Showcasing the Best of Welsh Business

New Pre-Action Protocol For Debt Claims


This article has been submitted by Peter Lynn and Partners 

The Pre-action Protocol for debt claims (“the Protocol”) comes into force on 1 October 2017 and may well have a severe impact on a business if it has outstanding debts due from individuals.

The Protocol will apply to any business (Limited/PLC, partnerships/LLP’s, sole traders and public bodies) when claiming payment of a debt from an individual (this includes a sole trader). The Protocol does not apply if the matter is covered by another pre-action protocol such as the protocol for mortgage arrears.

The Protocol does not apply to business-to-business debts (unless the debtor is a sole trader) and the Protocol sets out the conduct the court will normally expect of parties prior to Court proceedings being commenced.

The aims of the Protocol are to:

(a) encourage early engagement and communication between the parties, including early exchange of sufficient information about the matter to help clarify whether there are any issues in dispute
(b) enable the parties to resolve the matter without the need to start court proceedings, including agreeing a reasonable repayment plan or considering using an Alternative Dispute Resolution (ADR) procedure
(c) encourage the parties to act in a reasonable and proportionate manner in all dealings with one another (for example, avoiding running up costs which do not bear a reasonable relationship to the sums in issue) and
(d) support the efficient management of proceedings that cannot be avoided.

The Protocol spells the end of days when a letter of claim could be sent threatening payment within 7 days and then starting off proceedings. The Protocol requires that a creditor will have to include with its letter of claim a template information sheet and a reply form in all cases.

If the debtor fails to fully complete a reply form the onus is on the creditor to contact the debtor to discuss and obtain any further information needed to properly understand the debtor’s position.

If the debt is disputed the parties should exchange information and disclose documents sufficient to enable them to understand each other’s position and the creditor must provide any document or information requested or explain why the document or information is unavailable within 30 days of receipt of the request.

If settlement still cannot be reached the parties are obliged to take appropriate steps to resolve the dispute without commencing court proceedings and, in particular, should consider the use of Alternative Dispute Resolution (ADR).

If an agreement still cannot be reached, the creditor should give the debtor a minimum of 14 days’ notice of its intention to commence court proceedings (unless, for example, the limitation period is about to expire).

What does this mean for creditors?

The process for recovering debts will be more onerous for those owed money as:

  • Creditors are required to provide more documentation to debtors in specific formats
  • There is increased scope for delaying payment by “difficult” debtors who can delay payment by up to 90 days
  • Creditors will need to be more pro-active when engaging with debtors to ensure information is properly exchanged and time periods met
  • Additional costs and delays will be incurred particularly if ADR is utilised
  • A review of existing recovery processes and changes will probably be necessary

For businesses dealing predominantly with consumers or sole traders and providing credit, the Protocol requires a lot more effort and patience when collecting outstanding debts.