Do you know how the the Pre-Action Protocol for debt recovery will impact your business? New legislation favours individual debtors while businesses will have to wait…
The Pre-Action Protocol for Debt Claims (PAP) comes into force on 1 October 2017 creating practical implications for business owners seeking to recover debts from individuals.
Who does the PAP apply to?
The PAP applies to claims where the creditor is a business, sole trader or public body and the debtor is an individual. It does not cover business to business debts unless the debtor is a sole trader.
What are the aims of the PAP?
The aims of the PAP are to encourage parties to communicate and exchange sufficient information relating to the dispute as early as possible with a view to resolving the matter without the need to commence court proceedings. It also aims to ensure that parties act reasonably and proportionately considering at all times the amount of the debt. If court proceedings cannot be avoided, it aims to support the Court in managing those proceedings.
Creditors may have to wait 60 days as opposed to the current 14 days
The information to be included as a minimum in a pre-action letter includes significant dates, names of parties, where and when the contract was entered into, payment details and details of the amount claimed including any interest and other charges. This process is straightforward where the claim is for payment of an undisputed invoice.
Most important are the timescales afforded by the PAP; debtors are given 30 days to respond to a letter of claim during which time the creditor cannot issue proceedings. If a debtor asks for further information or informs the creditor they are seeking legal advice, the creditor must wait a further 30 days from the date of sending the further information or from the date of receipt of the Reply Form.
Where no agreement is reached, the creditor must write to the debtor again giving them a further 14 days to reply and setting out their intention to commence legal proceedings. In total this could afford a debtor at least 60 days as opposed to the current 14 days.
What happens if parties do not comply with the PAP?
Should a creditor commence proceedings without following the PAP the Court may impose sanctions on the non-complying party. These range from staying the proceedings whilst the PAP is complied with to making various orders relating to payment of costs and/or interest on judgment sums in favour of the complying party.
What are the implications of the PAP?
The PAP undoubtedly works in favour of the debtor allowing them a generous time in which to respond to the letter of claim. During this time, the creditor is without payment and has no alternative but to sit and wait or risk the sanctions of the Court if proceedings are later commenced. This could have serious consequences in being able to run their business effectively or at all.
This article is not intended to constitute legal advice and should not be regarded as such.