Chasing business debt and proposed pre-action protocol for debt claims

Are you staying on top of people who owe money to your business?

Providing products and services on credit is something suppliers offer to their customers and which is widely taken for granted. You will probably have incurred costs to deliver what your customer wants and the resulting credit agreement can put incredible strain on a business’ cash flow.

To reduce this pressure, businesses should be chasing up commercial debt – actively and legally – much sooner.

While shrewd businesses might have a process of issuing friendly reminder letters to debtors even ahead of the invoice due date, you should strongly consider issuing a letter of claim – a warning of possible legal action – earlier in the process.

There is a general protocol that businesses must follow when sending out this correspondence to debtors. For example, a debtor has 14 days to respond to a letter of claim. Above all, you should stay on top of your credit control as a credit sale is a gift until it’s paid for.

However, if a new Government proposal regarding debt claims gets the go-ahead, recovering money from debtors will become more difficult for businesses and take longer.

Proposed pre-action protocol for debt claims

A pre-action protocol is a regulation that needs to be followed before starting legal proceedings to recover a debt.

The Government has recently conducted a consultation – now completed – on potential changes to the current legislation governing the area of debt claims, with the aim of fewer cases coming to court. If the proposals become law, debtors will be given more time in the process while creditors will have to do much more to get paid.

So what would the proposals mean for businesses?

• The protocol would apply only to businesses seeking payment from an individual or sole trader, not limited companies or limited liability partnerships.
   
• The business pursuing payment would need to supply a considerable amount of information in a Letter of Claim before any proceedings can begin. That information would include new requirements where the debt is based on an oral agreement, including who made the agreement, what was agreed and when/where.
   
• The debtor would be given 30 days to reply to the letter of claim (double the previous amount of time) and could ask the creditor to supply any documents they wish to see. The debtor would also be allowed time to seek debt advice while the creditor would be unable to begin court proceedings less than 30 days from receiving the initial reply from the debtor.

Overall, the proposed pre-action protocol would be more onerous and time-consuming for companies waiting for debts to be paid. Unfortunately, this runs the risk of becoming a “debtors’ paradise” in which seasoned non-payers could deploy delaying tactics and demands for documents which just add to the cost for companies pursuing legitimate payment. It’s hard to believe that the Government wants such a situation to arise. Indeed, previous discussions in the UK and Europe about non-payment of commercial debt have focused on speeding up the process; the proposed protocol would be extending it.

Whether or not the proposals become regulations, seeking legal advice will remain an option for businesses to secure unpaid debts. The support of a commercial solicitor can help to address any weaknesses in your governance of delivering products and services to customers, such as improving your contract terms and conditions to help obtain payment. Above all it’s critical to remember that in pursuing legal action you need to have the right evidence in order to make a case, as – in the legal process – the onus falls on the creditor to prove a claim.