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Mark Gardner is a debt recovery and insolvency specialist at national law firm Excello Law

Mark Gardner

Mark Gardner

On 1 October 2017, the government will introduce a new pre-action protocol for debt. This new protocol from the Head of Civil Justice will have extensive implications for businesses that deal with individual debtors, such as in business to consumer or business to business environments where the customer is an individual.

The protocol encourages parties to engage early on and resolve their differences without going to court. It is designed to encourage mutual exchange of information and a dialogue. Both of these are legitimate and worthy aims.

The protocol has very precise requirements. Gone will be the 2-page letter of claim setting out the sums due and the 7 or 14-day period (or less with some firms who undertake recovery). This will transform the document into something of around 10 pages in length and gives a period of at least 30 days for a response. That will have cash flow implications for businesses that are basically unable to pursue the debt during this period.

The letter should be posted on the day it was written or, if not reasonably possible, the following day. It also states that the letter should be sent by post unless the debtor has made an explicit request that it should not be sent by post and has provided alternative contact details.

If the debtor does not reply to the letter of claim within 30 days of the date on the top of it then court proceedings can begin provided that the debtor has been given 14 days’ notice of the intention to commence proceedings. This must be included within the initial letter but if a reply is received and an agreement not reached then a separate 14 days’ notice of intention to start proceedings will be needed.

More worrying for creditors, if the debtor responds by, for example, requesting copy documents, then the creditor should not start court proceedings for at least 30 days from receipt of the completed Reply form or 30 days from the creditor providing documents requested by the debtor, whichever is later.

There is the potential for a savvy debtor to drag this out and then argue failure to comply in front of the court.  Also, if the debtor indicates that they wish to seek legal advice then the creditor must allow reasonable time for that to happen – I am guessing that will be more than 30 days!

Additionally,parties should consider the use of alternative dispute resolution. If a settlement is reached and then breached the whole process recommences with the time limits. Unsurprisingly, the courts will expect compliance with the protocol when giving directions to timetable the matter going forward. We may see numerous cases being fought on technical breaches of the protocol simply to avoid paying interest, court and other costs by some debtors. 

After the protocol comes into effect, those who could not handle the strain of being in debt may bury their head even more in the sand due to being overwhelmed by it all. It will not aid dialogue – a 10-page bundle will simply phase them.

Secondly you will get debtors who play the system – by replying at day 30, requesting documents, relying on 30 days to consider them, saying they are going to get legal advice, claiming they cannot get it and then seeking to enter into a dialogue to reach an agreement to pay a nominal sum, defaulting and saying they are trying to get additional advice,and then simply going to ground.

I do think that the pendulum has swung too far. It is clearly designed to catch the lower tier recovery organisations with the hard to recover assigned debts but consequently, is catching legitimate businesses who are trying to survive and secure the business and jobs for their staff. Sadly, these are the businesses who will have given credit to individuals and are themselves most vulnerable to market pressures and failure to pay.

For individual sole trader businesses continuing to trade will become more difficult.  They will be squeezed if they trade with individuals like themselves and yet might be unable to get credit from their suppliers. Big business may not wish to trade with them on credit for the aforementioned reasons.

Money up front or on delivery materializes as the way forward until this all levels out and the requirements relax. If credit is to be given parties should follow the golden rule of getting a credit application form and proof of business entity documentation. Additionally, know who you are dealing with from the off, and monitor any payments or letterheads that are coming in.

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