?
If debt recovery proceedings are started, the court will expect the parties to have complied with the Protocol.
If the parties have not complied, the court may put the proceedings on hold and order the parties to go through the steps of the Protocol. Or, the court could penalise the non-compliant party in a variety of ways, for example with a costs order or by disallowing interest.
Will the forthcoming Protocol make a difference to day-to-day debt recovery?
In a word - yes - especially for those businesses for which it is standard practice to start court proceedings if individual/sole trader debtors (not business debtors) do not pay. Non-compliance could have significant administrative and financial consequences for the creditor.
The Protocol will make the debt recovery process more difficult for creditors and will mean that debtors will be able to delay payment further. Creditors will have to be substantially more pro-active in dealing with debtors and ensuring that they have sufficient information to deal with the debt.
What should businesses do now?
Creditors should review their debt recovery procedures now to ensure their employees familiarise themselves with the new required steps in debt recovery procedures to comply with the Protocol.
Your debt recovery team is likely to have an established system for dealing with debts that includes the following:
- an email or two requesting payment;
- a telephone call or two or more to chase the debt;
- instructing a solicitor to issue a letter before action, and, if there is still no response;
- starting court proceedings against the debtor.
This process works reasonably well in most cases because the threat of court proceedings is, very often, enough to encourage individual and sole trader debtors to pay up. The Protocol introduces additional steps into the process and makes delays to payment more likely. There is also a risk that financially unstable debtors might become bankrupt before the debt can be taken to court.
Businesses should therefore:
- check the credit ratings of those to whom valuable goods and services are supplied;
- be careful about giving credit and ask for money up-front for goods;
- review debt recovery processes to ensure compliance with the Protocol. (In particular, supply the Information Form and Reply Form with the letter before action);
- provide any information requested as quickly as possible and be more proactive about supplying information;
- communicate more with debtors; and
- try ADR processes such as mediation.
Failure to comply with the Protocol could mean you do not later recover some of the interest on the debt; you might lose some entitlement to your costs even if the debt is found to be due; and you might have to pay some of the debtor's costs.
For more information about the new Protocol and its effect on your business, contact Christopher Burke on 0161 684 6941 or make an enquiry.
Posted 12 May 2017Subscribe to our newsletter
Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.
This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.