New Pre-action Protocol comes into force on 1 October 2017 and could potentially have a considerable impact on any business that has overdue invoices due from individuals and/or sole traders.

For businesses providing credit for goods and services to either individuals or sole traders e.g. shop owners/retailers, tradesmen, subcontractors, home workers etc, the new procedures will require a degree of greater patience when collecting outstanding debts. Any business now extending credit to individuals is urged to re-visit credit terms and limits and ensure that they can act promptly and in accordance with the new requirements when invoices are not paid.

The Protocol does not apply to business-to-business debts unless the debtor is a sole trader. It describes the conduct a court will expect both parties to have undertaken prior to any court proceedings being commenced.

What does this actually mean for creditors?

It is very clear that the recovery of debts from Sole Traders will be more cumbersome:

  1. Creditors are required to provide more documentation to debtors in specific formats
  2. There is the chance that debtors could use the system to delay payment by up to 90 days in addition to normal credit terms
  3. Existing credit accounts for sole traders/individuals should be reviewed, credit control tightened and recovery process changes may be necessary
  4. Creditors will need to ensure they have kept copies of purchase orders, (telephone orders should be avoided – try to get orders in writing/email), signed delivery notes and supporting information. Credit control staff will need to be more pro-active when engaging with debtors to ensure the required information is properly exchanged and time periods are met.
  5. Additional costs and delays will undoubtedly be incurred particularly if dispute resolution (ADR) is triggered.

A quick overview:

If you at the unfortunate stage of having to consider going down the legal route for an overdue debt, you will now have to issue a Letter of Claim (with a list of at least eight mandatory items to be included) as well as a template information sheet and a reply form in all cases (approx. 10 pages in addition to the letter itself). Click here to request a full pdf copy of the pre action protocol document and templates for your use.

If the debtor does not reply to the Letter of Claim within 30 days, the creditor may then commence court proceedings. Simple you say. However….

If the debtor responds he/she will need to use the reply form. The debtor has the option to request copies of any documents it wishes to see and enclose copies of any documents it considers relevant.

If the debtor indicates he/she is seeking debt advice, the creditor is required to allow a reasonable period for advice to be obtained and you cannot start a court claim less than 30 days from receipt of the completed reply form or 30 days from your provision of any documents requested by the debtor, whichever is later. You, the creditor, will be required also to allow reasonable extra time for the debtor to obtain the advice where it would be considered reasonable to do so.

If the debtor requires time to pay, both parties need to reach an agreement for the debt to be paid by instalments based on the debtor’s income and expenditure. If the debtor fails to fully complete a reply form the onus is on the creditor to contact the debtor to properly understand the debtor’s position. A time to pay offer therefore needs careful consideration.

If the debt is disputed, the parties should exchange information and disclose documents to enable them to understand each other’s position. The creditor must provide any document or information requested or explain why the document or information is unavailable within 30 days of receipt of the debtor’s request.

If settlement still cannot be reached the parties are obliged to take appropriate steps to resolve the dispute without commencing court proceedings and both will need to consider the use of alternative dispute resolution (ADR).

If an agreement still cannot be reached, the creditor needs to give the debtor a minimum of 14 days’ notice of intention to start a court claim.

What happens if there is Failure to comply with the Protocol?

There may be:

  1. Further delay in collection of debts if any legal proceedings are stayed to remedy failures to comply with the Protocol, or the claim may be struck out completely.
  2. Additional costs awarded against the Creditor e.g. payment of the debtor’s legal costs and/or inability to recover any costs at all
  3. Inability to recover any interest from a debtor.

If you require any further information about reviewing your credit control processes in the light of the new protocol or require any assistance with collection of invoices or business debts, please contact a member of the Gravity Credit Control team on 01905 700170 or click here to contact us and we will reply to your message.

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