On 1st October, the pre-action protocol for debt claims comes into force. Our Commercial Disputes Associate, Guto Llewelyn, explains the big impact it'll have on businesses that are owed outstanding debts.

The protocol brings significant changes to the pre-action process, and will change how creditors approach debts that aren’t being paid, from start to finish. It applies to any business claiming a debt payment from individuals (including sole traders), but not to business to business debts.

Aims

The protocol's aims are similar to current practice direction.

Firstly, it encourages reasonable dialogue between both sides, to try to resolve the issue without going to court.  

It then states that, before starting proceedings, creditors must send a detailed letter, including:

  • details of the debt (amount, interest, charges, where it’s come from)
  • why repayment in instalments isn’t acceptable
  • a prescribed Information Sheet and Reply Form, asking what further information the debtor might want
  • a financial statement form.

Timescales

If a debtor does ask for a document, the creditor has 30 days to either provide it, or explain why it’s unavailable. They shouldn’t issue proceedings until 30 days after the letter of claim, and must allow debtors a reasonable period of time to seek legal advice.

If, following discussions, the two sides haven’t reached an agreement, the creditor has to give the debtor at least 14 days' notice of their intention to start proceedings.

Impact

Without a doubt, the process of debt recovery will now be more cumbersome for creditors, and they’ll have to provide more documentation to debtors, in specific formats. They’ll also need to be more pro-active, making sure they exchange information properly, and meet time periods.

Not complying with the protocol could mean more delays, increased costs, and the inability to get interest back. There’s also the risk that debtors could use the increased timescales to delay things.

None of these options are good news for creditors, and they’ll have to be more patient when collecting outstanding debts. They’ll also no longer be able to use the prospect of imminent court proceedings to put the pressure on. SMEs, in particular, with concerns about cash flow problems, will have to reflect on when, and to whom, they give credit, and ensure they act promptly when debts arise.