Since October 1 2017, a new pre-action protocol for debt claims has been in existence.
The protocol is applicable to all businesses owed money by an individual, unless the debt is covered by another pre-action protocol, such as construction and engineering.
Whilst the aims of the protocol are to encourage early communication between the creditor and the debtor with a view to avoiding the necessity of court proceedings, the protocol could be a hindrance rather than a help to your business.
Although the protocol does not cover debts from business to business, the definition of an ‘individual’ has been broadened to cover sole traders - so your business is obliged to offer sole traders the same treatment as individuals.
The protocol does not distinguish between those debtors that have a genuine dispute with you about the product or service you have supplied, and those debtors that just do not want to pay.
The protocol applies, regardless of why you have not been paid.
Your 'chasing letter' for payment of the debt owed must contain a lot of prescribed information, and enclose a lot of prescribed documentation, including an information sheet on how the debtor can obtain debt advice.
The debtor gets a minimum of 30 days to respond. If the debtor does respond, you should not instigate court proceedings for at least another 30 days. The time frame may be longer if the debtor has asked you to provide further documentation, or if they need more time to seek debt advice.
If the debtor requests time to pay, you will be expected to analyse the information they provide about their income and expenditure, and will be expected to try to come to an agreement with them.
What if you do not comply with the protocol?
The Protocol is clear. The court will expect both the creditor and the debtor to have complied with it. Should you issue proceedings for recovery of the money owed, the court will, first of all, want to know whether you have complied with the Protocol.
How might the Protocol affect you and what should you be doing?
The protocol, used properly, ought to enable you to identify:
- Those debtors that have a genuine grievance about the product and/or service you have supplied or the price you have charged,
- Those debtors that do want to pay you but need time to pay you, and
- Those debtors that are simply trying to evade paying you
However, those individuals falling in to the third category now have the protocol in their armoury, to delay making payment for even longer.
It is more important now, than ever, to make sure your business has:
- Written terms and conditions of business
- Payments on account where possible, and
- Excellent record keeping processes in place
Make sure that you are familiar with the protocol. If a debt does need to be chased, make sure that you have all of your ducks in a row from the start; otherwise the debtor is likely to use the protocol to your detriment.
It remains to be seen how widespread use of the protocol will become. The court expects compliance. Can you, therefore, afford to ignore the protocol? Equally, can your business afford to effectively extend the debtor further credit by complying with the protocol?
Rather than assisting a business’s cash flow, compliance with the protocol might have the opposite effect.