Pre-Action Protocol for Debt Claims: what it means
On 21 March 2017, the Ministry of Justice released the long awaited final version of the new Pre-Action Protocol for Debt Claims (the Protocol) which will take effect from 1 October 2017. Who will it impact and how will it affect businesses seeking payment of unpaid invoices?
Woodfines provides an overview on the impact the Protocol will have on the businesses collection process. You can read the full Pre-Action Protocol here.
The Protocol applies to all businesses (including sole traders and public bodies) claiming payment of a debt from an individual. The Protocol does not need to be followed where the debtor is a business, unless the debtor is a sole trader (e.g. Mr Smith trading as Smith Plumbers). The Protocol details what steps a business should take before issuing court proceedings to recover a debt.
These steps are more onerous for businesses and include:
- Sending an enhanced letter of claim which encloses a prescribed form information sheet, reply form and financial statement form for completion by the debtor;
- Allowing the debtor 30 days to complete and return the reply form, information sheet and financial statement;
- Where the debtor requests, allowing the debtor additional time to take debt advice before returning the debtor’s forms;
- Providing the debtor with a copy of a document requested by the debtor;
- Refraining from issuing court proceedings until 30 days after receipt of the debtor’s reply form or 30 days after providing requested documents to the debtor.
The Protocol’s aim is to encourage early communication between parties and a full exchange of information, so that where a debtor disputes a debt, the parties have the opportunity to discuss the dispute before proceedings are issued. However, debts are often not disputed. The MOJ published its quarterly statistics on 1st June 2017. These show that 87% of County Court Judgments obtained between January and March 2017, were default Judgments (i.e. following a debtor’s failure to defend the claim).
Notwithstanding that a small percentage of debt claims are defended, there is no doubt that the Protocol will mean that a business pursuing a debt against an individual will have to a) factor in additional days into its credit control process and b) incur additional collection costs.
If a business fails to comply with the Protocol and issues court proceedings, the court will take into account non-compliance with the protocol when giving directions. Where there is a complete disregard for the Protocol, this could result in the court making an award of costs against the business, even where the court orders that the debtor pay the business’ invoice.
A business can ensure compliance with the Protocol and keep its collection costs as low as possible, by using a fixed cost debt recovery service. A business can also look to reduce the impact of the Protocol by ensuring that its internal credit control process is as efficient and streamlined as possible. For example, where an internal credit control cycle is currently more than 90 days, it may be sensible for a business to consider whether this is too long and whether it can be reduced so that any unpaid invoices can be referred to a solicitor sooner.
Woodfines offers a fixed cost debt recovery service to businesses, and can advise on the changes that the Protocol will bring about for you. If you have any questions on the new Protocol or would like Woodfines to review your credit control process, please contact email@example.com. Details of the firm's debt recovery proposal can be found here.
For a more detailed summary on the Protocol, please click here.
With offices in Cambridge, Milton Keynes and Bedfordshire, Woodfines Solicitors provide a full range of legal services to businesses and individuals.