New Pre-Action Protocol for Debt Claims in force from 1 October 2017. Are you ready?

Banking Disputes Quarterly

By:

After a lengthy consultation period, the Pre-Action Protocol for Debt Claims (PAPDC) has now been finalised and will come into force on 1 October 2017. This protocol will apply to lenders who are seeking payment of a debt from an individual/ sole trader, as a debtor or guarantor. Now is the time to update your systems and procedures to accommodate the new protocol requirements.

What is required?

The PAPDC encourages the parties to engage early with each other and to communicate and exchange sufficient information about the matter to help clarify the particular issues in dispute. The overarching aim is for parties to act proportionately and, where possible, to avoid formal litigation altogether.

The PAPDC is intended to complement any regulatory regime to which the creditor is already subject, so will apply in addition to any requirements stipulated by the Consumer Credit Act 1974 or embedded in the Consumer Credit Sourcebook. The PAPDC does not apply to mortgage arrears.

Exceptions will be made if proceedings need to be issued on an urgent basis, for example, if there is an upcoming deadline for limitation purposes. Otherwise, a failure to comply with the PAPDC will be taken into account when the court gives directions for case management and the court will be able to impose costs and interest penalties on the party at fault. The court will also be able to stay proceedings whilst steps are taken to comply.

Before commencing proceedings, the creditor should send the debtor a letter of claim which sets out:

  • The amount of the debt
  • Whether interest or other charges are continuing to apply
  • Details of either the oral or written agreement which forms the basis for the debt
  • Where the debt arises from a written agreement, a statement confirming that a copy of the written agreement can be requested
  • Where the debt has been assigned, details of the original debt and creditor and when and to whom it was assigned
  • An explanation as to why any offer from the debtor to pay regular instalments is not acceptable
  • Details of how the debt can be paid, and what the debtor can do if they wish to discuss payment options
  • The address to which the Reply Form (see below) should be sent

The creditor must also enclose an up to date statement of account (which includes details of any interest, administrative or other charges added), or enclose the most recent statement of account and state in the letter of claim any interest, administrative or other charges added since its issue to bring it up to date, or, if no statements have been issued, state in the letter of claim any interest, administrative or other charges imposed since the debt was incurred.

The creditor must also enclose:

  • A standardised Reply Form
  • A standardised Information Sheet
  • A Financial Statement Form for the debtor to complete

Copies of the standardised Information Sheet and Reply Form, and an example of a Financial Statement Form are annexed to the PAPDC which you can access here.

The letter of claim must be clearly dated and posted either on the date it is dated or the next day. The postal requirement is slightly archaic. Email may only be used if the debtor has made an explicit request, so creditors will not be able to rely on notice provisions to this effect in their standard terms and conditions.

The Debtor's Response

The debtor should use the Reply Form to respond to the letter of claim within 30 days. If the debtor does not reply at all within 30 days the creditor can start proceedings (subject to complying with any other regulatory obligations it may have).

If the debtor does reply, they can request copies of any relevant documents they wish to see (which the lender must provide within 30 days) and may provide copies of any documents they consider relevant to the disputed claim.

If the debtor indicates that they are seeking debt advice, the creditor must allow the debtor a reasonable period for the advice to be obtained. In any event the creditor should not start court proceedings less than 30 days from either the date of receipt of the completed Reply Form or when the creditor provides any documents requested by the debtor, whichever is later. Should a debtor only provide a partially completed Reply Form in response to the letter of claim, this should be construed as an attempt by the debtor to engage with the matter. In those circumstances, the creditor should attempt to contact the debtor to discuss the Reply Form and obtain any further information needed to understand the debtor's position.

Where a debtor indicates in the Reply Form that they require time to pay, the creditor and debtor should try to reach agreement for the debt to be paid by instalments, based on income and expenditure (as per the debtor's completed Financial Statement). Where the parties reach agreement concerning repayment of the debt, the creditor should not start court proceedings whilst the debtor is complying with the agreement. Should the debtor breach that agreement and the creditor wants to start court proceedings it must send an updated letter of claim and comply with the PAPDC afresh.

Where any aspect of the debt is disputed, such as the amount, interest, charges, time for payment, or similar, then sufficient information and documents should be exchanged with a view to enabling the creditor and debtor to understand each other's position.

If the parties still cannot agree about the existence, enforceability, amount, or any other aspect of the debt, they should both take appropriate steps to resolve the dispute without court proceedings and, in particular, should consider the use of an appropriate form of ADR.

If, after all the above steps have been taken, the matter is still not resolved, the parties should take stock and consider whether proceedings can be avoided. The creditor should give the debtor 14 days' notice of its intention to start proceedings.

Why has the PAPDC sparked controversy amongst lenders?

Although a creditor can issue proceedings if the debtor does not respond to the letter of claim, the new timescales for responses under the PAPDC delay the point at which formal action can be commenced. Previously, a debt dispute might have been regarded as a 'simple' matter requiring a response time of around 14 days, with potential discretion to allow a 28 day period of response if there were complex circumstances giving rise to the debt. The concern with the PAPDC is that it seems to indulge debtors by extending their credit terms and could lead to them actually delaying making payment. It is also arguable that the PAPDC imposes an unfair burden on creditors who have to invest significant effort compiling the letter of claim and collating the necessary documents when there is no corresponding obligation on the debtor to meaningfully engage in the dispute with good faith. The PAPDC seems to protect the interests of the debtor above those of the creditor and fails to recognise that not all debtors are unsophisticated borrowers requiring a significant level of protection. It is very unlikely that a letter of claim will be the first time that a creditor has spoken to a debtor about the level of debt, and the PAPDC does not make any allowance or provision for circumstances when a creditor has already previously granted a debtor time to consider the matter. As mentioned above, the PAPDC imposes additional requirements in addition to lenders' pre-existing regulatory requirements.

Whilst some of the administrative burden initially imposed on creditors in earlier drafts of the PAPDC has been diluted throughout the consultation, the requirement to locate and supply supporting contractual documentation on demand, will undoubtedly impose an extra layer of bureaucracy and expense. Note that there is no 'de minimis' provision: lenders will be required to adhere to the PAPDC requirements regardless of the value of the claim. There must therefore be some question as to whether the PAPDC really achieves its aim of resolving disputes in a 'proportionate manner'.

Also, the focus on discussion, negotiation and ADR in the PAPDC all seem to create an expectation that a creditor will be the party most likely to compromise and accept an amount lower than the full value of the debt. Yet, by its very nature, a debt claim is a claim for a calculated and ascertained amount alleged to be due and owing by the debtor.

Many businesses may question whether the added delay and costs of compliance with the PAPDC are really proportionate given that current statistics suggest that 86% of 'debt' claims currently end with judgment in default. If debtors still do not engage in the process, arguably, all the PAPDC will have done is to impose an extra administrative burden and an extra 30 day 'waiting period'.

Next Steps

Steps should be taken now to review and improve internal policies and systems to mitigate against the impact of the PAPDC before it comes into force and to raise awareness of the issues. Thought must be given as to how you will locate and retrieve the written agreement or other documentation within 30 days if requested by the debtor. It may make sense to collect such supporting information in advance and provide it from the outset. You may also need to review and alter routine document destruction policies and make provision for historic copies of agreements and contract terms to be archived or retained in a manner that can be easily accessed.

Ironically, there are ambitious plans afoot to introduce a new online court by 2020 for all money claims worth under £25,000 to which no pre-action protocol will apply. It seems therefore that the PAPDC, which took so long to negotiate, is actually destined to have a limited shelf-life. Against that backdrop some may question whether it has actually been worth the effort.