What is changing?
October 2017 will bring a new pre-action protocol for debt recovery claims which will significantly change the way businesses (including sole traders) can recover debts from individuals. The protocol does not apply to businesses contracting with other businesses.
The aim of the protocol is to encourage parties to communicate early on in the matter and try to resolve the issue before it becomes necessary to issue claims in the Court.
How will this impact businesses?
The new rules will vastly increase the amount of work that businesses are required to carry out before the simplest, undefended debt matters can be issued in the Court. Consumers are now given more time and leeway when an account becomes overdue and the time limits for them to respond to credit control letters has increased substantially.
Businesses carrying out work for individual clients are encouraged to consider whether it would be commercially viable to recover a debt given the amount of time and money required to be spent before a claim can be issued in the Court. The process cannot be shortcut and compliance is essential to avoid cost sanctions from the Court.
The changes in detail
The main changes to the way debts can be recovered are listed below:
- Updates to the Letter Before Claim
A Letter Before Claim must be sent before a claim is issued in the Court. The basic content is unchanged and must include:
- full details of the debt (with calculations including details for interest and compensation)
- how it has become overdue
- an offer of alternative solutions to issuing a claim such as mediation
- details of how and when payment should be made
- copies of the invoices which are overdue and a statement of account (for debts owed to businesses only)
Under the new rules, there are some new documents which are required to be included with the Letter Before Claim:
- a Reply Form which makes it simpler for the debtor to respond
- an Information Sheet stating where debtors can get help and what they need to do next
- a Financial Statement Form which requires the debtor to list their income and expenditure. This enables businesses to assess how much money the debtor has left at the end of the month
- Increased Response Times
Individuals are now given an extended amount of time to respond before a claim can be issued in the Court.
Once the letter before claim has been sent, the debtor is given 30 days to send the completed Reply Form back. Businesses are not able to start any legal proceedings or chase the debtor before this and because the response could be posted towards the end of the 30 day period it is good practice to add a couple of additional days to allow for postage.
During the initial 30 day response period, the debtor is permitted to request any additional documents that were not attached to the letter before claim. The business will then be required to allow an additional 30 days from when the documents were sent to the debtor before issuing a claim.
If the debtor states that they require legal advice, the business is required to allow a reasonable period for them to obtain legal advice. Even if they state that they are seeking legal advice that cannot be obtained within the 30 day timeframe, a “reasonable period” must be given for the debtor to obtain this before a claim can be issued.
If the Reply Form is returned by the debtor, the business must then leave an additional 30 days from the date that this is received before they are entitled to issue a claim. The Reply Form will indicate to the business whether the debt is disputed and whether the debtor can pay the debt. This will make it easier for businesses to assess the case and consider whether it would be commercially viable to take the claim further. It will also encourage the parties to communicate and reduce the number of claims that are issued in the Courts.
When a debtor requests time to pay the debt or offers to pay the debt in instalments, the business is not entitled to simply issue a claim if they do not agree with this. The business should first contact the debtor and attempt to reach an acceptable agreement for the debt to be paid in instalments. Businesses should take into account the Financial Statement Form that the debtor should have returned with the Reply Form when assessing an instalment plan offered. If the business does not agree to the instalment plan proposed, the business should contact the debtor and state their reasons why. The debtor is then given a “reasonable period” in which they can respond and/or increase the offer.
Lastly, when the business is entirely satisfied that the protocol has been successfully complied with and 30 days have passed since the letter before claim has been sent, the business is required to send the debtor a notice of its intentions to issue a claim. This gives an additional 14 days before a claim can be issued.
So, to summarise:
- In the best case scenario, the earliest a business can issue a claim in Court without a Reply Form being received is 44 days after the letter before claim has been sent – this is 30 days longer than the current rules
- In the worst case scenario the debtor could request additional documents 30 days after receiving the Letter Before Claim and then take the full 30 days to respond after receiving them or request time to obtain legal advice. This would mean a minimum of 74 days between sending the Letter Before Claim and issuing a claim in Court. If the debtor puts forward instalment proposals which must be responded to then this could easily stretch to 80 or 90 days.
If there is a possibility that a claim would reach its limitation date during the protocol period then it is acceptable to issue the claim before the protocol is finished. The case will then be stayed at Court to enable the parties to follow the protocol correctly.
- New Disclosure Requirements to encourage Negotiated Settlement
Under the current rules, most disclosure of documents takes place once a claim has been issued.
Under the new rules the parties are encouraged to exchange at an early stage those documents likely to be used/needed during a Court hearing:
- In the Reply Form, the debtor is required to send to the business all documents relevant to the outstanding debt
- While completing the Reply Form the debtor may request relevant documents from the business who then has 30 days to send these documents or provide reasons why they are unavailable
Disclosure of documents at this stage is designed to help both parties decide whether it will be cost effective to issue or defend a claim in Court and will indicate the strengths and weaknesses of the claim. This will in theory encourage amicable or negotiated settlements and reduce the burden on the Courts.
What should Businesses do to prepare for the new rules?
As we have seen the new protocol elongates the debt recovery process for businesses against individuals, at best by 30 days and at worst by up to 60 days or more. On the Information Sheet attached to the initial Letter Before Claim, debtors are made aware of the timeframes within which they must respond and this unfortunately gives them a template for dragging matters out as long as possible.
This should be a prompt for anyone selling to consumers to review and overhaul their invoicing and credit control procedures before the changes come in and here we have some suggestions for businesses to consider.
- Should you offer credit at all? Consumers don’t expect credit terms in the same way as businesses, but it may be given as standard to all customers, whether formally in your Terms and Conditions or informally by applying the same credit control process to everyone.
- If credit is necessary to your sales then consider credit checking all customers over a certain transaction size.
- For large transactions, consider ways of offering finance which pass the credit risk to the finance company. At the very least require a deposit up front and then staged payments.
- If credit must be offered, reduce payment terms for consumers and bring forward the credit control process. If you offer 30 days now, consider reducing this to 14 days and send reminders at 7 days. You will then be able to start the debt recovery process on day 15 if necessary.
- Consider using a Direct Debit service where customers provide bank or card details at the outset and payment is taken automatically a set period after the invoice is sent. This doesn’t prevent chargebacks or cancelled direct debits but it reduces the likelihood of non-payment.
To find out more about the new Pre-Action Protocol for consumer debts, or to ask any other Debt Recovery question please contact the experts at Backhouse Solicitors and we will be happy to help.
The Backhouse Solicitors Debt Recovery Team
Tel: 01245 893400
Email: [email protected]