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The new pre-action protocol for debt claims came into force on 1 October 2017 and, while it will not have a retrospective effect, the court will expect the parties to have complied with this protocol going forward.

The protocol on debt claims

The new protocol encourages early communication, early disclosure of information and court intervention as a remedy of last resort for debt claims. The protocol also has a particular focus on alternative dispute resolution (ADR) as an alternative method of resolving disputes.

The new protocol applies to any business (including sole traders and public bodies) claiming payment of a debt from an individual (including when that individual is a sole trader).

It does not apply:

  • To commercial debts (i.e. business-to-business), unless the debtor is a sole trader;
  • Where the debt is covered by an alternative protocol (such as construction and engineering or mortgage arrears); or
  • To claims issued by HMRC for the recovery of taxes and duties governed by Practice Direction 7D.

Introduction of the Debt Information Pack

The creditor will need to send a letter of claim to the debtor that is compliant with part 3.1(a) of the protocol, including:

  • The amount of the debt;
  • What, if any, interest is applicable;
  • The basis of the debt (e.g. if it is contractual, details of the contract);
  • Whether the debt has been assigned (e.g. to a debt collection agency), the origin of the original debt and when it was assigned; and,
  • The Debt Information Pack.

The required Debt Information Pack includes details of where the creditor can obtain debt advice, a declaration of whether the debt is disputed and (if instalments are proposed) a summary financial statement to be completed, showing income and expenditure (set out in annex 1 and 2 of the protocol).

Service of the Letter of Claim

The protocol states: “The Letter of Claim should be sent by post.  If the creditor has additional contact details for the debtor, such as an email address, the creditor may also send the Letter of Claim using those details.”

The use of ‘should’ suggests that postal notification is not the only method that would be deemed sufficient service (personal service would most likely be good service) but the protocol specifically states if the debtor has made an explicit request that correspondence should not be sent by post and has provided alternative contact details, the creditor should use those details when sending the Letter of Claim.

Be warned, however, the fact that the creditor ‘may also’ send the letter by email suggests that  just sending the letter before action by email would not be compliant with the protocol – a condition in a creditor’s standard terms of business that email service is deemed effective service does not constitute an explicit request and cannot therefore be relied on.  Until we have further guidance on this point, we should assume that the letter before action should be served by post, hand or fax to be compliant and that email should be secondary method of communicating the information.

ADR highly encouraged

Where any aspects of debt claims are disputed, be it amount, interest, any charges, time for payment or the creditor’s compliance with relevant statutes and regulations (such as the Consumer Rights Act), ADR is recommended as an effective way of resolving the dispute. Throughout the protocol, there is an emphasis on the parties’ engaging with the process, for early disclosure and for parties to communicate effectively with each other and, in particular, engage in ADR prior to issuing proceedings (see paragraphs 2.1(b) & 6 in particular).

While the protocols, generally, are not to be used for tactical reasons (such as  ‘costs building’) under this protocol, the onus is on the creditor to provide early disclosure of documents for the debtor to understand the case they are to meet and to only use the courts as a remedy of last resort. While there are likely to be some transitional wobbles shortly after the protocol comes into force, the court will take into account non-compliance when giving directions for the management of proceedings, as well as the inevitable costs sanctions for non-compliance at conclusion.

In short, businesses seeking the recovery of outstanding debt will need to ensure that they are compliant with the protocol or face the prospect of suffering sanctions as a consequence of not doing so.

The protocol can be viewed here.

If you have any questions about the issues raised in this article, contact Rebecca Martelette in our Insurance Litigation: Claimant team by emailing [email protected] or calling 0117 904 8980.