5th January 2023
5th January 2023
In our previous guide titled 'How to Recover Debt and Not Become Enemies' (debt recovery guide), we explored the steps which should ordinarily be considered by a creditor and the solutions which may be available outside of the court arena in respect of unpaid debt. Where such factors have not been considered, it may be useful to refer to our debt recovery guide first, before returning to the information outlined below.
Where a creditor is left with no alternatives available, they may then consider the option of issuing a court claim against the debtor in order to recover the debt. This guide will outline some of the key factors which should be addressed by a creditor who is contemplating a court claim in England and Wales in relation to a debt. In particular, this guide explores certain formal factors which should be actioned before such a claim is issued at court. This is known as the pre-proceedings process, or pre-action process.
The creditor: a person who, or business that, lends money to another person or business with the intention that the money will be repaid in future.
The debtor: the person who, or business that, owes the money to the other person or business.
Where a claim is issued in respect of an unpaid debt it will be heard in the Civil Court. There are rules and directions in place (referred to as the Civil Procedure Rules and Practice Directions) which set out a procedural code for the way in which civil cases should be dealt with. Included within those codes are instructions about how matters should be dealt with in the pre-proceedings stage.
There is a general practice direction that deals with pre-action conduct and procedures, which is commonly referred to as the Practice Direction. For certain types of debt claims, there is a specific protocol, which is commonly referred to as the Debt Protocol.
The Practice Direction: The Practice Direction Pre-Action Conduct and Protocols
The Debt Protocol: The Pre-Action Protocol for Debt Claims
The Debt Protocol applies to any business which is intending to claim the payment of a debt from an individual, save for two exceptions. The two exceptions are:
(1) where the debt is covered by a different Pre-Action Protocol; OR
(2) where the claim will be issued by HMRC and is governed by a specific Practice Direction for the recovery of tax.
For the purposes of the Debt Protocol, the definition of a business creditor includes all usual business structures such as companies, LLPs and partnerships. The definition of a business for the purposes of the Debt Protocol also includes sole traders or a public bodies. An individual debtor means any individual person. The definition of an individual debtor under the Debt Protocol also includes any sole trader.
Therefore, the Practice Direction (as opposed to the Debt Protocol) will generally apply in relation to any prospective debt claim where:
In considering the above, it is important to note the definitions which apply to sole traders in the Debt Protocol before selecting which protocol to follow. It may also, in certain very specific circumstances, be necessary to refer to a different Pre-Action Protocol.
Finally, it useful to keep in mind that, where the Debt Protocol applies, the Practice Direction still remains relevant to address any matters which are not covered specifically within the Debt Protocol.
Different Pre-Action Protocols: An example of a different specific Pre-Action Protocol which may be referred to is the Pre-Action Protocol for Construction and Engineering Disputes. The full list of Protocols is available online.
Under both protocols, it is necessary to send a letter setting out the details of the claim. The letter helps to confirm the details of the issues which are in dispute. It also provides the parties with the final opportunity to settle the issues outside of court. The content of the letter will vary, depending upon whether the Debt Protocol applies or whether the Practice Direction applies.
Where the Debt Protocol applies, it is necessary to send a letter which contains all the specific information as required by the Debt Protocol. The document titled Letter Before Claim for Unpaid Debt (Debt Protocol) is available on our website and may be used by a business where the Debt Protocol applies.
A letter which is sent in accordance with the Debt Protocol should confirm:
Assigned debts: A debt is assigned when the original creditor transfers the debt to another third party (the assignee) and the assignee then holds the right to receive the repayment of the debt. An assignment must be made in a specific format.
The letter must do one of the following:
The letter must also enclose the following documents:
The letter of claim should be dated at the top of the first page. The letter should be sent by post unless the debtor has made an express request to receive correspondence via an alternative method. It should be posted either on the day it is dated or, if that is not possible, the following day.
Where the debtor does not provide a response, including a completed Reply Form, within 30 days from the date of the letter, the creditor may issue court proceedings. The creditor must consider any alternative duties and obligations they may have to the debtor prior to issuing the claim and should also consider the possibility that any response may have been posted towards the end of the 30-day period.
Information Sheet: The Information Sheet tells the debtor what action they are required to take upon receipt of the letter before claim.
The Information Sheet is contained at 'Annex 1' of the Debt Protocol and can be printed out from this source. Our letter before claim for use under the debt protocol includes a space where this document can be attached.
Reply Form: The Reply Form enables the debtor to provide a formal response to the issues raised in the letter before claim.
The Information Sheet and Reply Form are contained in 'Annex 1' of the Debt Protocol and can be printed out from this source. Our letter before claim for use under the debt protocol includes a space where this document can be attached.
Financial Statement: The financial statement provides a format for the debtor to confirm their current financial situation in their response.
An example Financial Statement can be found in 'Annex 2' of the Debt Protocol and can be printed out from this source. Our letter before claim for use under the debt protocol includes a space where this document can be attached.
For debts claims which are governed by the Practice Direction, a letter before claim should follow the format specified by the Practice Direction. Our document titled 'Letter Before Small Claim' may be used in these circumstances. Our letter is designed for use where the claim will be issued in the Small Claims Court.
Small claims: Claims which are allocated for adjudication in the Small Claims Court are generally simple in nature and do not contain complex features. A small claim for debt will not have a value of more than £10,000.
A letter before claim under the Practice Direction should:
The debtor should be provided with a reasonable period of time to respond. For small claims, a reasonable period will usually be 14 days.
The Court may impose sanctions on any party if they fail to comply with the relevant Pre-Action Protocol. The sanctions which may be imposed by the Court upon the party who has failed to comply (the party at fault) include:
Costs on an indemnity basis: This is a basis for assessing costs which is alternative to the usual basis, and which is generally more favourable to the party who is receiving the costs payment.
Usually, when there is order that one party shall pay the costs of another party, this will be assessed on what is called the 'standard basis' by the Court. When assessing costs on the standard basis, the Court will give the benefit of any doubt about whether the costs were reasonably incurred or proportionate and reasonable in amount in favour of the party who is paying the costs.
When costs are assessed on an indemnity basis, the Court will give the benefit of any doubt regarding whether the costs were reasonably incurred and reasonable in amount in favour of the party who is receiving the costs.
In view of the above possible implications of failing to comply, it is important to ensure the correct protocol is selected from the outset. Furtheremore, once the correct protocol has been identified, it is important to ensure that the provisions of that protocol are adhered to, including sending the appropriate letter before claim with all the required information.