Commercial and consumer debt recovery and collections will be subject to another big change with the new Pre-Action Protocol, writes Spratt Endicott’s Richard Gwynne
In 2014 a previous pre-action protocol was introduced and was, in many ways, accepted as being a sensible approach to collection of all debts.
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The Pre-Action Protocol (PAP) for debt claims, which is due to be enforced on 1 October 2017 will affect people in many different ways.
The PAP applies to any business, from the sole traders and public bodies, claiming payment from an individual, including a sole trader.
The protocol is intended to allow individuals who have been given credit a fair opportunity to raise queries within a protected time frame. The Ministry of Justice suggests that the PAP is intended to compliment any other regulatory regime to which the creditor is currently subject.
The PAP aims to encourage parties to communicate at an early stage and exchange sufficient information about the matter to help clarify when there are issues in dispute. The aim of the PAP is to try and avoid court proceedings and to possibly use a reasonable repayment plan or consider using alternative dispute resolution procedures. It seems the PAP concentrates on procedure prior to litigation and dictates how and what the creditor should follow in anticipation of litigation.
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By GlobalDataThe PAP details what the creditor is required to do, i.e. sending, by post, a detailed letter of claim to the debtor which should contain the following information:
The amount of the debt with interest where the charges are continuing for a debt arising from an oral agreement, who made the agreement, what was agreed and when it was agreed;
If the debt arises from a written agreement the creditor must detail the date of that agreement, the parties to the agreement enclosing a copy and stating that a copy can be requested from the creditor;
Statement of account for the debt including the amount of interest and any other charges imposed since the debt was incurred;
Details of how the debt can be paid and what the debtor can do if he wishes to discuss payment options;
Enclosing an information sheet and reply form found at Annex 1 of the Protocol;
Enclosing a financial statement for the debtor to complete, an example of which can be found at Annex 2 of the Protocol.
The procedure after the letter before action has been sent would be for the following:
The customer would use the reply form which should be enclosed with the letter to respond;
If the customer indicates that they are seeking legal advice the creditor must allow the customer a reasonable time period to do so. The parties should exchange and disclose documents as early as possible, i.e. within 30 days of the request;
If the parties cannot come to an agreement about repayment of the debt they should consider using ADR or a without prejudice meeting;
If there is no response or no agreement after 30 days and all reasonable negotiations have been exhausted then the creditor is at liberty to issue court proceedings. However a word of caution, the creditor must be sure that they have complied with the above before contemplating proceedings and give a further ‘14 day’ letter before action advising of their intention to issue proceedings.
The creditor cannot issue proceedings for at least 30 days from the date of the letter and the court will expect the parties to have completed and complied with the protocol. If the matter goes to litigation then the court will consider any non-compliance with the protocol and the successful creditor who has not complied with the protocol could be penalised on costs.
If the customer responds to the letter claim but an agreement is not reached the creditor can commence court proceedings but should give the customer at least a further 14 days notice of intention to do so unless action is required.
All creditors will have to comply with PAP, but it will only apply to individuals and sole traders – not companies limited by their liability, or public bodies. It applies to all qualifying debts outstanding and overdue which are potentially being pursued in contemplation of litigation. It is unclear if we have to consider the PAP if we are not contemplating litigation at such an early stage.
If litigation is not considered at the early stages of collections, then we firmly believe that the credit manager has options, and we have set them out below.
But if you are considering litigation, then you will have to comply with the PAP – it cannot and should not be avoided. The choices for the credit manager could be as follows:
Ignore the PAP: This is not recommended, as the consequences would be paying costs for both sides and potentially restarting the case, if allowed;
You could incorporate the PAP for all cases that are passed to your agents for collection. This would have the effect of:
Extending the collections period by 30 days;
Requiring data to be included which currently is not on the requirements list for all qualifying cases, i.e. for limited companies, which is not necessary. If individuals and sole traders can be identified by you at the instructions stage then separate them for inclusion in the PAP procedure and exclude the non-qualifying contracts – or at the very best incorporate the additional work within your current internal collections process.
If you are unable to identify and separate out PAP qualifying cases, or it causes too much additional work, then it may be beneficial to delay the incorporation of the PAP and simply adopt a collections process by you or your agent which does not threaten litigation, i.e. no PAP required. In our view, this non-threatening method of collection will derive quicker payment from most customers, and will allow the credit manager to collect debt which may otherwise have been delayed by the PAP.
