Pre-action steps to recovering debts from individuals - what businesses need to know

10 May 2017


Businesses seeking to recover debts from individuals (including sole traders) will, from 1 October 2017, need to comply with the requirements of a new pre-action protocol for debt claims or potentially face financial consequences.

First drafted in 2012, the protocol has twice been out to consultation with the proposals continuing to prove contentious with stakeholders on both the credit and debt advice side. Despite a lack of consensus as to whether there is really any need for the protocol at all, the final form has now been approved ready for implementation.

The aims of the new pre-action protocol (PAP) are broadly similar to the existing Practice Direction for Pre-Action Conduct (PD) as set out in the Civil Procedure Rules (CPR) and with which businesses conducting their own debt recovery will be familiar. However, the PAP is more prescriptive and has introduced some key changes to the way in which debt claims should be managed before court proceedings are commenced, including time limits for compliance, of which businesses need to be aware.

As with the current PD, the PAP sets out the conduct the court expects of the parties prior to the commencement of proceedings. The focus is very much on attempting to resolve outstanding debts - rather than resorting to litigation - with the emphasis on encouraging debtors to contact creditors about their debts and if possible agree a reasonable repayment plan. Early engagement and communication between the parties, including the exchange of relevant information, is required, and parties are encouraged to act in a reasonable and proportionate (to the size of the debt) manner.

When will the PAP apply?

It will apply to any creditor business (including sole traders and public bodies) seeking to recover payment of a debt from an individual or sole trader. It does not apply to business-to-business debts unless the debtor is a sole trader. It also does not apply where the debt may be covered by another pre-action protocol contained within the CPR. It is intended to be complementary to any existing regulatory regime to which a creditor may be subject and where there is any inconsistency, the regulatory obligations will take precedence. The PAP should also be read in conjunction with industry and government guidance relating to good practice in the recovery of debt.

What are the creditor's obligations under the PAP?

Debtors should be provided with sufficient information by way of a letter of claim (LOC) to enable them to obtain advice on their position prior to issue of a claim.

What should be contained within the LOC?

The LOC should contain the following information:

  • The amount of the debt, interest and charges claimed;
  • If the debt arises from an oral agreement, details of who made the agreement, what was agreed, when and where; and
  • If the debt arises from a written agreement, the date of the agreement and the parties to it. A copy does not have to be provided, but the LOC should state clearly that a copy can be made available to the debtor on request. One of the main bones of contention during the two consultations was whether a copy of any written agreement should be provided upfront, or only when requested by the debtor. The credit sector in particular considered that it would be disproportionately burdensome to provide the agreement at the pre-action stage when it is statistically unlikely to be required, given that most debt claims are undefended. Although that requirement has been dispensed with, there remains concern on the creditor side that some debtors will use the ability to request such documentation as a delaying tactic;
  • Full details of any assignment of the debt;
  • If regular instalments are being offered or paid by or on behalf of the debtor, an explanation of why that offer is not acceptable and why a claim is being considered;
  • Details of how the debt can be paid and how to proceed if the debtor wishes to discuss payment options; and
  • An address to which the completed Reply Form (a draft of which is set out in the PAP) should be sent;

The LOC should also enclose:

  • An up-to date statement of account for the debt which includes details of interest and charges added, or if no statements have been provided, the amount of interest incurred and charges imposed since the debt was incurred;
  • A copy of the Information Sheet and Reply Form as set out at Annex 1 of the PAP; and
  • A Financial Statement form - an example of which is provided at Annex 2 of the PAP.

The LOC should be clearly dated at the top of the first page and posted on that day or the following day. An alternative method of communication can be explicitly agreed with the debtor, but creditors should note that a condition in their standard terms and conditions does not constitute an explicit request/agreement for these purposes.

If no response is received from the debtor within 30 days of the date of the LOC, court proceedings can be commenced, but before doing so creditors should also consider that a debtor may only have responded on the 30th day following receipt of the LOC. It is suggested that a further period of grace to permit time for a last minute response should be considered.

What are the debtor's obligations under the PAP?

A debtor should reply using the Reply Form, stating if they agree with the debt or not, asking for copies of any documents required, and providing information they wish to rely on. If the debtor advises they are seeking debt advice, the creditor should allow a reasonable amount of time for that advice to be obtained. The creditor should not start court proceedings less than 30 days from receiving the Reply Form or providing any documents requested, whichever is the latter. If it is going to take the debtor longer than 30 days to obtain that advice, the debtor must explain why and how long they think it will take as per the Reply Form. The creditor should allow reasonable extra time for that advice to be obtained where it is reasonable to do so in the circumstances.

If the debtor requests time to pay the debt, the parties should try to reach an agreement on affordable instalments based on the debtor's income and expenditure with regard being had to the provisions of the Standard Financial Statement or equivalent guidance. If the creditor does not agree with the debtor's proposals, the reasons why should be given in writing.

If the debtor only partly completes the Reply Form, the creditor should treat this as an attempt to engage in the process and should try to contact the debtor to discuss the debt further and attempt to reach a settlement.

Provision of documents

The exchange of documents and relevant information to help clarify or resolve the dispute is at the heart of the protocol. Should the debtor request a document or information, the creditor should supply it, or explain why it is unavailable, within 30 days of receipt of the request.

Do the parties need to consider alternative dispute resolution (ADR)?

Yes, if agreement cannot be reached. However, this may be as little as engaging in informal discussions or negotiations (through to full-blown mediation through a third party or referral to the Financial Ombudsman Service (where appropriate)). The potential cost of ADR is also a relevant consideration.

Default following agreement

Where the parties reach agreement about the debt but the debtor subsequently defaults and the creditor wishes to start court proceedings, the creditor should send an updated LOC and comply with the PAP afresh.

Are there penalties for not complying with the PAP?

The court will expect compliance with the PAP and may well put the proceedings on hold for a period of time after issue so that the PAP steps can be taken. The court will also have regard to non-compliance when considering costs - especially where the cost of issuing a claim could (in its view) have been avoided altogether had the PAP been followed - and any award of interest.

What's the position if, despite complying with the PAP, the parties cannot reach an agreement?

If a resolution has not been possible, the parties should take stock to see if anything further can be done to avoid litigation, or to narrow the issues between them. The creditor should give the debtor a further 14 days' notice of intention to commence court proceedings, unless exceptional circumstances dictate otherwise.


Businesses will need to ensure that their current pre-action processes and systems for debts owed by individuals and sole traders are reviewed and made compliant with the new PAP procedure by 1 October 2017. For some, this will be no more than some fine tuning and the addition of the required forms. For others, it will be more substantial with the need to ensure better preservation, storage and searchability of relevant documents in their systems. In particular, where the debt has been sold on, parties will need to ensure they have access to the underlying agreement (as well as the relevant assignment) or they will have to explain to any debtor who requests it, why they cannot provide it.

Given the new 30 day period for response by a debtor, as opposed to the 14 days under the current PD, and the additional time provided for in various places under the PAP where documentation is sought and/ or forms are returned (be that completed or half completed), debt recovery (against individuals and sole traders) is set to become a slower process. This will add further frustration to businesses where statistically the majority of debt claims end with a judgment in default. It is hard to avoid accepting that a wily 'won't pay' debtor could easily seek to use the new system to introduce delays just for the sport of it; and debt management companies may do likewise, just with a view to seeking lower settlement figures on what is in fact an undisputed debt, in return for offering a quick agreement.

It is also, with the additional documentation that needs to be provided, likely to become more burdensome in terms of processes and consequently more expensive - again, unwelcome for creditors.

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