Debt recovery is a prevalent issue in the media, but what’s being done to tighten up best practices about chasing late payments? The Blackstone team explore…
Understanding the New Pre-Action Protocol
On the 1st October 2017, a new Protocol came into force setting out rules on how to start the legal process in relation to debt recovery. Designed to promote good practice regarding debt recovery and encourage parties to act reasonably, the Pre-Action Protocol ultimately aims to reduce the number of debt-related cases progressing to court.
Whereas the Practice Direction for Pre-Action Conduct and Protocols (PDPAC) applies to business-to-business debt claims, this covers any business seeking payments of debts by individuals (including sole traders).
So what’s new about the Protocol, and what does it mean for businesses who might find themselves in the position of creditor to individuals or sole traders? We take a closer look:
Why is there a new Protocol?
There’s a lot of media interest around late payments and debt recovery at the moment, and it’s something that the government is keen to address. However, there is general agreement that court proceedings should be a last, rather than a first, resort.
The New Pre-Action Protocol was created to encourage communication, giving both sides an opportunity to understand each other’s position and pinpoint any issues. As such, the Protocol has given debtors more time to respond to letters chasing late payments, while ensuring creditors provide key information from the outset to avoid delays.
New time limits, explained
Under the old rules, you could write a letter before action to debtors and give them 14 days to respond. Now, creditors must wait 30 days for a response before embarking on court proceedings.
If a debtor responds to your letter, but an agreement cannot be reached, you should provide a further 14 days before issuing court proceedings (unless urgent action is required due to time limits).
In the event that you do agree a payment plan and the debtor defaults, the debt recovery process begins again…
What should your letter include?
To ensure that debtors have all the information they need to respond and act appropriately, the Protocol has outlined new guidelines for the content of pre-action communications. When writing to the individual, you must:
- Attach an information sheet, finance statement and reply form for the debtor, which can be obtained from justice.gov.uk. The debtor should use this for their response.
- Provide a clear breakdown of the total outstanding sum being claimed
- Enclose the most recent statement of account for the debt
- Confirm whether any charges or interest are continuing on the outstanding debt
- Provide details of what was agreed, if this was an oral or written contract, and when and where it was agreed
- Enclose a copy of any written agreement
Along with this information, you should provide an address for the debtor to send the reply to, and give details of how the debt can be paid i.e. by direct debit (bank details) or cheque (payable to).
Then, if the debtor responds to the letter you must:
- Provide any information or documentation requested, or explain why it is unavailable.
- Be willing to arrange for the debt to be paid by instalments, based on their income and outgoings set out in the finance statement, if the debtor needs time to repay the debt. If you cannot accept the debtor’s proposal, you should explain why.
- Ask the debtor to fill in any gaps if you receive a reply form that isn’t fully completed.
- Confirm who the debt has been assigned to and when, if assigned to another party. You will still need to provide details of how the original debt arose and the name of the creditor.
What does this mean for debt recovery?
The new Protocol is something of a double-edged sword for debt recovery. On the one hand, some say that debtors may take advantage and use it as a delay tactic. On the other, 30 days gives you and the debtor time to try to resolve any issues, especially if you follow the best practices to ensure they have all the information they need.
It’s important to note that if you start a court claim without following the Protocol you could be penalised; you may be asked to pay the debtor’s legal costs, be refused interest, or fail to recover your costs altogether.
As such, you must keep a close eye on deadlines and time periods imposed by the new protocol. For example, if a debtor wants to seek advice you must allow them a reasonable time to do so.
Worried about how the new Protocol will affect your debt recovery capabilities? For more information on the new rules, contact our debt recovery team today on 0161 929 0121. Alternatively, allow us to contact you by completing our online enquiry form. We would be happy to answer any questions you may have.
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