Debt protocol: An unnecessary hurdle or a necessary protection?

On 1 October 2017 the new CPR pre-action protocol for debt claims will come into force (the debt protocol).

The debt protocol will apply to all civil claims brought by a “business” (including sole traders and public bodies) claiming a debt from an “individual” (including sole traders), unless the claim is of a type already covered by another specific pre-action protocol (such as the mortgage possession claims protocol). It will not therefore apply to business-to-business debts, unless the debtor is a sole trader. The claimant business is referred to as the “creditor” and the individual debtor as the “debtor”.

The primary requirements relate to information required to be in the letter of claim; documents which must be sent with the letter of claim; and time limits for responding.

Letter of claim and enclosures

The creditor must send a letter of claim to the debtor before proceedings are commenced. The debt protocol sets out the mandatory content for that letter as well as mandatory enclosures. Lawyers should refer to the protocol for a full list of the requirements, but in summary these include:

• Details of the amount of the debt as well as any interest and charges due (including enclosing an up-to-date statement of account if available);

• Full details of the written or oral agreement under which the debt arose, as well as making it clear that the debtor can request a copy of the written agreement;

• If the debt was assigned, details of any assignments;

• If instalments are being paid, an explanation as to why the instalments arrangement is no longer acceptable;

• Details of how the debt can be paid and/or how to proceed if the debtor wishes to discuss payment;

• A reply form and information sheet (pro formas are annexed to the debt protocol) and address to which to send them; and

• A financial statement form (pro forma annexed to the debt protocol).

The letter of claim must be sent by post, unless expressly agreed otherwise with the debtor (a clause in the standard terms and conditions will not suffice). If an email address or other contact details are known then these can be used in addition to posting.

The response

A creditor must now give the debtor at least 30 days from the date of the letter of claim to respond. The debt protocol specifically states that account should be taken of the possibility that a reply was posted towards the end of the 30-day period. Caution should therefore be exercised before issuing any proceedings inside 32 or 33 days from the date of the letter of claim.

The debtor is expected to reply by using the reply form. Any requests for documents or information by the debtor should be made at the same time. If a debtor states that debt advice is being sought, or more time is required, the creditor must allow “reasonable extra time” for the advice to be obtained and should avoid issuing proceedings until 30 days from receipt of the completed reply form, or from the creditor providing the documents requested, whichever is later.

If a debtor requires more than 30 days to obtain the advice, the debtor must provide details as to why the advice cannot be obtained sooner and also when it is expected to be received.

If a repayment proposal is rejected, written reasons must be provided to the debtor.

Starting proceedings

If a debtor fails to respond, proceedings may be issued 30 days after the letter of claim. If a response is received but no agreement reached, the protocol states that the parties should “take stock” of their positions. In any case, in these circumstances, creditors are then expected to provide a further 14 days’ notice of their intention to commence proceedings.

The parties are also signposted to various ADR services within the debt protocol and encouraged to consider these.

Although the debt protocol indicates that the courts will not be concerned with minor and technical breaches, particularly when the matter is urgent, the courts do have the power to consider breaches of the protocol and impose sanctions which could include costs orders, orders relating to interest, or unless orders.

The debt protocol is likely to cause increased delays in pursuing legitimate debt claims. At least 30 days must be given for a response and it may be much longer. It is unclear whether and how quickly debtors can receive debt advice given the lack of funding available for such services, and creditors may find themselves faced with standard replies asking for more time. The costs which need to be expended on complying with the debt protocol are likely to be particularly disproportionate for low-value debts and may lead to a certain level of debt threshold being uneconomical to pursue.

Melanie Hart is a senior associate at Harbottle & Lewis, advising on a broad range of corporate, commercial, and individual disputes