Administration of justice update
New pre-action protocol for debt claims
Rob Thompson looks at the forthcoming Debt Pre-Action Protocol and considers its likely impact. The protocol comes into force on 1 October 2017.¹
About the author
Rob Thompson is a Chartered Legal Executive, a partner in the collections and recoveries team at Brachers LLP and vice-chair of the Civil Court Users Association. He sat on the Debt Pre-Action Protocol sub-committee of the Civil Procedure Rule Committee.
A pre-action protocol for debt claims has been suggested for many years, but this has always been controversial. Those in favour have suggested that it would promote early resolution and reduce unnecessary legal claims, while those against have argued that most creditors already make great efforts to engage, not least to avoid incurring the ever-increasing court fees, and that further requirements simply represent unnecessary bureaucracy.
In the author’s experience, it is usually the creditor who is keen to engage, the debtor often considerably less so. I intend no criticism when I say this. It stands to reason when you consider that the creditor is champing at the bit to be paid, whereas the debtor may be unable or unwilling to do so, often fearful of what may then happen and probably, therefore, fails to see the benefit of engaging. Allaying those fears and promoting those benefits has been a key part of the approach of volume creditors for many years.
Debt claims are very different to most non-money claims brought before the courts. Most other claims are brought before the courts for the express purpose of resolving disputes. By definition, a debt is not a dispute.
Ninety- five per cent of debt claims result in a default judgment. In other words, 19 out of 20 money claims are not even responded to, let alone disputed. Among volume creditors with effective pre-action processes, the statistics are even clearer: only around 2% of claims are disputed. As Lord Justice Briggs recognised in his July 2016 Civil Courts Structure Review: final report: ‘The majority of civil claims already come to the court for enforcement rather than for the resolution of any dispute (para 10.11).’²
So, to the author’s mind, a debt protocol needed to be very different when compared with existing pre-action protocols for other types of claim. The principal purposes of a debt protocol should be to encourage engagement and resolution (often a payment arrangement of some sort); to signpost to debt advice, where necessary, to identify and safeguard the vulnerable; and, essentially, to get the parties communicating so that the enforcement to which Briggs LJ refers, ultimately, becomes unnecessary.
It is, of course, important that there must be an opportunity for a debtor to raise the statistically unlikely query or dispute, but I think that should be very much the secondary purpose of the debt protocol. In the few cases where a query or dispute is raised, the protocol needs to have a robust mechanism to deal with it effectively. However, the author’s belief is that this should only come into play in the unlikely event a query or dispute occurs. Until then, it should not dominate the requirements of the protocol.
The protocol only applies to a business claiming payment of a debt from an individual, including a sole trader. It seems sensible that business-to-business debts should, in general, be outside the scope as it should not be necessary for all of the protections and safeguards the protocol provides, which do, of course, come at the expense of urgency.
It would be a major hindrance to business to have to follow the protocol time frames, particularly if the very reason for escalation is tardiness in payment of invoices. Why then is the sole trader included? I am aware that this is controversial, but I think it probably strikes the correct balance. Among other factors, I believe that this recognises the fact that some sole traders may blur the lines between their personal and business accounting, and that if managed incorrectly the situation could effectively impact their ability to put food on their family’s table.
I do appreciate that it could be argued that partners in a business might be equally deserving or, conversely, that certain claims may be less worthy of the protection the protocol affords. Overall though, the line has to be drawn somewhere, and the approach taken seems appropriate.
A very important part of the protocol is the information and documentation to be included with the initial letter. This ensures transparency, and should encourage the desired engagement and communication. I am aware that the requirements are causing significant challenges to some creditors, necessitating changes to systems and processes.
However, the requirements seem reasonable in ensuring that the debtor is clear about exactly what is being requested from them; what it relates to; and the various steps and responses open to them. There is flexibility as to exactly how this is achieved, with the creditor able to draft their letter much as they wish, subject to the inclusion of the key points. There are also various means by which the creditor can supply statements, depending on how they have sent statements previously, if at all.
After much debate and controversy over the past couple of years, ultimately, a copy of the original agreement is not required to be supplied with the initial letter. This recognises that queries and disputes are unlikely, which is a major victory for proportionality. In the author’s opinion, there could have been no justification for the massive cost and expense of sending the agreement in every case, when the debtor has no interest in seeing it. However, transparency is maintained by making clear that the original agreement can be requested.
There are plenty of safeguards in the protocol to ensure that the debtor is given every opportunity to engage and to bring issues to light, whether this be financial difficulties, health issues, vulnerability, or any other problem which needs to be considered and taken into account. There is a huge amount of signposting to debt advice.
On receiving the initial letter, there is provision for the debtor to make direct contact with the claimant. Often, this is all that is required to resolve matters and agree a repayment arrangement. However, remaining in line with other pre-action protocols, there is also a more formal process which can be taken as well. This has resulted in a somewhat contradictory situation, with alternative approaches being possible and a rather long-winded reply form. However, I appreciate that this is intended to cover all manner of possible situations, and provides choice to the debtor.
There is creditor concern about the possible cumulative impact of the time frames: taken individually they seem reasonable, and it is very important for adequate time to be provided. However, theoretically it is possible for a debtor to delay matters deliberately, without genuine intentions, for weeks or even months. Perhaps the most perplexing requirement is that a creditor always has to leave at least 30 days before starting court proceedings, after receiving the reply form or supplying documents. I can see why that might be appropriate, for example, where the debtor needs to take advice; however, equally I can see situations where it would not be pertinent, for example if the response on the reply form is unconstructive.
I suspect that creditors may have to take a view on whether they are prepared to give such time based on the responses they receive. This is, perhaps, a good time to remind readers that the obligations under the protocol apply to both parties, and they should both behave genuinely and constructively.
I hope that the result will be positive, but the extent is difficult to predict. Many creditors already go to great lengths to encourage engagement, so they will possibly see little change. Elsewhere, hopefully some additional debtors will be encouraged to engage or seek debt advice or other help. Conversely, the additional information and documentation may be off putting to some, and may have the opposite effect.
Unfortunately, I understand that there is already activity on the internet encouraging debtors to ignore all attempts to engage and wait for the issue of proceedings to then argue spurious technical ‘breaches’ of the protocol by claimants, and deliberately slow down or stop the claim. I would hope that any attempt to use the protocol as a weapon will not get far, and any such phenomenon would be short-lived. As well as being completely incorrect and outrageous as an approach, the penalty for breaches is costs. Even if genuine, a breach should not prevent issue of proceedings or give rise to a defence.
Overall, as 1 October approaches, I would not like to predict the extent of any statistical changes to the number of people engaging and number of defences. It is even entirely possible that once all the factors have balanced out, there may be little overall change. We shall soon find out!
1 Pre-action protocol for debt claims, available at: http://tinyurl.com/lgfj89n
2 Available at: http://tinyurl.com/gpm57bl