A debt recovery pre-action protocol now exists but should you use it?

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A debt recovery pre-action protocol now exists but should you use it?

07 Dec 2017

Many businesses will have been inundated with emails, mailshots and circulars about the Debt Recovery Protocol (which commenced on 1 October 2017), what it will do to the debt recovery process and the sanctions for non-compliance. Here, Head of Litigation Andrew Weinberg takes businesses through what they need to know, why they may wish to consider not using it either in part or at all, and what the potential risks are in terms of non-compliance.

General Idea Behind Pre-action Protocols

At their most basic, pre-action protocols are a method of the prospective parties to a dispute exchanging information in order to try and resolve a dispute or in an attempt to narrow the issues between them. If proceedings have to be issued it is hoped that the parties will have narrowed the scope of the dispute and are better informed about the other side’s position.

Pre-action Protocols already exist for various types of dispute including personal injury claims, dilapidations, professional negligence – to name a few.

Why You May Wish to Consider Not Using the Protocol

I am not reviewing the process involved in using the Protocol.

The Letter Before Action is expected to provide considerable detail, copies of various documents, an information sheet and reply form, a financial statement for the debtor to complete and the possibility of raising payment terms. This alone could run to more than 12 pages.

Additionally, creditors should allow 30 days for the debtor to respond. If no agreement can be reached the parties are supposed to consider Alternative Dispute Resolution or the possibility of a without prejudice meeting.

This process will put the creditor to expense. A wily debtor may adopt delaying tactics increasing the creditor’s expense. The cost of the process may be disproportionate to the amount of the debt.

The quarterly civil justice statistics released in September 2017 show that over 80% of issued debt claims end in the creditor obtaining judgment in default. There are also a percentage of judgments based on admissions.

Creditors may take the view that in those circumstances they would prefer to make a commercial decision. This could involve sending a non or “semi compliant” letter providing the debtor with a shorter period of time for payment but then issuing proceedings if payment is not made. This could be on the basis that they have reasonable prospects of obtaining a default judgment which they can then enforce more often than not.

If a creditor knows that the debtor is almost certainly going to contest those proceedings or the debt is complex then, subject to the amount involved, it may make more sense to engage with the Protocol to avoid criticism at a later stage.

Potential Risks of Non Compliance

If you choose not to follow the Protocol, you issue proceedings and either your debtor is familiar with the Protocol or instructs solicitors who are, then the following sanctions can be imposed by the court:-
• An order staying the proceedings which also requires compliance with the Protocol;
• An order that if you have not complied you pay the costs of the proceedings or part of the costs of the other side even if you obtain judgment in your favour;
• An order that those costs are paid on a more stringent basis known as an indemnity basis;
• An order depriving the party who is at fault of any entitlement to interest or alternatively awarding interest at a reduced rate;
• Depending on who is at fault the court can also order payment of a higher interest rate of up to 10% above base rate.

Additionally, using the Protocol may generate useful intelligence about the debtor and their financial circumstances which a creditor may not be able to obtain simply by starting proceedings. This could be relevant if the creditor discovers that the debtor has little or no money or assets. In such circumstances they may decide commencing proceedings could simply result in throwing good money after bad.

It would be wrong to suggest that ignoring the Protocol is a risk free option. However, there may be occasions where you are considering a commercial decision which could be based on the size of the debt, knowledge you already have regarding a debtor, the fact that there may be other creditors pursuing a specific debtor and the person who applies the maximum pressure may be likely to get paid first.

Advice on the Protocol

This article is not meant to provide advice on the Protocol itself. However, if you do require any advice or assistance either in implementing the Protocol and/or in considering any of the points regarding whether or not it may be worth not using the Protocol, contact us us or call Andrew Weinberg on 0161 838 7811.

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