Making Bad Debt Worse? New Restrictions on Debt Recovery Claims

The Protocol

On 1 October 2017, the Pre-Action Protocol for Debt Claims (the “Debt Protocol”) will be added to the Civil Procedure Rules that govern the conduct of court proceedings in England and Wales.

As with other existing Protocols (such as those for professional negligence or personal injury claims), the Debt Protocol details what will be expected of a creditor before it starts court proceedings. Any failure to comply with the requirements will be viewed dimly if a claim follows, and will be taken into account when the court considers which party should bear the costs of the proceedings.

Scope and Initial Steps

The Debt Protocol applies to any business (including a sole trader) seeking payment of a debt from an individual. It does not extend to business-to-business debts, unless the debtor business is operating as a sole trader.

As is already the case under the general rules on pre-action conduct, the creditor will be expected to send a Letter Before Claim to the debtor setting out the amount of the debt and details of how and when it arose. The letter should also enclose, if possible, an up-to-date statement of account for the debt, as well as details of any interest and administrative charges added. These requirements are largely uncontroversial.

However, an important departure from the existing regime comes in the form of the documents that the creditor must now enclose with its Letter Before Claim. These include:

• An “Information Sheet”, which provides the debtor with information on what it must do following receipt of the Letter Before Claim and where it can seek independent debt advice.
• A “Reply Form”, which the debtor should complete and return to the creditor within 30 days. In the Reply Form, the debtor can state whether it admits or disputes the debt, whether it requires time to pay the amount admitted, and what further documents (if any) it requires from the creditor.
• A “Financial Statement” form, in which the debtor can provide information about its income and outgoings and any existing debts.

Timescales

Until now, a creditor has been able to choose how much time the debtor should be permitted to respond to the Letter Before Claim. In many cases where the debt is clearly established, it is not uncommon for creditors to allow only fourteen days (and, in some cases, as little as seven) for the debtor to respond.

The Debt Protocol, however, introduces a new minimum period of 30 days after the Letter Before Claim is issued before the creditor can start proceedings. Moreover, if the debtor returns the completed Reply Form mentioned above, this 30-day period will not start running until:

• The creditor receives the completed Reply Form; or, if later
• The creditor provides copies of the further documents requested by the debtor.

This is one of the areas in which the Debt Protocol is likely to have the biggest impact. If a debtor returns its Reply Form at the very end of the 30-day period, the result will be a minimum period of 60 days from when the Letter Before Claim was issued before the creditor will be permitted to issue its claim.

If the debtor is particularly astute, it will also request further documents when sending back its Reply Form, in the knowledge that this will buy it even more time; under the Debt Protocol, the creditor must provide copies of the requested documents (or to explain why they are unavailable) within 30 days of such a request. Importantly, there is no ability in the Debt Protocol for the creditor to explain why the requested documents are irrelevant; only to explain why they are unavailable. Again, this appears ripe for exploitation by vexatious debtors, who may well request volumes of irrelevant documents in an effort to delay or frustrate the commencement of a claim.

Taking Stock

Unfortunately, for creditors, this is not the end of matters. If the process outlined above fails to achieve a resolution, the creditor must then give the debtor 14 days’ notice of its intention to commence court proceedings (described in the Debt Protocol as a “taking stock” period). When added to the timings required under the Letter Before Claim and Reply Form, this could see the pre-action period in some cases extend to more than 100 days – a sevenfold increase from the 14 days commonly given at present.

Thoughts

Whilst the intentions behind the Debt Protocol are arguably admirable, the reality for many businesses is that this will represent a significant additional hurdle to the recovery of trade and other debts. At a time of increasing court fees and dwindling court resources, it will now be more important than ever to seek considered, tailored legal advice at the very earliest stages of the debt recovery process.