Earlier this year, the Ministry of Justice released the final version of The Pre-Action Protocol for Debt Claims (PAP) which comes into force on 1 October 2017 creating practical implications for business owners seeking to recover debts from individuals.
Why has the PAP been introduced?
Since 6 April 2015, debt claims have been governed by the Practice Direction Pre-Action Conduct and Protocols (PD PAC). In his Final Report on Civil Litigation Costs (21 December 2009), Lord Justice Jackson recommended the introduction of a separate pre-action protocol dealing specifically with debt claims (where the claimant was a business and the defendant an individual) on the basis that they “constitute a high swathe of business of the courts”. A lengthy consultation process ensued and the final version of the PAP was released on 21 March 2017.
Who does the PAP apply to?
The PAP only applies to claims where the creditor is a business, sole trader or public body and is seeking to recover a debt from an individual. It does not cover business to business debts unless the debtor is a sole trader. Any debts falling outside of this scope will continue to be governed by the PD PAC.
What are the aims of the PAP?
There are four main aims of the PAP; (1) to encourage parties to communicate and exchange sufficient information relating to the dispute as early as possible; (2) to enable parties to resolve the matter without the need to commence court proceedings by agreeing a payment plan or through alternative dispute resolution (straightforward negotiation or a more formal method such as mediation); (3) to encourage parties to act reasonably and in proportionality to the amount of the debt; and (4) if proceedings cannot be avoided, to support the Court in managing those proceedings.
What are the key provisions of the PAP?
Paragraph 3.1 of the PAP sets out in detail the information to be provided by the creditor to the debtor in the letter of claim. This includes, but is not limited to, 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. The PAP also introduced new documents which must be enclosed with the letter; an Information Sheet, Reply Form and Financial Statement Form (all of which are annexed to the PAP).
Most importantly 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. In the event that the 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.
What happens if parties do not comply with the PAP?
Should a creditor commence proceedings without following the PAP (i.e. by not providing sufficient information, not acting within a stipulated time limit or within a reasonable time or unreasonably refusing to partake in ADR), the Court will consider whether all parties have complied in substance with the terms of the PAP and is not likely to be concerned with minor or technical infringements.
Sanctions may include an order that:
(1) The defaulting party pay the entire costs of the proceedings or a part of the other party’s costs;
(2) The defaulting party pay costs on an indemnity basis;
(3) No interest is payable or interest at a lower rate is payable in cases where the Claimant obtains a judgment but they were also the party at fault;
(4) Interest at a higher rate is payable (up to a maximum of 10%), in cases where the Claimant obtains a judgment and the Defendant was the party at fault.
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 (previously 14 days has widely been accepted as a reasonable time to respond to a straightforward debt 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.
Where proceedings are inevitable, the debtor will be given another opportunity to respond to the claim form in completing and filing the ‘Response Pack’, which is incredibly similar to the Reply Form, leading to further delay in the creditor obtaining and enforcing a judgment and recovering what is owed.
In addition to the delay, the creditor could also face an unnecessary financial burden should they need to instruct solicitors earlier on in the process to ensure they are compliant with the PAP. Protracted communications between parties could mean higher fees unless a fixed-fee approach is adopted by firms.
For debts arising out of business to business contracts, it is business as usual and the current PD PAC will continue to apply.
If you require any advice in respect of this or any debt recovery or litigation matter then please contact Neena Jakhu on 01707 329333 or email@example.com.
(This article is not intended to constitute legal advice and should not be regarded as such. It is intended for discussion and guidance purposes only.)
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