New Debt Protocol: A Headache for Businesses?

1 October 2017 saw the new Pre-Action Protocol for Debt Claims (‘Protocol’) come into force. It applies to any business – limited company, partnerships, sole traders and public bodies – claiming the payment of a debt from an individual (including sole traders). (It is worth noting here that the Protocol doesn’t apply to business-to-business debts, unless the debtor is a sole trader, and it also doesn’t apply to matters covered by other Pre-Action Protocols such as mortgage arrears).

The new Protocol means that a letter of claim – which contains set information about the debt – now has to be sent to debtors before any proceedings are issued. Indeed, more information will need to be provided than under the previous 7-day warning letter, and the debtor now has 30 days to reply.

The creditor will have to include an information sheet and enclosures with the letter-before-claim, which includes (but isn’t limited to) the amount of the debt; whether interest or other charges are continuing; references to written agreements about the debt; explanations of why instalment-offers might not be acceptable; how the debt can be repaid and up-to-date statements of account.

The creditor then has to wait 30 days before it can take further action, but this can be delayed if the debtor indicates that they are seeking advice. Furthermore, if the debtor needs time to pay, the Protocol requires that the creditor and debtor try and reach an agreement. If an agreement cannot be reached, the parties are encouraged to take steps to try and resolve the matter using Alternative Dispute Resolution (‘ADR’), before Court proceedings are started.

The aims of the Protocol are to encourage an early dialogue between the parties and to try and settle the debt, before resorting to Court. However, the process of recovery of such debts could become far more burdensome for creditors due to the increased paperwork, the probable delays in collecting the debts and the potential additional costs (if ADR is triggered, or if there is a failure to comply with the Protocol).

If your business is suffering from bad debts and/or cash flow problems, then a confidential discussion – at an early stage – with an experienced and qualified specialist to talk through the range of options available, may well be an appropriate course of action. Please contact us if you would like an initial consultation, free of charge.