Debt Recovery Claims Pre-Action Protocols
As a result of his review, the government is now considering the introduction of a new controversial Pre-Action Protocol for Debt (the “Protocol”). If adopted, the Protocol is likely to have substantial cost and practical implications for creditors seeking to pursue their outstanding debts.
The Civil Procedure Rules set out detailed rules and guidance governing the conduct of litigating parties’ behaviour during the course of litigation. The Practice Direction on Pre-action Conduct (the “Practice Direction”) sets out how the courts expect parties to behave prior to commencing a claim. Parties usually follow the Practice Direction as this is the general starting point. The exception to this is when the claim is in a certain area of civil litigation where a specific pre-action protocol exists. There are thirteen pre-action protocols in total covering areas such as medical negligence, professional negligence and now potentially debt.
The Protocol mirrors the existing Practice Direction in terms of the aims and the scope. It also sets out additional specific requirements and imposes a number of onerous obligations on creditors. It will apply to any business (including a sole trader) claiming payment of a debt from an individual (including a sole trader). It does not apply to business to business debts unless both parties are sole traders.
An example of this is the requirements relating to sending out a letter before action (“LBA”). Under the Protocol the creditor will be required to enclose:
- a copy of the Protocol (currently nine pages);
- a copy of the contract or agreement;
- a full statement of account setting out full details of interest, charges and any other sums due (including how they have been calculated) together any payments made by the debtor; and
- a reply form together with a self addressed envelope.
In addition, the creditor is required to give the debtor a longer period of time to provide a substantive response to the LBA. Under the Practice Direction, the creditor only has to give the debtor 14 days to substantively respond before issuing proceedings. However under the Protocol the claimant is required to give the debtor 28 days and if the debtor indicates that they will be seeking debt advice a further 28 days in order to do that (56 days in total).
The Protocol will undoubtedly have a negative impact for creditors as a whole. Complying with the requirements will result in increased costs due to the additional paperwork, manpower and resources that will be required. Further, the recovery process will be prolonged unnecessarily due to the increased period of time given to the debtor after the issue of the LBA. The LBA is usually issued as a last resort after the creditor has exhausted all collections activity. During this period the debtor will have had ample opportunity to obtain independent advice and raise any dispute with the creditor. It is unduly burdensome to require the creditor to wait an addition 14 or 42 days over and above the current 14 day period before issuing proceedings.
Failure to comply with the Protocol
As with the Practice Direction, the Protocol contains a costs sanction which can be awarded by the Court against either party for non-compliance. When considering compliance the Court will consider factors such as; the degree to which parties have complied with the Protocol, the proportionality of steps taken and the urgency of the matter. The Court will look at the overall position taking into account the factors when assessing the effect of non-compliance on the other party.
In reality, the costs sanctions will only really apply if a debtor seeks to challenge an award of costs on the basis that if the creditor had adhered to the Protocol they would have paid the debt without the need for the issuing of proceedings.
It is likely that the Protocol will come into force in a similar guise to the current draft. At this point in time we suggest that you consider how these changes will impact you and your debt recovery process. From our perspective, we appreciate the challenges that the Protocol poses for you and your business. Going forward, how you instruct us to proceed is really a matter for you to decide having regard to the advantages and disadvantages.
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