The pre-action protocol for debt claims could have severe implications for businesses that are owed money by individuals or sole traders. Amy Richardson discusses the main issues.
The protocol comes into effect on 1 October and does not bode well for businesses providing goods and services on credit terms to consumers or sole traders.
The new regime means creditors must be significantly more patient when collecting debts – and it effectively removes the option of using imminent court proceedings to press debtors to pay up.
The new rules are expected to create potential cash flow issues that will require SMEs in particular to think much more carefully about who they give credit to – and also make sure early action is taken when late payment issues crop up.
What the new protocol means in a nutshell
The new protocol will apply to limited liability companies, partnerships, sole traders and public bodies when claiming payment of a debt from an individual or sole trader. The new system does not apply to business-to-business debts – unless the debtor is a sole trader.
It sets out the conduct courts will expect before creditors go to court in order to recover what is owed to them. However, the protocol does not apply to mortgage arrears or construction disputes, which are governed by a different pre-action protocol.
What does the new protocol mean for businesses?
The bottom line is that there is likely to be a significant delay in businesses being able to take court action – possibly up to three months from the date of the first letter requiring the payment of a debt.
The idea behind the protocol is that creditors and debtors have longer to negotiate and settle the dispute, rather than creditors going to court at the earliest opportunity. It also encourages the parties to disclose all documents at an early stage, which often helps to reach a settlement. Unfortunately, the new regime will squeeze cash flow – the lifeblood of any business.
The nuts and bolts of the new system
Under the new system, debtors must be given 30 days to respond to a creditor’s pre-action letter, compared to the previous seven days. If the debtor responds with a ‘reply form’ within the 30-day period, the creditor must allow a further 30 days before court proceedings can be issued.
In addition, if copies of documents are requested in the reply form, the creditor has to allow 30 days from providing these documents before issuing proceedings. On top of this, if the debtor says they are seeking debt advice, the creditor must allow a ‘reasonable period’ for this to take place.
Moreover, in situations where a debtor’s reply form asks for time to pay, the creditor and debtor should try to reach agreement for the debt to be paid in instalments.
What happens if creditors don’t comply?
If creditors do not conform to the new rules, there could be adverse costs consequences, or the court could halt proceedings completely to give the creditor time to rectify any breaches of the new rules.
For further advice on pre-action protocol, call Amy Richardson on 0161 761 8061 or email her at firstname.lastname@example.org