Pre-Action Protocol for Debt Claims: Finalised and in force 1 October 2017

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The Civil Procedure Rules contain a number of protocols which place a real emphasis on Alternative Dispute Resolution (ADR) and require parties to undertake prescribed pre-action steps which are designed to facilitate settlement, so that the issue of court proceedings should be a last resort for the resolution of disputes.  Non-compliance with a pre-action protocol can result in cost sanctions and in any regulator taking a dim view.

The pre-action protocol for debt claims (the Debt PAP) was originally proposed some years ago.  It has been the subject of much debate and redrafting, largely because of a perceived imbalance between the rather onerous requirements initially placed on creditors seeking to recover a debt on the one hand, and purported consumer protection measures on the other.  The final version, which does address some of the creditors’ key concerns, was released to stakeholders late on 21 March 2017 and came into force on 1 October 2017.

Key points

The key aspects of the Debt PAP are:

  • It does not apply to “business to business” debts, unless the debtor is a sole trader.  The Debt PAP will not, therefore, apply to debts owed by companies and partnerships, but guarantee liabilities owed to a creditor by an individual will be covered.
  • It does not apply where the debt is covered by another pre-action protocol, such as mortgage arrears and construction and engineering disputes.
  • The aim of the Debt PAP is to encourage early engagement and communication between the parties, including early exchange of sufficient information to help clarify whether there are any issues in dispute.  The hope is that court proceedings can be avoided, and a reasonable repayment plan can be agreed or ADR considered.  If proceedings have to be issued, then compliance with the PAP will support efficient case management.
  • Creditors should send a letter of claim (LoC) to debtors before starting court proceedings. The LoC should contain:
    • the amount of the debt and whether interest or other charges are continuing
    • where the debt arises from an oral agreement, full details of where and when the agreement arose
    • where the debt arises from a written agreement, confirmation of the date and parties and the fact that a copy can be requested from the creditor.  (One key complaint at the consultation stage was that earlier drafts of the Debt PAP required creditors to send a copy of any written agreement with the LoC.  Fortunately that requirement, which would have imposed a significant financial and administrative burden on large-scale lenders and managers of consumer debt, has been dispensed with)
    • full details of any debt assignment
    • if regular instalments are currently being offered by the debtor, or are being paid, an explanation as to why the offer is not acceptable and why a court claim is still being considered
    • details of how the debt can be paid, for example a method and address for payment; and details of how to proceed if the debtor wishes to discuss payment options
    • the address to which the completed Reply Form (see below) should be sent
    • an up-to-date account statement (including details of any interest and administrative or other charges added); the most recent statement of account for the debt along with confirmation in the LoC of the amount of interest incurred and any administrative or other charges imposed since the statement of account was issued, sufficient to bring the statement up to date; or, if no statements have been provided for the debt, a statement in the LoC of the amount of interest incurred and any charges imposed since the debt was incurred
    • a copy of the Information Sheet and the Reply Form (provided at Annex 1 of the Debt PAP) and
    • a Financial Statement form. (Annex 2 of the Debt PAP provides the Standard Financial Statement as an example, so other forms could also be used.)
  • The LoC should be sent to the debtor by post.  The LoC can only be sent by email only if the debtor has made an explicit request and creditors should note that a provision to that effect within their standard terms and conditions will not constitute an explicit request.
  • The debtor has 30 days from the date of the LoC to respond.  If he or she fails to do so, the creditor can issue proceedings (albeit there is a further onus on the creditor to ‘take stock’ before doing so, in case proceedings can nevertheless be avoided or, at least, issues narrowed).
  • The Debt PAP similarly places obligations on the debtor in relation to its response:
    • The debtor should respond using the Reply Form at Annex 1.  He or she should request copies of any documents they wish to see and enclose copies of any documents they consider are relevant.
    • If the debtor indicates that he or she is seeking advice, the creditor must allow a reasonable period for that advice to be obtained and should not start court proceedings less than 30 days from receipt of the completed Reply Form (or from the creditor providing the debtor with any documents requested, whichever is the later).
    • If the debtor wishes to seek advice but cannot do so within 30 days, then he or she must provide details as to why advice can’t be obtained within 30 days, and when advice is expected.  The creditor should then allow reasonable extra time, where that is reasonable in the circumstances.
    • If the debtor says in the Reply Form that he or she needs time to pay, then the creditor and debtor should try to reach an agreed payment plan based on the debtor’s income and expenditure.  Regard should be had, where appropriate, to the Standard Financial Statement (at Annex 2) or equivalent guidance.
  • If the creditor does not agree to any proposal made by the debtor for repayment, it should give written reasons.
  • The Debt PAP encourages early disclosure of documents and relevant information to clarify or resolve any issues in dispute.  Where any aspect of the debt is disputed, such as the amount, interest, charges, time for payment, or the like, 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 debtor requests a document or information, the creditor must provide it, or explain why it is not available, within 30 days of receipt of the request.
  • If the parties still cannot reach agreement, they should both take appropriate steps to resolve the dispute without starting court proceedings.  That might involve ADR such as further discussion and negotiation, the involvement of the Financial Ombudsman Service, or a mediation. (Note that the potential costs of mediation, in proportion to the level of the debt, can be taken into account.)
  • If agreement is reached regarding repayment of the debt, then the creditor should not start court proceedings whilst the debtor complies with the agreement.  Should the creditor wish to start proceedings at a later date, they must send an updated LoC to the debtor and comply with the protocol afresh.  If documentation was sent with a LoC within the preceding 6 months, then it doesn’t have to be sent again, unless it needs updating.
  • Where the debtor has responded to the LoC but agreement has not been reached, then the creditor should give at least 14 days’ notice before issuing any court proceedings (unless there are exceptional circumstances in which urgent action is required, such as a limitation period being about to expire).

WM comment and practical advice

Despite the controversy surrounding earlier incarnations of the Debt PAP, the Civil Procedure Rules Committee (the CPRC) has decided that a PAP will be helpful, both in terms of creditors and debtors resolving individual claims, and in going some way towards reducing the very large proportion of civil court business in England and Wales that is comprised of debt claims against individuals.

The CPRC has also taken on board much of the feedback it received from creditors during the consultation process, and it is therefore to be hoped that the new obligations genuinely do facilitate early and amicable settlement to the benefit of all parties, rather than merely increasing upfront, pre-action cost and delaying ultimate resolution via litigation.

Courts will expect parties to comply with the protocol.  Non-compliance will be taken into account when directions are given for the management of court proceedings and when it comes to the consideration of possible cost sanctions. Whilst the Debt PAP does specifically confirm that the courts are not likely to be concerned with minor or technical breaches (especially when the matter is urgent), and while there will still be some exceptional cases in which a decision is taken not to comply and to issue legal proceedings in any event, it is now incumbent on creditors, especially large-scale lenders and consumer debt management businesses, to ensure that their internal processes accommodate the requirements of the Debt PAP.

If you would like any further advice, either in connection with the requirements of the Debt PAP generally and with implementation of processes which are both compliant and practical for your business, or in connection with the merits and management of any individual debt claim, please do not hesitate to contact us.