Attention all businesses

Since 1^st October 2017, a Pre-Action Protocol for Debt claims (‘the Protocol’) has been in existence. This Protocol applies to all businesses owed money by an individual. The only exception is if another Pre-Action Protocol covers the debt, such as Construction and Engineering.

The protocol aims to encourage early communication between the Creditor and the Debtor. This helps avoid the necessity of Court Proceedings. However, the Protocol could prove to be a hindrance rather than a help to your business.

1. Although the Protocol excludes business-to-business debts, the definition of an ‘individual’ now includes Sole Traders. Therefore, your business must offer Sole Traders the exact same treatment as individuals.
2. The Protocol draws no distinction between debtors with a genuine dispute regarding your product or service and those who simply refuse to pay. It applies regardless of why you remain unpaid.
3. Your initial “chasing letter” for the owed debt must contain extensive prescribed information. It must also enclose specific prescribed documentation, including a formal information sheet on how the Debtor can obtain debt advice.
4. The debtor receives a minimum of 30 days to respond. If they do respond, you must refrain from instigating Court Proceedings for at least another 30 days. This timeframe may extend further if the Debtor requests extra documentation or more time to seek debt advice.
5. If the Debtor requests time to pay, you are expected to analyze the income and expenditure information they provide. You must then attempt to reach a mutual agreement with them.

What if you do not comply with the Protocol?

The rules of the Protocol are completely clear. The Court expects both Creditor and Debtor to comply fully. If you issue Proceedings to recover owed money, the Court will first ask whether you complied with the Protocol.

How might the Protocol affect you and what should you be doing?

Used properly, the Protocol should help you identify:

1. Those Debtors holding a genuine grievance regarding your supplied product, service, or charged price.
2. Those Debtors who genuinely want to pay you but require extra time.
3. Those Debtors who are simply trying to evade payment.

Unfortunately, individuals falling into that third category can now use the Protocol as a weapon to delay payment even longer.

It is now more important than ever to ensure your business maintains:

1. Written Terms and Conditions of business.
2. Payments on account wherever possible.
3. Excellent record-keeping processes.

Make sure you are fully familiar with the Protocol. If you need to chase a debt, ensure all your preparations are locked in from the start. Otherwise, the Debtor will likely use the Protocol to your distinct disadvantage.

It remains to be seen how widespread the use of the Protocol will become. Because the Court expects strict compliance, can you really afford to ignore it? Equally, can your business afford to effectively extend further credit to a debtor by complying with it?

Rather than assisting cash flow, compliance with the Protocol might ultimately have the exact opposite effect.

For help with any of the matters discussed in this article or more information on debt collection, please contact Jeff Williams Partner and Dispute Resolution Solicitor at Forrester Sylvester Mackett Solicitors on 01225 755621 or jeffwiliams@fsmsolicitors.co.uk