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Read articles on debt collection written by Carlo Pegna

Pre Action Protocol for Debt Claims — be careful! Think before you act.

The new Pre Action Protocol for debt claims introduces rules on the conduct of debt recovery where a business is owed money by an individual or sole trader. If the new Pre Action Protocol for Debt Claims is not managed effectively it will  have an impact on your cash flow.

The new Civil Procedure Pre-Action Protocol for Debt Claims (the Protocol) that came into force on 1st October 2017 will have an impact on the cash flow of SMEs and other businesses. If the debtor is an individual or sole trader they now have 30 days from the date of the letter of claim to reply. If the reply is sent within the 30 day time limit, the debtor will have at least a further 30 days to discuss the debt with the business or to seek debt advice before the business can take the debtor to court.

Damage to your cash flow

While on the one hand the Protocol will help sole traders and individuals suffering financial difficulty on the other hand unless managed effectively it will see an increase in aged debt that could be damaging to your cash flow most certainly if the majority of your customers are sole traders and individuals. Furthermore the unscrupulous sole traders and individuals will string out the process as long as they can in the knowledge that legal proceedings cannot be issued until such time as the Protocol has been satisfied.

Indeed if you do not follow the Protocol the court can issue sanctions for non compliance including ordering you to pay the costs of the debtor, and/or an order depriving you of interest on the sum claimed for a specified period, and/or awarding interest at a lower rate than would otherwise have been awarded. From a Credit Control perspective the message is clear ‘Beware of Sole Traders and Individuals’.

No more final demands

The implications of the Protocol are such that Master Collections no longer send a letter and depending on the result of the same a Final Demand to sole traders and individuals. We send a letter of claim with a 30 day time limit in which for the debtor to complete and return the Reply Form prescribed by the Protocol that we enclose, and if no response is forthcoming in that time we issue legal proceedings.

Aims of the protocol

The Protocol among other things aims to enable the parties to resolve the matter without the need to start court proceedings, including agreeing a reasonable repayment plan or considering using an Alternative Dispute Resolution (ADR) procedure. As a result if not already you need to consider introducing terms and conditions that include limitations on liability, warranties and a dispute resolution process. For example Master Collections were asked to resolve a lengthy dispute between a glazing supplier (Our Client) and an extremely difficult customer (the Customer) who over a period of 3 months sent our client 350 pages of emails making unreasonable demands.

We resolved the dispute by referring the Customer to Our Client’s terms and conditions and drafted an appropriately worded Guarantee for Our Client to offer the Customer in order to manage after sales customer service. The Protocol was welcomed in this case because we referred the Customer to the same and in particular the aim of encouraging the parties to act in a reasonable and proportionate manner in all dealings with one another (for example, avoiding running up costs which do not bear a reasonable relationship to the sums in issue).

As a result Master Collections explained to the Customer that we would not be considering 350 pages of emails sent to Our Client because to do so would be disproportionate to the sum in dispute and unnecessary when the dispute could only be determined by expert evidence.

Credit control review considerations

In consideration of the Protocol we suggest you review your Credit Control process and consider the following:-

  • If not already in order to decide whether or not to extend credit invite customers to complete an appropriately worded Credit Application form including agreement to your terms and conditions.
  • If not already produce comprehensively worded Terms and Conditions as advised above, and have your customers agree to the same as part of your Credit Application process.
  • Credit check sole traders and individuals before offering credit to be sure they are good for it.
  • If your business serves predominantly a consumer and/or sole trader market unless covered by an independent finance package do not offer credit.
  • Offer sole traders and individuals a warranty or guarantee that is worded in such a way that it can effectively manage disputes and prevent the debtor from making a nuisance of themselves.
  • Reduce your letter cycle to ensure no time is lost. For example at Master Collections we no longer send a Final Demand to sole traders and individuals.
  • Any credit limits and terms given to sole traders and individuals should reflect the complications presented by the Protocol.


Need Help or advice?

If you need advice on the new Protocol call award winning credit professional and Legal Executive Carlo Pegna at Master Collections on 01920 48146