Pre Action Protocol (PAP) for Debt Claims
“In this business, if you don’t pay your debts you’re finished.” – Roger Stone
On the 1st October 2017 a new Pre Action Protocol for Debt Claims was introduced for debt claims in England and Wales.
Compliance with the Pre Action Protocol has undoubtedly proved a challenge for some Creditors, bearing in mind that the requirements are designed to apply to a wide range of debts, not just the relatively sophisticated and regulated debt that Creditors may deal with.
The Protocol applies to any business (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader). This Protocol does not apply to business-to-business debts unless the debtor is a sole trader.
Some of the Pre Action Protocol Requirements
One important part of the new protocol is that Creditors must provide either a copy statement of account or copy invoice/s at Letter Before Action (LBA) stage.
There is a requirement for all Creditors to make it clear in the Letter Before Action (LBA) itself that the customer has the right to ask for documentation, including the original agreement/contract, although this should not be prominent as to encourage spurious requests.
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There is also a requirement for all Creditors to include a template Information Sheet, Reply Form and an income/expenditure form in all cases. Whilst the Pre Action Protocol recommends that the new Standard Financial Statement (SFS) should be used as the income/expenditure form, this format is not compulsory and Creditors can adopt their own versions. The Statement should include a number of standard elements, which we can provide guidance upon if required.
Initial information to be provided by the Creditor
The Creditor should send a Letter Before Action to the customer before proceedings are started. The Letter Before Action should –
- Contain the following information
- The amount of the debt;
- Whether interest or other charges are continuing;
- 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;
- 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;
- 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;
- 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;
- The address to which the completed Reply Form should be sent;
- Do one of the following –
- Enclose an up-to-date statement of account for the debt, or
- Enclose the most recent statement of account for the debt and state in the Letter Before Action the amount of interest incurred and any administrative or other charges imposed since that statement of account was issued, or
- Where no statements have been provided for the debt, state in the Letter Before Action the amount of interest incurred and any administrative or other charges imposed since the debt was incurred;
- Enclose a copy of the Information Sheet and the Reply Form ; and
- Enclose a Financial Statement form (Income/Expenditure Questionnaire).
Important points to note
Form of communication
The LBA must be sent by post, unless the customer has explicitly requested that no post should be sent. The Creditor may also send it electronically, but that will be in addition to the hard copy.
Debts subject to a personal guarantee
Any debt which is payable by a guarantor, falls within the Pre Action Protocol, even if the original debt was due from corporate entity. For example a company debt backed by a Personal Guarantee, will fall under the Protocol if a Creditor wishes to pursue the guarantor.
If a customer responds to the original letter and enters into payment plan, but then defaults, a further letter which is compliant with the new Pre Action Protocol is not required, providing the default occurs within a reasonable period (6 months is deemed reasonable). A letter will be required to notify the customer of the default and allow 14 days to rectify or enter into a different arrangement.
Time for customer to reply
The Pre Action Protocol requires Creditors to allow 30 days for the customer to respond to the LBA. However it also indicates that Creditors may wish to allow additional time for postage of replies. Consideration should be given to allow an additional short period before issuing a Claim.
Duplication of process
If Creditors enclose a statement of account and/or copy invoice as part of their credit control cycle prior to sending a letter before action (either internally or externally), this will not remove the requirement to enclose a copy statement and/or invoice with the letter before action (LBA). It is a specific requirement of the Protocol that a copy statement or other alternative (as outlined above) should be sent with the letter.
What does all this mean for Creditors?
Without doubt, the process of recovery of debts from consumers and sole traders has become more onerous for Creditors:
- Creditors are required to provide more documentation to customers in specific formats
- There is increased scope for customers to delay payment beyond the initial 30 day period
- Creditors need to be more pro-active when engaging with customers to ensure information is properly exchanged and allow specific time periods to reply
- Creditors need to ensure that Statements of Account are up to date
- A review of existing internal credit control processes and timescales may be necessary
- Potential increase in Day Sales Outstanding(DSO)
- Review of Credit Insurance policies
What happens if Creditors fail to comply with the Pre Action 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 from the debtor
- Inability to recover interest from a debtor or recovery at a reduced rate.
Creditors should ensure that whether they or their external partners are issuing any Letter Before Action (LBA) they are compliant with the new protocol, which places an additional burden upon them.
There may be some requirement for Creditors to amend their internal credit control letters and review their internal procedures. A general review of your internal credit control letters is something which all Creditors should do periodically and ensure they are still relevant and fit for purpose.
The burden on companies seeking to recover debts is becoming more and more onerous. If your business is in need of help and support, seek experienced and professional help – check your systems and procedures and comply with the rules or you’ll be wasting a lot of time and effort for little benefit!