Changes to Pre-action Conduct affecting Debt Recovery Claims

The new regime:

As at 6 April 2009, a practice direction for pre-action conduct (“PDPAC”) comes into force. It is a set of rules the court will expect to be followed before any legal proceedings are issued. It will introduce some dramatic changes which could materially affect a creditor’s ability to collect debts in as quickly as they may have up to now been used to.

The Aims and General Principals of the New Rules:

The PDPAC is clearly aimed at making parties try and settle issues between themselves without the need to start proceedings. This is to be achieved by encouraging parties to exchange information about the issues in question and by considering the use of a form of Alternative Dispute Resolution.

The rules are very clear. They state in no uncertain terms that “starting proceedings should usually be a step of last resort” and that proceedings should not normally be started when a settlement is still actively being explored. The duty to try and settle is an ongoing one.

Types of Proceedings to which it will apply:

For creditors in general, the pre-action protocol will apply to all types of debt recovery claims. It will not however be applicable to urgent “without notice” orders, such as freezing injunctions.

What happens if the pre-action protocol is not followed?

Failure to follow the new rules could result in any of the following sanctions:-

1. The staying of proceedings until steps which ought to have been taken, have been taken;
2. An order that the party at fault pay the costs or part of the costs of the other party. This is also applicable to claims in the Small Claims Track which have up to now been generally cost free.
3. An order that the party at fault pays those costs on an indemnity basis.
4. An order that the Claimant be deprived of interest on all or part of the sums sought and/or that interest is awarded at a lower rate than would have otherwise been awarded.

There is even provision in the new rules that the Claimant must state in the Claim Form or the Particulars of Claim that they have complied with the relevant requirements of the PDPAC. It is unclear whether this will mean that the courts will simply refuse to issue claims without having the relevant certificate on them, but it can be assumed that good reason will need to be provided in the absence of such a statement if it is later questioned by the court (most likely at the Case Management Conference stage).

What are the Pre Issue requirements?

A Claimant should set out the details of the matter in writing by sending a Letter before Claim (“LBC”) to the Debtor. The Debtor should then give a full written response within a reasonable period, preceded if appropriate by a written acknowledgement of the LBC.

What is a reasonable period for the Debtor to respond in?

A reasonable period of time varies depending on the matter. However, the minimum time the Debtor is allowed to respond is 14 days. This can rise to 30 days in matters “where there are issues about evidence” and anything up to 90 days in more complex claims.

What will be the specific requirements of the letter before claim?

Guidance on this issue is provided in Annex A of the rules. The Claimant’s LBC is required to give concise details about the matter in question with the aim of enabling a Debtor to understand and investigate the issues without needing to request further information.

The letter should include:

1. The Claimant’s full name and address;
2. The basis on which the claim is made;
3. A clear summary of the facts on which the claim is based;
4. What the Claimant wants from the Debtor;
5. If financial loss is claimed, an explanation of how the amount has been calculated;
6. A list of the essential documents on which the Claimant intends to rely;
7. The form of alternative dispute resolution (if any) which the Claimant considers the most suitable and invite the Debtor to agree this; and
8. The date by which the Claimant considers it reasonable for a full response to be provided by the Debtor. 

What if the Debtor is not legally represented?

In cases where the Debtor is not legally represented, the letter should also:-

1. Refer the Debtor to the new practice direction and in particular draw his/her attention to paragraph 4 concerning the court’s powers to impose sanctions for failure to comply with the practice direction; and
2. Inform the Debtor that ignoring the letter before claim may lead to the Claimant starting proceedings and may increase the Debtor’s liability for costs.

The further requirements contained in Annex B

There are further specific requirements in debt claims where the Claimant is a business and the Debtor is an individual. In these cases, the Claimant should also:-

1. Provide details of how money can be paid (for example the method of payment and the address to which it can be sent).
2. State that the Debtor can contact the Claimant to discuss the possible repayment option and provide the relevant contact details.
3. Inform the Debtor that free independent advice and assistance can be obtained from organisations such as the National Debt Line, the Consumer Credit Counselling Service, the Citizens Advice Bureau and Community Legal and provide the contact details.

Are there any exceptions to having to send a Letter Before Claim?

The answer appears to be yes. You are not bound to send an LBC in circumstances where the debt is not disputed. No guidance is provided as to how it can be determined that a debt is not disputed, although the obvious situation of a debtor admitting so on the phone is likely to suffice. It is unclear that simply having no response to a request for payment will be sufficient.

Should you be concerned with the new rule changes?

In our opinion, yes for the following reasons:-

1. The new rules do appear to be weighted in favour of a debtor and could easily be taken advantage of by debtors and their lawyers to try and slow down claims. It would appear easier for a claim to be “legitimately” delayed possibly leading to difficult funding decisions for creditors where the recovery of the overdue money is badly needed.
2. There is also going to be a greater obligation on a creditor to have its documents properly in order, so that any letter before claim meets the standards required in terms of evidential exchange at the time it is written.
3. Speed is also vital in the current economic climate - getting ahead of other creditors and extracting your money before a Debtor hits real financial difficulty is the key. In our view these provisions could materially affect your ability to recover your monies as quickly as before.
4. The PDPAC seems to be a “one size fits all” approach. Whilst the emphasis on settlement is to be commended and should always be explored, there are times when it is vital that proceedings are issued quickly in order to protect a creditor’s position. No two cases are the same and some claims simply aren’t suitable for a negotiated / formal settlement. Yet time and money may have to be spent going through the new processes simply to satisfy the court that the “right” procedures have been taken.

What can be done to overcome the likely delay in recovery actions?

You cannot pretend the new rules don’t exist. If you do, you are likely to be forced by the courts to comply with them before issuing or if proceedings have already been issued, during the course of those proceedings. You could also be heavily penalised for costs and interest as set out above if you try and ignore them. Proper planning can definitely mitigate their impact on you. You should consider the following to help protect your position:-

1. Consider incorporating the content for the LBC’s at the earliest opportunity in to your Dunning cycle – i.e. the first letter you send out. By doing so, not only will you be able to prove to the court that the provisions have been adhered to, but doing so early in the cycle will mean that if you do ultimately have to refer the matter to your legal advisers, they can immediately issue proceedings without having to start the whole protocol process from scratch. We are working with a number of our clients and review their dunning cycle processes and the content of their letters. If you are interested in assistance on this matter, please contact us.
2. Always consider the more “insolvency” based recovery tools such as statutory demands, bankruptcy petitions and winding-up petitions which appear to fall outside of the scope of the PDPAC entirely. Whilst care needs to be taken to ensure that these tools are properly used, they do in our experience always lead to far better recovery rates in terms of speed, amounts recovered and costs recovered than the traditional High Court and County Court routes. We have always recommended where appropriate avoiding the more “traditional” County Court and High Court claims in favour of “insolvency” based procedures. The new rules only reinforce our view about this.
3. If you do amend your Dunning cycle letters to make them PDPAC compliant, then this should in turn flush out any “disputes” by debtors at an early stage and in the absence of such disputes, you can also take more comfort in progressing down the Insolvency based route.
4. Review your own internal procedures to ensure that in cases where legal action is likely to be needed to recover a debt, make sure you have all the relevant paperwork to hand.

Francis Wilks & Jones is happy to assist you in the following areas:-

• A review of the content of your Dunning cycle letters
• Lecturing on the new rules and looking at the best ways in which to use them
• Looking at the benefits of alternative recovery tools
• How to maximise your recoveries in light of the current rule changes