02/12/2024

If you have ever had difficulty getting a customer to pay an invoice due to you or your business, this blog outlining the pre-action protocol for debt claims is a must-read.

I know I make myself sound 100 when I say this, but in the old days you could just write a letter demanding payment in seven days or else! However, things work somewhat differently now.

There are rules governing the conduct of parties, including what steps you are expected to take, before issuing a claim.

This blog outlines the steps the court expects you to have taken before commencing proceedings. This is known as pre-action conduct and protocols. I will also consider the consequences of non-compliance and provide information and tips for both claimants and defendants.

What is the pre-action protocol for debt claims?

Before starting a claim, a party must consider the rules governing the pre-action protocol for debt claims. There are potentially serious consequences for both claimants and defendants of failing to comply with the protocol.

The pre-action protocol for debt claims is a set of guidelines established under the Civil Procedure Rules to encourage parties to resolve debt disputes before starting court proceedings. It applies when a business is claiming repayment of a debt from an individual (including a sole trader).

The protocol’s aim is to:

• Encourage the exchange of early and full information about a prospective claim.
• Enable parties to avoid litigation by agreeing to settle a claim before the commencement of proceedings.
• Support the efficient management of proceedings where litigation cannot be avoided.

Key steps in the pre-action protocol for debt claims

• Letter of claim

The creditor must send a detailed letter of claim to the debtor, setting out:

• the amount owed and how it is calculated,
• details of any agreements or contracts, and
• copies of relevant documents, such as invoices or statements.

The letter should give the debtor at least 30 days to respond.

 

• Debtor’s response

The debtor has the opportunity to:

• admit the debt and propose a repayment plan;
• dispute the debt, providing reasons and supporting evidence, or
• request additional information or documentation.

 

• Further communication

If the debtor disputes the claim or requests more details, the creditor must respond within a reasonable timeframe. Both parties are encouraged to exchange information and consider alternative dispute resolution (ADR), such as mediation.

 

• Court proceedings

If no resolution is reached after following the protocol, the creditor may commence court proceedings. However, the court may penalise a party that has not complied with the protocol by ordering costs or other sanctions.

 

The pre-action protocol for debt claims applies to any business, including sole traders and public bodies (creditor), claiming payment of a debt from an individual, including a sole trader (debtor). The word ‘business’ does not seem to be defined in relation to the protocol, but it has been described as an “etymological chameleon”, which suits its meaning to the context in which it is found.

Please be aware as of 1 October 2023, there is a new intermediate track covering all claims issued on or after that date with a value of between £25,000 and £100,000, to which fixed costs recoverable apply.

The main disadvantage of this change is that the fixed costs regime will apply more widely than it previously did, with more cases subject to the risk that the successful party will be able to recover less than it previously could, from the losing party. The main advantage is greater costs certainty on both sides. Overall, it means that very careful consideration needs to be given to the cost-benefit of bringing claims that may or will be allocated to the new intermediate track.

 

Can a statutory demand be used as an alternative to the pre-action protocol for debt claims?

This is a question that I am frequently asked. The pre-action protocol should not, in principle, prevent a creditor from choosing to serve a statutory demand as an alternative, provided that the statutory demand route is appropriate. The creditor must show that the debtor appears to be either unable to pay the debt or has no reasonable prospect of being able to pay and the debt is for a liquidated sum of £5,000 or more, payable either immediately or at some future time, and is unsecured.

 

Why is compliance with the pre-action protocol important?

Failure to follow the pre-action protocol can lead to delays in the legal process or adverse consequences in court. Courts expect creditors and debtors to take reasonable steps to resolve disputes amicably before resorting to litigation.

By adhering to the protocol, parties can save time, reduce costs, and potentially avoid the stress of court proceedings.

The court expects you to have complied with the pre-action protocol provisions and will take into account non-compliance when giving directions for the management of proceedings. Where a party has not complied with the protocol, the court may make an order for costs against that party or deprive it of costs which it would otherwise have recovered.

When considering compliance the court will:

• be concerned with the degree to which parties have complied in substance with the relevant principles and requirements of the protocol and is not likely to be concerned with minor or technical shortcomings;
• consider the proportionality of the steps taken compared to the size, complexity, and importance of the matter including whether any costs incurred and claimed against the other party bear a reasonable relationship to the sums in issue;
• take account of the urgency of the matter and any consequent lack of opportunity to comply; and
• look at the overall effect of non-compliance on the other party when deciding whether to impose sanctions.

 

What are the possible sanctions for non-compliance with the pre-action protocol?

• Staying (that is suspending) the proceedings until steps which ought to have been taken have been taken.
• An order that the party at fault pays the costs, or part of the costs, of the other party.
• An order that the party at fault pays those costs on an indemnity basis.
• If the party at fault is the claimant in whose favour an order for the payment of a sum of money is subsequently made, an order that the claimant is deprived of interest on all or part of that sum, and/or that interest is awarded at a lower rate than would otherwise have been awarded.
• If the party at fault is a defendant and an order for the payment of a sum of money is subsequently made in favour of the claimant, an order that the defendant pay interest on all or part of that sum at a higher rate, not exceeding 10% above base rate, than would otherwise have been awarded.

 

For advice on any debt recovery matter, please contact Richard Anderson at Beswicks who will be happy to guide and advise you. You can email richard.anderson@beswicks.com or call 01782 205000 or 0161 929 8494. Take a look at our services to find out more about how we can help you.