On 1st October 2017, a new Pre Action Protocol for Debt Claims will come into force.
The Protocol aims to encourage early communication between the creditor and debtor to identify whether there are any issues in dispute and enable the parties to resolve the matter without the need to resort to issuing Court proceedings.
Any claims for the recovery of a debt should be set out in a Letter of Claim addressed to the debtor before Court proceedings are issued. The Letter of Claim should contain information regarding the amount of the debt, how the debt has arisen and the amount that is due to be paid.
If the debt is based upon a written agreement, the Letter of Claim should set out the parties to the written agreement and provide a copy of the written agreement.
If the debt arises from an oral agreement, the Letter of Claim should clearly set out the terms of that agreement, including, where possible, the words used and when and where the agreement was reached.
The new Protocol still requires the creditor to send a Letter of Claim, but now includes a basic form for the debtor to complete to respond.
Using the prescribed form, the debtor must confirm whether or not they admit that the debt is owed and if they accept that the debt is owed, how they propose to pay it.
The debtor should be allowed 30 days to complete the reply form and return it to the creditor.
If the debtor indicates in the reply form that they are seeking advice in connection with the debt, and that this cannot be obtained within 30 days, the creditor should allow “reasonable” extra time for the debtor to obtain that advice.
This means that the creditors cannot start Court proceedings until at least 30 days after the Letter of Claim has been sent and should allow the debtor a “reasonable” extension of time to respond, if required.
The focus of the new Protocol is to try and avoid the issue of Court proceedings. The parties are encouraged to consider the use of mediation or other forms of Alternative Dispute Resolution (ADR).
If Court proceedings are issued, then the Court will take into account whether the parties have complied with the new Protocol. However, if there has been a minor infringement or non-compliance with the Protocol, then the Court is not likely to be too concerned with the breach, especially if the matter is urgent.
Where the debtor has responded to the Letter of Claim but agreement has not been reached, then the Protocol still requires the creditors to still give the debtor at least 14 days notice of their intention to start Court proceedings, unless there are exceptional circumstances in which urgent action is required.
The new Protocol could have an impact on creditor’s cash flow because of the required time limits to allow for a response to the Letter of Claim and recoverability of debts is now likely to be a slower process.
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