New rules on debt recovery may delay payment of consumer debts
Are all business debts affected?
Only debts owed to you by individuals are covered by the new rules; however, sole traders are included within the definition of an individual so they are also relevant for some business debts.
What do the rules require?
The rules – set out in the pre-action protocol for debt claims issued under the Civil Procedure Rules 1998 – require you to engage with individual debtors to establish why the debt has not been paid and whether it is because it is disputed. The aim is to try to resolve the matter without the need to go to court or alternatively, if this cannot be avoided, to at least narrow down the points in dispute and agree to try to deal with it in a cost-effective manner.
As the creditor, you are required to write to your customer to confirm how much is owed, including any interest or other charges which have accrued on the debt. You also need to confirm whether the debt is owed under an oral or written contract and the ways in which the debt can be paid. If an offer to pay by instalments has already been made by the debtor, but is unacceptable to you, you need to explain why.
The letter of claim must be accompanied by two specific forms: one to enable the debtor to reply and one for them to set out details of their financial circumstances.
You need to state the date of the letter clearly towards the top of the first page, and ensure that it is posted to the debtor on the same day or, if this is not practicable, the day immediately after. Alternative methods of service (such as via email) are permitted but only if the debtor has expressly agreed to them.
If no reply is received within 30 days of the date of the letter you are free to issue proceedings. However, if a reply is received – but which is not sufficient to enable you to understand why the debt has not been paid or how your customer proposes to deal with it – the onus is on you to engage with them to find out what is going on.
If the customer replies, but tells you that they intend to take advice on their position, you have to allow them a reasonable amount of time (a minimum of 30 days) to take that advice. Further time will have to be given where debt advice cannot be reasonably obtained within the initial period allowed.
If the debtor requests copies of any documents you hold to help them assess their position, these must be provided promptly and in any event within 30 days of the request.
If the proposed solution offered by your customer is repayment of the debt in instalments, you have to consider the proposal (afresh, if you have already refused it) and, if it is (or remains) unacceptable to you, you need to explain why this is.
If you cannot agree a way forward via correspondence, consideration should be given to whether a form of dispute resolution outside of the court arena might be appropriate. For example, negotiation via solicitors or the appointment of an independent mediator.
In any event, you must give your customer at least 14 days prior warning of your intention to begin a claim at court. This is unless the time limit for bringing a claim (usually six years from the date the debt fell due for payment) is about to expire.
Failure to follow the rules could result in:
- any proceedings you issue at court being stayed until you do comply with the rules;
- you being deprived of your legal costs (even if you win) or being ordered to pay your customer’s costs; or
- you being denied an award of interest.
Is there anything I can do to avoid being caught by the rules?
There are some limited situations in which the rules do not apply – for example, if your debt can be classed as a business-to-business debt or if there are other rules governing the contract between you and your customer, such as the pre-action protocol on construction and engineering disputes or the protocol on mortgage arrears. The protocol will not apply to debts owed to HMRC for unpaid tax.
Where the debt rules do apply, you will need to comply with them but you can limit the impact they will have on your business by having robust credit control procedures in place which ensure debts are picked up early and the correct process for dealing with them followed. You need to become familiar with the information that needs to be included in the formal letter you are required to send and the forms that need to accompany it. You also need to make a note of the relevant time limits and ensure you stick to them. To do this you should revise all template letters and forms and update your credit control procedures.
If court proceedings look likely, you should seek legal advice at an early stage to ensure that alternative dispute resolution options have been explored and your position fully protected. This is particularly important where it is possible the debt may be disputed.