How will the new Pre-action Protocol for Debt Claims affect my business?December 20, 2017
On 1 October 2017 we saw the Pre-action Protocol for Debt Claims (“the Protocol”) come into force which now determines how companies recover debts from their individual customers.
Scope of the Protocol
The Protocol is not concerned with business to business debts unless the debtor is a sole trader.
It remains to be seen how this will affect landlords seeking to recover rent arrears from their tenant before issuing a claim for the arrears, alone or together with a possession claim. However, at this stage it is probably safe to say that landlords who have converted their lettings business to a limited company must comply with the Protocol. We have seen a move in this direction for many landlords to combat the upcoming tax burdens on their rental income.
At this stage we would recommend that landlords keep the Protocol in mind when pursuing rent arrears because the Court may consider any non-compliance when making an order or awarding costs.
Why has this come about?
The Protocol aims to reduce the number of debt recovery cases proceeding to Court. These disputes are rife and often incur a great deal of time and cost to the parties. It is hoped that the Protocol will encourage the parties to communicate effectively and act proportionately so that Court is a last resort.
I run a limited company and we have several customer invoices outstanding, what is required of me under the new rules?
After you have exhausted your own credit control process, you will likely wish to take legal action to seek payment. Firstly, you must send a detailed Letter of Claim to the debtor setting out particular information, including, but not limited to the following:
- Information relating to how the debt arose;
- The amount due and whether interest is accruing, and how much; and
- An explanation of how the debt can be paid.
The Letter of Claim should also enclose an up to date statement of the account where possible and you must attach the Information Sheet, Reply Form and a Financial Statement form as annexed to the Protocol. These can be found here: https://www.justice.gov.uk/courts/procedure-rules/civil/pdf/protocols/pre-action-protocol-for-debt-claims.pdf (pages 8-17).
The Letter of Claim must be clearly dated at the top of the page and sent on the same day, or the following day. The debtor must be provided with no less than 30 days to respond. You should also allow time for the letter to reach you. Today, two days for first class post is reasonable.
In the past, businesses would have only had to wait 14 days for a response before they were entitled to take further action. The new 30 days requirement is not likely to be a welcome change for creditors and it doesn’t stop there…
What happens next?
Your debtor should use the Reply Form to respond.
If the debtor indicates in Section 3 that they are or will be seeking advice, you must provide them with a reasonable period to obtain such advice. There is provision on the Reply Form for the debtor to ask for more than 30 days to do this. By this time it is possible that at least 60 days would have passed since you sent your Letter of Claim. For landlords, this means there could be two months’ of rent arrears by now and you would be entitled to serve the relevant notice to quit under Section 8 of the Housing Act 1988.
If the debtor asked for more information or specific documents, they should be supplied without delay and Court proceedings should not be started any sooner than 30 days after providing the documents.
What about alternative dispute resolution (“ADR”)?
The debtor may make an offer for settlement of the debt and if this is not acceptable, the creditor will be required to outline their reasons for rejection and consider other options, for example ADR. This might involve further negotiation, mediation through an independent mediator or even arbitration.
Unfortunately, ADR is often costly and can be disproportionate, depending on the method used and whether an agreement is reached. If the parties fail to use ADR prior to issuing a claim, the Court may impose further fees.
If you have taken all possible steps to settle the debt, it is then necessary to give the debtor a final 14 days’ notice before you issue a claim.
What happens if the debtor does not respond at all?
Court proceedings can be issued after the deadline for responding elapses. Make sure you diarise this.
My debtor and I had an instalment arrangement in place and they have defaulted, can I issue proceedings now?
No. The guidance says you must comply afresh with the Protocol and send another 30 day Letter of Claim.
The practical implications of this are likely to be extremely arduous and we imagine that many debtors will intermittently default and continue to avoid a county court judgment in this way.
In light of the implementation of the Protocol and the new drawn-out process, our advice for businesses is as follows:
- Review and streamline your internal credit control procedures to avoid stretching your cash flow;
- Ensure that your Terms of Business make reference to alternative dispute resolution and invite your debtor to engage in this process. This is required when contracting with individuals under the Consumer Rights Act 2015;
- Act promptly and do not let bad debts fester;
- Be realistic and leave room for negotiation if you can; and
- Assess your options, have you tried everything? If not, you will likely be exposed to a risk from a costs perspective.
Please do not hesitate to get in touch with us should you have any unpaid bills to recover and would like some advice.
If you are concerned about whether your Terms of Business are compliant with the above, we can review and re-draft these where appropriate.
The Court process can be difficult to navigate. The process will seem lengthy and arduous. If you have any concerns or questions about landlord issues, contact our Landlord Services Team on 0117 929 0451 or by email.