Debt recovery stage 1
The Pre-action Protocol for debt claims comes into force on 1 October 2017 and will potentially have a severe impact on a business if it has outstanding debts due from individuals.
The Protocol will apply to any business (in limited form, partnerships, sole traders and public bodies) when claiming payment of a debt from an individual (which is defined to also include a sole trader).
The Protocol does not apply to business-to-business debts unless the debtor is a sole trader and describes the conduct the court will normally expect of parties prior to court proceedings being commenced. The Protocol does not apply if the matter is covered by another pre-action protocol such as construction and engineering or mortgage arrears.
The aims of the Protocol are to:
‘(a) encourage early engagement and communication between the parties, including early exchange of sufficient information about the matter to help clarify whether there are any issues in dispute
(b) enable the parties to resolve the matter without the need to start court proceedings, including agreeing a reasonable repayment plan or considering using an Alternative Dispute Resolution (ADR) procedure
(c) encourage the parties to act in a reasonable and proportionate manner in all dealings with one another (for example, avoiding running up costs which do not bear a reasonable relationship to the sums in issue) and
(d) support the efficient management of proceedings that cannot be avoided.’
A creditor will have to include with its letter before claim a template information sheet and a reply form in all cases. The letter before claim should contain:
i. the amount of the debt
ii. whether interest or other charges are continuing
iv. where the debt arises from an oral agreement, who made the agreement, what was agreed (including, as far as possible, what words were used) and when and where it was agreed
v. where the debt arises from a written agreement, the date of the agreement, the parties to it and the fact that a copy of the written agreement can be requested from the creditor
v. where the debt has been assigned, the details of the original debt and creditor, when it was assigned and to whom
vi. if regular instalments are currently being offered by or on behalf of the debtor, or are being paid, an explanation of why the offer is not acceptable and why a court claim is still being considered
vii. details of how the debt can be paid (for example, the method of and address for payment) and details of how to proceed if the debtor wishes to discuss payment options and
viii.the address to which the completed reply form should be sent.
The creditor should also:
i. enclose an up-to-date statement of account for the debt, which should include details of any interest and administrative or other charges added or
ii. enclose the most recent statement of account for the debt and state in the letter of claim the amount of interest incurred and any administrative or other charges imposed since that statement of account was issued, sufficient to bring it up to date or
iii. where no statements have been provided for the debt, state in the letter of claim the amount of interest incurred and any administrative or other charges imposed since the debt was incurred
a. enclose a copy of the information sheet and the reply form in the form annexed to the protocol
b. enclose a financial statement form as annexed to the protocol
If the debtor does not reply to the letter before claim within 30 days, the creditor may commence court proceedings.
The debtor should use the reply form for its response. The debtor should request copies of any documents it wishes to see and enclose copies of any documents it considers relevant, such as details of payments made but not taken into account in the creditor’s letter of claim.
If the debtor indicates that it is seeking debt advice, the creditor has to allow the debtor a reasonable period for the advice to be obtained and should not commence court proceedings less than 30 days from receipt of the completed reply form or 30 days from the creditor providing any documents requested by the debtor, whichever is the later.
The creditor should also allow reasonable extra time for the debtor to obtain that advice where it would be reasonable to do so in the circumstances.
If the debtor requires time to pay, the protocol requires the creditor and debtor to try and reach an agreement for the debt to be paid by installments, based on the debtor’s income and expenditure. If the creditor does not agree to a proposal for repayment of the debt, it should say why in writing.
If the debtor fails to fully complete a reply form the onus is on the creditor to contact the debtor to discuss and obtain any further information needed to properly understand the debtor’s position.
If the debt is disputed the parties should exchange information and disclose documents sufficient to enable them to understand each other’s position and the creditor must provide any document or information requested or explain why the document or information is unavailable within 30 days of receipt of the request.
If settlement still cannot be reached the parties are obliged to take appropriate steps to resolve the dispute without commencing court proceedings and, in particular, should consider the use of alternative dispute resolution (ADR).
If an agreement still cannot be reached, the creditor should give the debtor a minimum of 14 days’ notice of its intention to commence court proceedings (unless, for example, the limitation period is about to expire).
What does all this mean for creditors?
Without the doubt, the process of recovery of debts will be more cumbersome for creditors:
- Creditors are required to provide more documentation to debtors in specific formats
- There is increased scope for delaying collection by intransigent debtors who can delay payment by up to 90 days
- Creditors will need to be more pro-active when engaging with debtors to ensure information is properly exchanged and time periods met
- Additional costs and delays could be incurred particularly if ADR is triggered and
- A review of existing recovery processes and changes may be necessary
What happens if creditors fail to comply with the Protocol?
Failure to comply with the Protocol may result in:
- Further delay in collection of debts if any legal proceedings are stayed to remedy failures to comply with the Protocol
- Additional costs sanctions in terms of payment of the debtor’s legal costs or a failure to recover costs and
- Inability to recover interest from a debtor or recovery at a reduced rate.
For businesses dealing predominantly with consumers or sole traders and providing credit, the new Protocol requires a considerable degree of greater patience when collecting outstanding debts. No longer will such a creditor be able to bring greater pressure to bear on a debtor by the prospect of imminent court proceedings. Small and medium-sized businesses in particular, with concerns about potential cash flow problems, will have to either reflect on when and to whom they give credit and to ensure that they act promptly when debts arise.
If you require any further information about reviewing your credit control processes in the light of these changes or require any assistance with collection of your debts, please contact the team at Kingston Collections
Stage 2: Issuing Court action
In the absence of any response to the letter of claim, and subject to receiving your instructions, we will instruct our solicitor to prepare a Claim form. Once approved, the Claim form will be sent to Court for issue.
On the issue of the claim, the debtor will thereafter be referred to as the Defendant. In addition to the principal debt we will also claim interest, court fees and solicitors costs (which are fixed or assessed by the Court. The Defendant has 14 days from service of the claim in which to respond.
A response may be either payment in full, a full admission and offer to discharge the claim by installments; a part admission or a defence to the claim. Where a defendant files an Acknowledgement of Service, a further 14 days from service of the claim form is allowed for service of a defence.
Stage 3: Judgment and Enforcement
Either upon receipt of an admission or else in the absence of any response to the claim form our solicitor can apply for Judgment. Registration of a Judgment (also known as a CCJ) can adversely affect the creditworthiness of the Defendant.
If the Defendant has not responded to the claim form, a default judgment will be obtained payable forthwith, meaning the full Judgment amount to include interest, court fees and costs is payable immediately. On applying for a Judgment our solicitor will also apply for enforcement proceedings.
There are various types of enforcement action that can be taken if a Judgment remains unpaid.
High Court/County Court Warrant
If the Judgment debt is below £600.00 a County Court warrant may be issued. For debts above £600.00 the claim may be transferred to the High Court for enforcement by Warrant. On payment of a court fee a County court warrant could be issued authorising a County Court Bailiff to levy on assets belonging to the Defendant. Property seized is generally sold at auction. The proceeds from the sale are then used to discharge the Judgment debt plus execution court fees and costs.
A High Court warrant authorises a High Court Enforcement Officer (HCEO) to attend an address at which assets belonging to the Defendant may be found and in the same manner as a bailiff, levy on assets may be taken. The fees of the HCEO are paid by the Defendant and generally the HCEO achieves a greater success rate executing warrants and achieving settlement.
Attachment of Earnings Order
Providing the Defendant is in full time employment, an application can be made for an Attachment of Earnings Order. If successful the Court will determine the rate of deductions and will order the Defendants employer to deduct money direct from the Defendants salary. Before the order is directed to the employer the Defendant is afforded an opportunity to settle the claim and if accepted, the employer may not be aware of the claim.
Where a Defendant owns a beneficial interest in a property an application can be made for a Charging Order. Providing there is sufficient equity in the property to which the Defendant is entitled on disposal of the property the debt may be discharged.
Third Party Debt Order
This enforcement method can be used where the Defendant is owed sufficient undisputed monies by a third party, or has money held in a bank or building society account. The court can order the stakeholder to release sufficient monies to the claimant.
We will always give you our advice and experience on the best possible method to enforce your Judgment, whilst keeping you informed at every stage of the process.