21 Nov 2017
On 1 October 2017, HMRC introduced a new pre-action protocol for debt claims. Corporate lawyers Paul Taylor and Sarah Carlton explain the changes and how they are likely to affect practices chasing bad debts.
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From 1 October, the new pre-action protocol for debt claims (also known as the debt claims protocol) will apply and organisations will need to ensure they have complied with it when trying to collect debts.
It is important to note the protocol will only apply to businesses – including sole traders and public bodies – claiming payment of a debt from individuals and sole traders. The debt claims protocol will not apply to debts from a business owed to another business (except where a sole trader is involved), nor will it apply to claims issued by HMRC.
The existing position for debt claims is a business creditor – a practice or its legal advisor – will issue a letter before claim to the debtor, to give the debtor the chance for the matter to be settled before court proceedings. The debt claims protocol seeks to formalise the process even before a letter before claim is issued. In practice, this will likely mean more work will need to be undertaken before even a simple debt claim is issued – the intention is the parties try to settle without the need for court proceedings, while protecting debtors from creditors.
Failure to comply with the new debt claims protocol will result in case management directions (where the court will give instructions to the parties on how they are to manage the case) and possibly cost penalties if the matter proceeds to litigation. It is worth pointing out the debt claims protocol specifically says courts are not to be concerned with minor or technical breaches. But what the courts will look at is whether the “substance” of the debt claims protocol has been followed.
The debt claims protocol requires a standardised letter before claim to be sent to a debtor, containing the following information:
As can be seen from the list, a letter before claim requires much paperwork and a great deal of effort on the creditor’s behalf. Everything has to be sent by post unless the debtor has made an explicit request to the creditor (this cannot be included in practice standard terms and conditions) that correspondence should not be sent by post, but by some other means for which alternative details have been provided. If this is the case, the creditor should use those details when sending the letter before claim. It is clear requiring the letter before claim, including all accompanying documentation, to be sent by post seems to represent a technological backward step by the courts.
In terms of the process, the debtor will have 30 days to respond to the letter before claim once it has been sent. If the debtor fails to pay, another letter must be issued from the creditor, giving a further 14 days for the debtor to respond.
If the debtor sends a reply, the reply form should be used with any documents requested by the creditor enclosed, or it should be used to request documents from the debtor. If the debtor asks for further documents to assist or help understand the position, the creditor should send these within 30 days of the request.
Where the debtor sends a reply stating legal advice is being taken, the creditor has to allow a “reasonable” period to seek this advice. If the debtor sends a reply requiring time to pay, the creditor and debtor should aim to reach agreement on repayment terms based on the debtor’s means (as set out in the financial statement form).
The thrust of the process is creditors – practices – should seek to take “proactive” steps to engage with debtors, whatever their response to a letter before claim, and even if the reply form has only been partially completed. Practices must make attempts to contact the debtor and obtain any information required to appreciate the position of the debtor.
Of course, the parties may not be able to reach an agreement or resolve the debt repayment, in which case both should take steps to resolve the dispute without starting court proceedings. They should consider other forms of alternative dispute resolution (ADR) – for example, “a without prejudice meeting” or mediation. Again, the creditors will need to consider the cost against the benefits when deciding whether to proceed with ADR – it may be the case that the amount of debt claimed does not justify such a process. If parties do reach an agreement and the debtor later defaults, the whole process must be restarted and a new letter before claim will need to be sent to the debtor.
It appears the debt claims protocol allows what may seem generous time allowances at each stage. Only time will tell whether individuals will use the new rules to frustrate collection actions against creditors, and whether the front-loading of costs on to the creditor pre-hearing may prevent creditors from pursuing all their debt actions. Practices that regularly claim money from individual clients will have to consider whether the preparation work now required makes the claim worth pursuing.
It is recommended every practice takes stock of this new debt claims protocol and revises its internal procedures to avoid potential non-compliance. Updates to “template” letters should be considered, as well as any relevant policies and procedures. Staff training could also be organised in anticipation of the introduction of the new debt claims protocol.
It may also be worth seeking legal advice in the first instance to determine whether pursuing a court action and, therefore, following the debt claims protocol is appropriate in the circumstances from a cost/benefit perspective. Alternatives include proceeding straight to ADR, a statutory demand or, better still, making sure payment is received in advance.
