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Debt Recovery Pre-Action Protocol

When seeking recovery of a debt, such as an unpaid invoice or loan, the creditor may be required to follow a procedure set out in the Pre-Action Protocol for Debt Claims.

As a creditor, it is essential to follow the Pre-Action Protocol for Debt Claims if it applies. Failure to do so could obstruct the creditor’s success at court, including having proceedings stayed (postponed) or costs applied depending on the circumstances and the court’s discretion.

Here, our debt recovery experts explain when the Debt Recovery Pre-Action Protocol applies to a debt dispute and the basic procedure a creditor must follow before instigating a formal debt claim.

In practice, the process is complicated and the exact steps often depend on the debtor’s engagement with the proceedings. So, seeking legal advice from lawyers who specialise in complex and high value debt recovery is the most effective way to ensure full compliance and maximise a creditor’s chances of recovery.

What is the Pre-Action Protocol for Debt Claims?

The Pre-Action Protocol prescribes how creditors should approach debt recovery, such as what information must be included in letters of claim and when the creditor may justifiably consider taking formal legal action.

The Pre-Action Protocol is designed to keep as many disputes out of court as possible as well as providing some level of protection for debtors who may need breathing space to respond to claims and negotiate a settlement. However, the procedure does not apply to all debt recovery claims.

Where the Debt Recovery Pre-Action Protocol does not apply and no other Pre-Action Protocol applies, the Practice Direction for Pre-Action Conduct and Protocols will apply instead.

Why is it important to follow the Pre-Acton Protocol?

Applying the right pre-action protocol and complying with its procedure is critically important and can affect how a court approaches a debt recovery claim.

Paragraph 1 of the Practice Direction (which sets out the objectives of the pre-action protocols) explicitly states that the Pre-Action Protocols, “set out the steps the court would normally expect parties to take before commencing proceedings for particular types of civil claims”.

Paragraph 13  states, “If a dispute proceeds to litigation, the court will expect the parties to have complied with a relevant pre-action protocol or this Practice Direction. The court will take into account non-compliance when giving directions for the management of proceedings… and when making orders for costs…”

The courts consider that litigation should always be a last resort and that claims should not be issued when settlement is still actively being explored.

Avoiding litigation can help creditors keep costs lower, maximising their recovery once settlement is achieved. It also helps parties resolve issues faster with no requirement to wait for hearings to be listed and, for some creditors, is beneficial for preserving their reputation as a reasonable business or individual.

Failure to comply with the pre-action protocols can result in penalisation further on in the proceedings, so compliance is essential. Sanctions for non-compliance will vary depending on the circumstances of the case. Minor issues of non-compliance may be accepted, but more serious lapses could result in costs orders or a stay of proceedings until pre-action steps have been taken.

What is the purpose of the Debt Recovery Pre-Action Protocol?

The Debt Recovery Pre-Action Protocol sets out its aims, which are to:

  • Encourage early engagement and communication between the parties” – creditors should be prepared to provide sufficient information and evidence about the debt and in turn can expect the debtor to engage in discussions, including providing information about their financial means.
  • Enable the parties to resolve the matter without the need to start court proceedings– potential outcomes could include agreeing a payment plan or turning to forms of alternative dispute resolution, such as mediation or arbitration.
  • Encourage the parties to act in a reasonable and proportionate manner in all dealings with one another” – this could include aiming to keep costs low by not engaging in negotiations about matters unrelated to the debts concerned.
  • Support the efficient management of proceedings that cannot be avoided”.

Who does the Pre-Action Protocol for Debt Claims apply to?

The Debt Claims Pre-Action Protocol applies to businesses (including limited companies, sole traders and public bodies) claiming repayment of a debt from an individual (including a sole trader).

For example:

  • Limited company claiming money from an individual – Pre-Action Protocol applies.
  • Limited company claiming money from a sole trader – Pre-Action Protocol applies.
  • Sole trader claiming money from a sole trader – Pre-Action Protocol applies.
  • Limited company claiming money from a limited company – Pre-Action Protocol does not apply.
  • Individual claiming money from an individual, sole trader or limited company – Pre-Action Protocol does not apply.

Where the Debt Claims Pre-Action Protocol does not apply and no other pre-action protocol applies, the parties must still follow the Practice Direction.

What is the debt recovery process under the Pre-Action Protocol?

Letter before action/letter of claim

The first step to commencing debt recovery proceedings is to issue a letter of claim (also known as a letter before action) to the debtor to demand repayment of the debt. Under the Pre-Action Protocol, the letter of claim should include:

  • The debt amount
  • Details of interest
  • Information about how the debt arose
  • An explanation as to why any previous settlement offer by the debtor is not acceptable
  • Why a court claim is still being considered
  • Details of how the debtor can repay the debt, such as a method of payment
  • The address to which the debtor should return any reply form
  • The date of the letter

With the letter of claim, the creditor should provide one of the following:

  • An up-to-date statement of account for the debt, including details of interest and any other charges
  • The most recent statement of account for the debt together with details of any interest and other charges

Where there is no statement of account, the creditor should state how much interest has occurred and details of other charges such as administrative charges within the letter of claim.

The creditor should also include certain documents which are annexed to the Pre-Action Protocol, including:

  • An information sheet and reply form (Annex 1) – this gives the debtor the opportunity to respond to the letter of claim, including:
    • Whether they admit liability for some or all of the debt
    • Whether they intend to repay and when
    • Whether they are getting debt advice
    • Whether they need any more information about the debt
  • A financial statement form (Annex 2) – the debtor should complete and return this to give the creditor a better picture of their income and expenditure to assist in settlement negotiations.

For more information, visit our solicitor’s letter before action page.

Serving the letter of claim

The letter of claim should be posted to the debtor on the day it is dated. Alternatively, if that is not possible, it should be sent as soon as possible the following day.

The letter should be served on the debtor by post, although the creditor may also send it to other contact details if available, such as the debtor’s email address.

Debt recovery timescales

The Pre-Action Protocol sets out timescales to allow the debtor space to respond to the creditor’s correspondence and engage in settlement discussions without the risk of the creditor instigating court proceedings.

Failure to respond to the letter of claim

The debtor should respond to the letter of claim within 30 days of the date on the letter. If they do not respond, the creditor may proceed with court proceedings.

Debtor’s response to the letter of claim

If the debtor returns their reply form, the creditor should wait a further 30 days from the date of receiving the response to start court proceedings. Similarly, if the debtor requests further information or documents, the creditor should allow at least 30 days from the date they provided them before commencing court action, or explain why they cannot provide them within 30 days of the request.

Debtor obtaining further advice

If the debtor responds to the letter of claim stating that they need further advice, such as advice from a debt specialist or a lawyer, the creditor should allow at least 30 days, or longer if reasonable, for them to do this.

Failure to reach an agreement

If the creditor and debtor enter into settlement discussions but are ultimately unsuccessful, the creditor should notify the debtor that they intend to proceed with court proceedings and give 14 days’ notice in writing.

Limitation

One exception to the 14 day warning is if the limitation period – the date by which the creditor must commence a legal claim to avoid being statute-barred – is about to expire.

Alternative dispute resolution

If the parties are unable to initially agree about the existence, enforceability, amount or any other aspect of the debt, where possible, the parties should pursue methods of alternative dispute resolution (ADR) rather than resorting straight to court. This could include:

Informal settlement negotiations

It is often possible for parties to come to an adequate agreement through ‘without prejudice’ discussions, which allow for open negotiation without the risk of any of the correspondence being brought before the court later on.

Formal dispute resolution processes

In some cases, the debtor may choose to go through a more formal process, such as making a complaint to the Financial Ombudsman Service where a regulated consumer debt is concerned.

Mediation

This is the process of negotiating a settlement with the guidance of a qualified civil mediator. The mediator’s role is to guide the discussions and help defuse conflict where necessary – they do not make any judgment on the case or take sides.

Arbitration

Arbitration is the most ‘formal’ of the ADR processes. It involves the parties putting their cases to a qualified arbitrator who weighs up the evidence and makes a decision about what the outcome of the dispute should be.

The arbitrator’s decision may be legally binding if all parties agree that it should be prior to the process commencing.

For more information about ADR, visit our Commercial Alternative Dispute Resolution page.

‘Taking stock’ – deciding whether to proceed with legal action

Should all settlement negotiation attempts be unsuccessful, the Debt Recovery Pre-Action Protocol encourages the parties to ‘take stock’ and review their respective positions. If there are any final steps the parties can take to avoid litigation, these should be thoroughly considered. At the very least, the parties should attempt to reduce the scope of the issues at hand.

As previously mentioned, where the debtor has engaged with the creditor in response to the letter of claim, the creditor should always give 14 days’ notice of their intention to start a debt recovery court claim, unless there are exceptional circumstances such as the expiry of the limitation period.

Debt claims against individuals

For information about the steps involved in a debt recovery claim against individuals, visit our articles on How to Recover a Debt from an Individual.

Speak to our specialist debt recovery solicitors in London

Here we have outlined the basic process of conducting pre-action under the Pre-Action Protocol for Debt Claims. However, it is always essential to seek specialist legal advice about the options available in the unique circumstances of the case to give the creditor the best possible chance of recovering their money.

For bespoke high value debt recovery advice, contact Saunders Law today for a free, no obligation initial discussion of how we may be able to help.

Call us on 0207 632 4300 or make an enquiry online.