The 7-day letter is one of the oldest forms of legal communication. Asking your lawyer to write to a debtor telling them to pay up or be sued has been around since Victorian times, and indeed for a lot longer. The exact form, and the period given, has varied over the years. When I qualified (a disturbing time ago now) it was usual to give 7 days, although the court were fairly sanguine if you gave less, and given that all communication was by letter, and all payments by cheque, the debtor would have to get their skates on to get payment to you in time. The letter could be very short and to the point, and no information other than the amount due and perhaps the invoice number was required.
Then the Pre-Action Protocol in the CPR increased the length of time to at least 14 days, and required certain basic information, and the provision of details of where to get help to be given to non-businesses. This was generally felt to be a good idea, although some debtors would play the system, asking for extra time to take advice when they had no intentions of taking any. But it meant that you might get offers of settlement before you issued proceedings rather than afterwards, which did at least save the issue fee. And you might be able to weed out the debtors who had no income or assets and so weren’t worth suing at all.
Well, everything has now been turned on its head, at least in respect of claims against individuals by businesses by the Pre-Action Protocol for Debt Claims which comes into force on 1st October 2017.
The Scope of the Protocol
It covers any business (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader). It complements any regulatory regime applying to the creditor (eg under the Financial Conduct Authority) which must be complied with as well, but does not apply to debts covered by other Protocols , such as the Construction and Engineering, or the Mortgage Arrears Protocols, or to claims by HMRC for taxes and duties (covered by PD7D).
So a claim against a consumer or a sole trader (eg F Bloggs t/a The Red Lion PH) is covered. A claim against a partnership or a limited company (eg F Bloggs Ltd t/a The Red Lion PH) isn’t.
What is Required
I am afraid that there is no alternative to setting a lot of the Protocol out in this piece, although I have summarised where I can. The exact wording can be seen via the link here and above.
- The Letter of Claim
The creditor has to send a Letter of Claim to the debtor. So far no real change. Note however that this must be sent by post – email or other electronic means will not do unless the debtor has expressly requested that the post is not used. And the Letter of Claim needs a lot more information than before, including:
- the amount of the debt
- whether interest or other charges are continuing
- details of any oral agreement
- the date and parties of any written agreement and an offer to supply a copy on request
- assignment details if relevant
- if regular instalments are being offered, or paid, an explanation of why the offer is not aceptable and why a court claim is being considered
- how the debt can be paid – where and how – and how to discuss payment terms
- the address where the completed Reply Form should be sent
The creditor also needs to send
- an up to date statement of account, or details of how the claim is made up including any interest and administrative charges
- the Information Sheet and Reply Form in Annex I
- a Financial Statement form (like the example at Annex II)
2. The Response by the Debtor
If the debtor does not respond within 30 days the creditor can start proceedings.
If they do (using the Reply Form) they can ask for copies of any relevant documents, supply any document sof their own, and make proposals. The creditor should allow at least 30 days from receipt of the Reply Form, or 30 days from provision of any documents requested before issuing proceedings. If the debtor needs more than 30 days to get debt advice they can ask for it and the creditor should allow extra time if reasonable in the circumstances.
Any proposals for payment by instalments should be considered and if not acceptable the creditor should give the debtor reasons in writing. And a partly completed Reply Form should elicit an attempt to contact the debtor to obtain further information.
3. Disclosure of Documents
If the debt, including any interest or time for payment etc, is disputed the parties should exchange information and documents to enable them to understand each other’s position. And if the debtor asks for a document or information it should be provided within 30 days, or an explanation should be given as to why it is unavailable.
4. Attempts to settle and ADR
Parties should negotiate on any points still in dispute using ADR if appropriate. This can range from discussions to formal steps such as mediation in a larger case.
If the parties reach agreement on repayment the creditor should not start court proceedings while the debtor complies with the agreement. And if they wish to start court proceedings at a later date they must send a new Letter of Claim and start the Protocol afresh, although they don’t need to send documentation again if it has been sent in the last 6 months.
5. Taking Stock
If the debtor has responded to the Letter of Claim but agreement has not been reached the creditor should give them at least 14 days’ notice of their intention to start court proceedings, to allow both parties to review their positions and see if proceedings can be avoided.
The Consequences of not Complying with the Protocol
These are the usual consequences of not complying with a Pre-Action Protocol – the court can give more time, penalise in costs or interest or in other ways. But it looks at the substance, and is not concerned with minor or technical breaches.
It is not clear at present how far the courts are going to enforce compliance with the Protocol, given the enormous number of debt claims that go to a default judgment and enforcement without any court officers actually looking at them. The other protocols generally cover areas which are disputed and where the parties can raise breaches in a Defence or application of some kind. Most debt claims are undefended and with most debtors unrepresented they may not know if corners have been cut or even avoided altogether. See below.**
You really need to read the Protocol for these. They set out
- An Information Sheet (compulsory)
- A Reply Form (also compulsory)
- A Standard Financial Statement (an example)
So What does a Creditor Do?
This cannot be ignored. It will have a radical affect on the recovery of debts from individuals, and unless businesses adapt appropriately they may suffer a disastrous hit to their cashflow. Because today’s 14 day letter will turn into between 30 and 104 days under this new regime, and possibly more if the debtor goes through the process, agrees to pay and then only pays a couple of instalments, when the Protocol must start again.
- Don’t allow credit – get paid up front before the goods or services are supplied. You may lose some customers, but customers who don’t pay aren’t worth having.
- If you deal with businesses consider avoiding sole traders. Claims against partnerships and companies are not affected by this. Although a small company may not be worth suing either, for different reasons.
- And make sure you know who you are contracting with (always a good idea anyway). Is The Red Lion PH run by a sole trader, or a partnership, or a company, and if so who are they?
- Credit-check you customers before you do business with them, not just before you sue them.
- Start the process very early – the moment that the payment becomes overdue.
- Send non-protocol letters chasing debts as present, knowing that at the end of the day you probably won’t sue for claims below a certain value.
- Insure, or factor, or sell your debts, or consider doing so. 50% of a debt that is actually paid is better than 100% of a debt that isn’t.
- Get some training so you can get things right, or pass the debt collection to an outside collector who knows the ropes.
- And get your paperwork in order. The new system will expose errors that you used to be able to hide in the past.
- Or hope for the best and see above.**
And the Verdict?
When the Mortgage Arrears Protocol was introduced a number of years ago there was much concern in the industry that the new procedure, not that different to that given here, would make mortgage arrears impossible to recover. In fact, once the lenders had got used to things I understand that it made very little difference, and although the process took longer this merely allowed the borrowers who could pay if given time a bit more time to pay, to everybody’s advantage. The borrowers who couldn’t pay were evicted a bit later, but as most of the debts were covered by the security of the houses the lenders got paid in the end. So on the whole it was a good result.
I’m not sure that this will happen here. Consumer debts aren’t covered by security on the whole, and small businesses can be badly affected by delays in payment. There is a lot of scope for the ingenious debtor to delay things and play the system.
These procedures may be appropriate for a finance company, or a credit card company which is recovering debts on a large scale, although they are already covered by the FCA’s requirements which are not that different. They are less appropriate for the plumber or nursery, or indeed the friendly local solicitor who don’t insist on payment in advance at the moment. Although that may have to change.
It will be interesting to see how this works out.