August 24, 2017

Debt Recovery: important changes to recovery of debts from individuals

You may not be aware but a new Pre-Action Protocol for Debt Claims will come into force on 1 October 2017 (“the Protocol”). The Protocol will apply to any business claiming payment of a debt from an individual (including a sole trader). It will not apply where the debtor is a limited company, partnership or similar entity.

What does the Protocol mean?

Broadly speaking, the aim of the Protocol is to encourage creditors and their debtors to communicate, with the intention of resolving their disputes without the need to resort to Court proceedings.

Strict compliance with the Protocol will be onerous for creditors, and slow. For example, the Protocol requires that the initial letter before action gives the debtor 30 days to respond. If they do respond then no Court proceedings should be issued within 30 days of that response. In addition the creditor has obligations to attempt to agree payment by instalments (if the debtor requests time to pay) or to consider methods of alternative dispute resolution, such as mediation, if the debt remains disputed. All of this is likely to significantly extend the period taken to recover debts from individual debtors, as well as the associated costs.

 However, there is another option and that is not to comply with the Protocol.

What is the impact of not complying with the Protocol?

The Courts have powers to impose sanctions where a party fails to comply with the Protocol. That normally means refusing to allow the winning party to recover all or some of its costs. Alternatively the Court has a power to give “directions” in the Court proceedings which reflect the fact that the creditor has not complied with the Protocol. The Protocol does not state what those directions will or should be, but we suspect it will mean the Court will “stay” the proceedings for a period (probably a month or two) to enable the parties to attempt to settle the dispute (in effect to force them to comply retrospectively with the Protocol).

 This of course only becomes an issue if Court proceedings are actually issued and the claim is defended (if no Court proceedings are issued then there will be no cost sanctions or directions to worry about; if Court proceedings are issued but no defence is filed, then the creditor will be entitled to request judgment in default, without the need for the Court to consider whether or not the creditor has complied with the Protocol).

Comment from a Debt Recovery Solicitor

As specialist debt recovery solicitors, Holmes & Hills make a recovery for 91% of our clients before any Court proceedings are issued. This is under our “Stage 1” service, which includes a letter before action demanding payment within 7 days, followed by a telephone call to the debtor if payment is not received.

Although such an approach will not be compliant with the new Protocol, the reality is that it works. In the majority of cases, our clients make a recovery and they make that recovery quickly. In the unlikely event that this approach fails (just 9% of the matters we are instructed to deal with), creditors will have the opportunity at that stage to consider whether or not they wish to take additional steps to comply with the Protocol before issuing any Court proceedings (our “Stage 2” service).

 In other words, as we see it, there is everything to gain, and little to lose by continuing to use this approach towards debtors who are individuals, even after the Protocol comes into force on 1 October. Accordingly, we will be recommending that in the majority of cases, our clients continue to use our Stage 1 service for all debtors.*

 There is of course another option for seeking to circumvent the Protocol, at least in the short term, and that is to take action before it comes into force. To achieve that, our view is that you will need to have progressed your debt claims beyond the pre-action stage by 1 October 2017 (i.e. by issuing any Court proceedings before that date). Under Stage 1 of Holmes & Hills’ Fixed Fee Debt Recovery Service, we send an initial letter demanding payment within 7 days, which we follow up with a telephone call if payment is not received. In the small percentage of cases where that doesn’t result in payment being made, we offer our Stage 2 service, which is to issue Court proceedings. We recommend that anyone wanting to ensure that they have commenced Stage 2 before 1 October 2017 provides us with their initial Stage 1 instructions by 1 September 2017.

 If you would like further information on how the new Protocol will affect your business please call Holmes & Hills Sam Bawden or Tom Farrell on 01376 320456 (Braintree) or 01787 275275 (Sudbury).

 *There will always be some individual cases in which, based on the specific facts, we will consider it more appropriate to comply with the Protocol. In those cases we will advise you of that at the point of accepting your instructions.

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