Pre-Action Protocol for Debt Claims

Current position

Where a specific existing pre-action protocol does not apply (e.g. where the debt is a construction debt), before issuing court proceedings creditors are expected to issue a letter of claim (LOC) containing concise details of the claim and the amount of the debt. They are then expected to allow a reasonable amount of time for the debtor to respond, to exchange sufficient information to narrow any issue in dispute and to consider whether negotiation or some other form of ADR might enable the parties to settle the dispute. In real terms the LOC can be simple, containing no background information or explanation of the debt, and creditors can commence legal proceedings from as little as seven days later.

The new Protocol

Whilst only approximately 5% of debt claims issued at court are defended (9% are admitted and 86% are subject to default judgment), the court wishes to promote early resolution of debt claims before proceedings are issued, which requires early identification of issues in dispute and the engagement of the parties in finding a resolution. The Protocol seeks to address this by requiring the parties to adhere to a prescribed process. Failure to comply with the Protocol may be considered by the court when deciding how to manage the proceedings and who should pay what costs.

The Protocol requires creditors to issue a more detailed LOC which includes:

  • full particulars of the debt, interest and charges;
  • how the debt arose, including the date and parties to the relevant contract;
  • if the debt has been assigned, details of the original creditor and assignment;
  • how it can be paid and, if the debtor has previously offered to pay by instalments, why that offer is unacceptable;
  • the address to which a prescribed 'Reply Form' should be sent by the debtor.
  • a copy of a statement of account recording the debt, interest and charges;
  • an ‘Information Sheet’ containing details of organisations which can provide advice;
  • a prescribed ‘Reply Form’ which the debtor is required to complete; and
  • a ‘Financial Statement’ for the debtor to complete if they wish to offer to discharge the debt by instalments, in which they record their income and outgoings.

A creditor must then give the debtor 30 days from the date of the LOC to respond before issuing court proceedings. If, however, the debtor responds within those 30 days, the creditor should not commence legal proceedings until a further 30 days after:

  • the debtor has returned the ‘Reply Form’ and has not requested further information or documentation about the debt; or
  • if the debtor asks for time to pay, the conclusion of further discussions between the creditor and debtor about this; or
  • if the creditor has only partially completed the ‘Reply Form’, the creditor has contacted the debtor to obtain any further information it requires to understand the debtor's position; or
  • if the debtor seeks in the ‘Reply Form’ further information/documentation about the debt, the creditor has provided it within 30 days of receipt of the request; or
  • if the debtor has indicated in the ‘Reply Form’ that the debtor will be obtaining legal advice and the date given for obtaining that advice has passed.

And then the creditor is expected to give an additional 14 days’ notice to the debtor of its intention to do so (unless exceptional circumstances justify urgent action). This means that if the debtor completes a ‘Reply Form’, the creditor is expected not to issue court proceedings until potentially 74 days after the LOC, depending on when the ‘Reply Form’ is received.

Impact of the new Protocol

A creditor will want to recover debts quickly and with as little cost as possible. The new Protocol makes the pre-action process longer, more time-consuming and potentially more costly, as a creditor seeking to recover a debt will need to:

  • prepare a more detailed LOC setting out how the debt arose;
  • respond to requests for information and documentation;
  • engage with the debtor in relation to disputes and proposals to pay; and
  • comply with the prescribed minimum time periods prior to commencing court proceedings.

If the creditor and debtor properly engage with the new process, it could potentially lead to an early agreed resolution without the need and cost of issuing court proceedings. Where a resolution cannot be agreed, the Protocol should help identify the key issues in dispute, which (in theory) could reduce the cost in the court proceedings and may assist the creditor in striking out frivolous defences and/or obtaining summary judgment.

However, a savvy debtor may seek to use the Protocol to delay the issue of court proceedings with a view to delaying or preventing the creditor’s ultimate recovery of the debt (e.g. by buying time to commence a voluntary insolvency process or to pay more pressing creditors).

An alternative: statutory demand for undisputed debts

Where a debt of no less than £5,000 is not the subject of a genuine dispute or cross claim by the debtor, a creditor may consider serving a statutory demand on the debtor, which is a different process to issuing legal a court claim to which the Protocol does not apply. Non-payment of the sum demanded within 21 days can be used as evidence that the debtor is unable to pay its debts when they fall due to support the subsequent presentation of a petition for the debtor’s bankruptcy.

The threat of bankruptcy can promote the early payment of the debt, potentially quicker than under the new Protocol. It may also flush out any dispute/counter-claim that has previously not been raised which, if genuine and not resolved, would require the creditor to consider following the Protocol to pursue the debt.

However, if the debtor is genuinely unable to pay the debt, the threat of bankruptcy may not improve the creditor’s position and may result in the debtor engaging with all its creditors and agree terms. Further, if a bankruptcy petition is presented and the creditor’s debt is subsequently paid, another creditor may apply to advance the bankruptcy petition and in the event the debtor is then declared bankrupt, the original creditor may be required to pay the sum it received from the debtor to the debtor’s Trustee in Bankruptcy unless the court orders otherwise. Such rules do not apply under the Protocol or normal court proceedings.

For further information about the Protocol or to discuss any aspects of financial disputes and debt recovery, please contact Jeremy Pearce in Thrings’ Debt Collection team; or Melissa George in Thrings’ Restructuring and Insolvency team.

Related Articles