Is your business prepared for new debt collection rules?

A new pre-action protocol for debt claims, which comes into force on the 1 October, has left many small businesses unprepared and at risk of falling foul of the regulations.

The protocol only applies to businesses claiming payment of a debt from an individual. It does not apply to business to business debts unless the debtor is a sole trader, or, where the debt is covered by another protocol such as in the construction and engineering sector.

Crucially, the current ‘Letter of Claim’ (otherwise known as a Letter Before Action (LBA)) is being overhauled.  This requires new and differing information, including:

  • Where the debt arose from an oral agreement – who made the agreement, what was agreed, when and where;
  • Where the debt arose from a written agreement – the date of the agreement, the parties to the agreement and that a copy of the agreement may be requested;
  • Where the debt has been assigned, details of the original debt, when it was assigned and to whom.

The Letter of Claim should also have further documents attached to it:

  • A statement of account – details of any accrued interest or charges. If no statement is available, then the Letter of Claim should set out the amount of accrued interest and charges;
  • The ‘Information Sheet’ and ‘Reply Form’ proscribed by the protocol
  • The ‘Financial Statement’ proscribed by the protocol.

The ‘Letter of Claim should be sent by post unless the debtor has explicitly requested that an alternative form of communication be used. If a response is received the protocol sets out what the parties need to do and in the event of a dispute, alternative dispute resolution should be considered.

If the debtor does not reply within 30 days the creditor may issue begin legal action and issue court proceedings.

The protocol’s aims are to encourage early engagement and communication and the exchange of information to clarify whether there any issues in dispute and to enable the parties to settle without having to resort to a legal battle.

Crucially, if a creditor issues proceedings without following the new protocol ‘the court will take into account non-compliance’ and it may order the claim be suspended, apply costs sanctions or deprive the creditor of some or all interest claimed. SMEs caught out by the change could find that such mistakes cost considerably more than the debt itself.

Matthew Halton, a commercial law solicitor and debt recovery expert at the national law firm, Stephensons, said: “The new Pre-Action Protocol for debt claims could prove disastrous for small and medium businesses with relatively modest debt collection systems.

“In particular, a requirement to allow a debtor 30 days before commencing court action builds an unnecessary delay into the debt collection process. Even then, a further 30 days has to be added if a completed reply form is received. Put simply – ‘delay is the enemy of recovery’.

“The protocol requires a creditor to provide an onerous amount of information in the letter of claim including details of who made the agreement under which the debt is claimed, what was agreed, when it was agreed and where it was agreed, even if the agreement was oral.

“In addition, each letter of claim has to be accompanied by a lengthy reply form and a draft financial statement. One shudders to think of the endless trees wasted and the photocopying costs before even considering the costs of putting such a letter together.

“In essence, the protocol is making the creditor do a lot of the work necessary to pursue a claim through the courts in advance thus front loading the costs of the debt recovery procedure, given that a high percentage of Letter of Claims are paid on receipt because the debtor was merely waiting for it before paying.

“The cost could be significant for little overall improvement and will in all likelihood lead to creditors seeking alternative means of debt recovery such as insolvency proceedings.”

9 Top Tips to Prepare Your Business

  1. The protocol will extend the pre-action notice from 14 days to 30 days. Consider when the Letter of Claim should be issued when chasing payment
  2. Decide how the information required for the letter of claim will be gathered
  3. Introduce new systems to record this information during the contractual procedure, rather than rushing to gather it later
  4. Designate a member or members of staff to prepare the Letter of Claim
  5. Review the standard terms of business in the light of the new protocol. Should a provision for recovery of collection costs be included?
  6. Should dispute procedures also be included in standard terms of business?
  7. Designate a member or members of staff to deal with responses received were a creditor does not agree a debtor’s repayment proposal.
  8. Decide at what stage lawyers should become involved
  9. Where in doubt, seek the advice of a specialist debt recovery solicitor.