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Pre-Action Protocol for Debt Claims - a debtors’ charter for delay?

22 March 2017

The Master of the Rolls, Sir Terence Etherton, has finally announced the provisions of the long-awaited Pre-Action Protocol for Debt Claims (“Debt Protocol”) which comes into force on 1 October 2017.

The Debt Protocol applies to any business claiming payment of a debt from an individual, including an individual in business as a sole trader. Other business-to-business debts are not covered. At the heart of the Debt Protocol are a number of aims which typically align with existing protocols in other areas, namely:

  • early exchange of information between the creditor and debtor, in particular to clarify any areas of dispute
  • avoidance of litigation through the agreement of mutually acceptable terms
  • use of ADR as a means of resolution
  • requirements for the parties to act reasonably and proportionately.

The claim process is initiated by a detailed Letter of Claim enclosing various documents which “should” be sent by post, a surprising formality in the growing age of electronic communications. The debtor then has 30 days in which to complete a proforma Reply Form and Financial Means Statement – much longer than many creditors are used to when sending what is traditionally termed a ‘7-day letter’ – failing which the creditor can commence court proceedings. If a debtor indicates that (s)he is seeking debt advice, the creditor should not start court proceedings within 30 days from receiving the Reply Form. Costs penalties can flow from any breaches of the Debt Protocol.

The reduction of court claims and the need to act reasonably in the pre-action phase are both laudable aims. However, many businesses of all sizes will remain strongly opposed to the introduction of the Debt Protocol, just as they were during the consultation stages. Clear opportunities exist for debtors to extend a period of credit by deploying the Debt Protocol effectively.

As many businesses continue to struggle with the economic challenges of Brexit, the likely detrimental effect that the Debt Protocol will have on their lockup will be an unwelcome obstacle, especially for debts where no legitimate reason for non-payment exists. For many businesses, they may ultimately have to weigh up whether the cost of non-compliance with the Debt Protocol is preferable to the continued delay in recovering sums which are lawfully due and undisputed.

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