UK: Pre-Action Steps To Recovering Debts From Individuals - What Businesses Need To Know

Businesses seeking to recover debts from individuals (including sole traders) will, from 1 October 2017, need to comply with the requirements of a new pre-action protocol for debt claims or potentially face financial consequences.

First drafted in 2012, the protocol has twice been out to consultation with the proposals continuing to prove contentious with stakeholders on both the credit and debt advice side. Despite a lack of consensus as to whether there is really any need for the protocol at all, the final form has now been approved ready for implementation.

The aims of the new pre-action protocol (PAP) are broadly similar to the existing Practice Direction for Pre-Action Conduct (PD) as set out in the Civil Procedure Rules (CPR) and with which businesses conducting their own debt recovery will be familiar. However, the PAP is more prescriptive and has introduced some key changes to the way in which debt claims should be managed before court proceedings are commenced, including time limits for compliance, of which businesses need to be aware.

As with the current PD, the PAP sets out the conduct the court expects of the parties prior to the commencement of proceedings. The focus is very much on attempting to resolve outstanding debts - rather than resorting to litigation - with the emphasis on encouraging debtors to contact creditors about their debts and if possible agree a reasonable repayment plan. Early engagement and communication between the parties, including the exchange of relevant information, is required, and parties are encouraged to act in a reasonable and proportionate (to the size of the debt) manner.

When will the PAP apply?

It will apply to any creditor business (including sole traders and public bodies) seeking to recover payment of a debt from an individual or sole trader. It does not apply to business-to-business debts unless the debtor is a sole trader. It also does not apply where the debt may be covered by another pre-action protocol contained within the CPR. It is intended to be complementary to any existing regulatory regime to which a creditor may be subject and where there is any inconsistency, the regulatory obligations will take precedence. The PAP should also be read in conjunction with industry and government guidance relating to good practice in the recovery of debt.

What are the creditor's obligations under the PAP?

Debtors should be provided with sufficient information by way of a letter of claim (LOC) to enable them to obtain advice on their position prior to issue of a claim.

What should be contained within the LOC?

The LOC should contain the following information:

  • The amount of the debt, interest and charges claimed;
  • If the debt arises from an oral agreement, details of who made the agreement, what was agreed, when and where; and
  • If the debt arises from a written agreement, the date of the agreement and the parties to it. A copy does not have to be provided, but the LOC should state clearly that a copy can be made available to the debtor on request. One of the main bones of contention during the two consultations was whether a copy of any written agreement should be provided upfront, or only when requested by the debtor. The credit sector in particular considered that it would be disproportionately burdensome to provide the agreement at the pre-action stage when it is statistically unlikely to be required, given that most debt claims are undefended. Although that requirement has been dispensed with, there remains concern on the creditor side that some debtors will use the ability to request such documentation as a delaying tactic;
  • Full details of any assignment of the debt;
  • If regular instalments are being offered or paid by or on behalf of the debtor, an explanation of why that offer is not acceptable and why a claim is being considered;
  • Details of how the debt can be paid and how to proceed if the debtor wishes to discuss payment options; and
  • An address to which the completed Reply Form (a draft of which is set out in the PAP) should be sent;

The LOC should also enclose:

  • An up-to date statement of account for the debt which includes details of interest and charges added, or if no statements have been provided, the amount of interest incurred and charges imposed since the debt was incurred;
  • A copy of the Information Sheet and Reply Form as set out at Annex 1 of the PAP; and
  • A Financial Statement form - an example of which is provided at Annex 2 of the PAP.

The LOC should be clearly dated at the top of the first page and posted on that day or the following day. An alternative method of communication can be explicitly agreed with the debtor, but creditors should note that a condition in their standard terms and conditions does not constitute an explicit request/agreement for these purposes.

If no response is received from the debtor within 30 days of the date of the LOC, court proceedings can be commenced, but before doing so creditors should also consider that a debtor may only have responded on the 30th day following receipt of the LOC. It is suggested that a further period of grace to permit time for a last minute response should be considered.

What are the debtor's obligations under the PAP?

A debtor should reply using the Reply Form, stating if they agree with the debt or not, asking for copies of any documents required, and providing information they wish to rely on. If the debtor advises they are seeking debt advice, the creditor should allow a reasonable amount of time for that advice to be obtained. The creditor should not start court proceedings less than 30 days from receiving the Reply Form or providing any documents requested, whichever is the latter. If it is going to take the debtor longer than 30 days to obtain that advice, the debtor must explain why and how long they think it will take as per the Reply Form. The creditor should allow reasonable extra time for that advice to be obtained where it is reasonable to do so in the circumstances.

If the debtor requests time to pay the debt, the parties should try to reach an agreement on affordable instalments based on the debtor's income and expenditure with regard being had to the provisions of the Standard Financial Statement or equivalent guidance. If the creditor does not agree with the debtor's proposals, the reasons why should be given in writing.

If the debtor only partly completes the Reply Form, the creditor should treat this as an attempt to engage in the process and should try to contact the debtor to discuss the debt further and attempt to reach a settlement.

Provision of documents

The exchange of documents and relevant information to help clarify or resolve the dispute is at the heart of the protocol. Should the debtor request a document or information, the creditor should supply it, or explain why it is unavailable, within 30 days of receipt of the request.

Do the parties need to consider alternative dispute resolution (ADR)?

Yes, if agreement cannot be reached. However, this may be as little as engaging in informal discussions or negotiations (through to full-blown mediation through a third party or referral to the Financial Ombudsman Service (where appropriate)). The potential cost of ADR is also a relevant consideration.

Default following agreement

Where the parties reach agreement about the debt but the debtor subsequently defaults and the creditor wishes to start court proceedings, the creditor should send an updated LOC and comply with the PAP afresh.

Are there penalties for not complying with the PAP?

The court will expect compliance with the PAP and may well put the proceedings on hold for a period of time after issue so that the PAP steps can be taken. The court will also have regard to non-compliance when considering costs - especially where the cost of issuing a claim could (in its view) have been avoided altogether had the PAP been followed - and any award of interest.

What's the position if, despite complying with the PAP, the parties cannot reach an agreement?

If a resolution has not been possible, the parties should take stock to see if anything further can be done to avoid litigation, or to narrow the issues between them. The creditor should give the debtor a further 14 days' notice of intention to commence court proceedings, unless exceptional circumstances dictate otherwise.

Comment

Businesses will need to ensure that their current pre-action processes and systems for debts owed by individuals and sole traders are reviewed and made compliant with the new PAP procedure by 1 October 2017. For some, this will be no more than some fine tuning and the addition of the required forms. For others, it will be more substantial with the need to ensure better preservation, storage and searchability of relevant documents in their systems. In particular, where the debt has been sold on, parties will need to ensure they have access to the underlying agreement (as well as the relevant assignment) or they will have to explain to any debtor who requests it, why they cannot provide it.

Given the new 30 day period for response by a debtor, as opposed to the 14 days under the current PD, and the additional time provided for in various places under the PAP where documentation is sought and/ or forms are returned (be that completed or half completed), debt recovery (against individuals and sole traders) is set to become a slower process. This will add further frustration to businesses where statistically the majority of debt claims end with a judgment in default. It is hard to avoid accepting that a wily 'won't pay' debtor could easily seek to use the new system to introduce delays just for the sport of it; and debt management companies may do likewise, just with a view to seeking lower settlement figures on what is in fact an undisputed debt, in return for offering a quick agreement.

It is also, with the additional documentation that needs to be provided, likely to become more burdensome in terms of processes and consequently more expensive - again, unwelcome for creditors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
14 Sep 2017, Seminar, Birmingham, UK

Has Cloud replaced traditional outsourcing models? We will compare cloud to outsourcing, consider whether they have effectively become the same thing for many solutions and assess some of the advantages and disadvantages of each model.

18 Sep 2017, Seminar, London, UK

Our annual event as part of the London Design Festival is now in its fifth year. We would be delighted if you are able to join us again.

21 Sep 2017, Seminar, London, UK

Has Cloud replaced traditional outsourcing models? We will compare cloud to outsourcing, consider whether they have effectively become the same thing for many solutions and assess some of the advantages and disadvantages of each model.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.