New debt recovery rules: what you need to know
This week, the new pre-action protocol for debt claims came into force – and it’s likely to leave some business owners and managers scratching their heads. Partner Samantha Castle decodes these new debt recovery rules for us and explain what they mean in practice.
A pre-action protocol is, in essence, a set of steps that you follow before going to court. They exist for all kinds of claims, but this new protocol focuses in particular on debt claims by businesses against individuals or sole traders.
The process for debts owed between individuals isn’t affected – and claims relating to construction and engineering are excluded entirely, as they’re governed by separated rules.
Strictly speaking, the protocol doesn’t apply to business-to-business debts, but in practice, I’d recommend to my business clients that they adopt a similar procedure for recovering money from other companies.
Why? Because it will help satisfy the court that you’ve taken reasonable steps to recover the debt before you issue court proceedings. This is important – if the court isn’t satisfied that you’ve done what could be reasonably expected to get your money back, then you may not be allowed to recover the costs of pursuing the claim and further you may be penalised both financially and procedural for ignoring the protocol.
What’s in the protocol?
The protocol encourages dialogue in debt disputes and the use of Alternative Dispute Resolution (ADR) before the case can get to the court stage.
It promotes solutions which are reasonable and proportionate to the size of the debt before court action is required, such as agreeing a repayment plan.
The benefits to both sides are obvious – the claimant gets their money back, the debtor’s credit history isn’t tarnished by a court judgement and both will hopefully spend less on legal advice and court fees.
So what are the salient points in the new protocol?
First, the pre-action letter of claim sent to the debtor now has to contain prescriptive information. As a result, whenever I draft a pre-action letter to a debtor I will now ask all my clients for the following details:
- An up-to-date statement of account for the debt, which states the debt owed and details of any interest and administrative or other charges added.
- Whether the debtor has offered to pay in regular instalments or is already paying in instalments. If either of these things is true, the creditor also needs to explain why the repayment plan isn’t acceptable and why they intend to take court action.
- Information on how the debtor can pay the debt – payment methods offered and the correct payment address. It’s a small thing, but it will affect the claim if it isn’t provided.
On top of the above, the letter also has to explain how the debt arose. If it was via an oral agreement, we need to say who made the agreement, what was agreed (including the exact form of words if possible) and the date and place of the agreement. If a written agreement, then we need to be able to say who made it and when, and offer to provide a copy if needed.
Also, if relevant, the letter will need to state if the debt has been ‘assigned’ (transferred) to someone other than the original creditor.
In addition, the debtor needs to be given specific documents along with the letter – an information sheet with guidance and a financial statement for them to complete. A solicitor can prepare these for you.
If the debtor doesn’t reply to the letter of claim within 30 days we can start court proceedings. However, if the debtor responds within 30 days, then timescales under the protocol will depend on their response.
There are too many different possible scenarios here to go into detail on each – suffice to say they range from the debtor immediately paying up (it does happen!) to them requiring additional time to get their own legal advice, which they are entitled to seek.