Are you a business owed money by an individual? Well, if you thought it was hard to get money out of a debtor (a person who owes you money) in the past, it’s going to get even harder in the future!
As from 1st October, 2017, if you, as a business, want to recover money owed to you by an individual or a sole trader, you’ll have to follow the new Pre-Action Protocol for Debt Claims. As a creditor (an organisation owed money), you’re now committed to following numerous - and, some might say, complicated - steps before you can even think of going to Court.
"What might end up happening is that more creditors will simply decide to write off debts owed..."
There are various reasons the Government has set up this new system, including the aim of keeping debt claims out of Court wherever possible, in the hope that they'll be resolved out of Court.
What might end up happening is that more creditors will simply decide to write off debts owed, because the new system requires a lot of input from the creditor. This will be particularly difficult for small businesses, who are unlikely to have the resources to deal with it.
Individuals might exploit the system, either refusing to pay or paying in meagre instalments. Businesses might end up taking the strain of debts owed, resulting in more businesses struggling financially or having to increase prices to cover the losses they might face through mounting debt.
So, whilst the new Protocol is great news for debtors, it might not be so great for creditors.
"You’ll have to use resources that should be used to grow your business to try to recover the debt..."
The protocol requires lengthy periods of time for you to communicate with the debtor over the debt and also puts the onus on you to share paperwork with the debtor about the debt. This will inevitably mean that you’ll have to use resources that should be used to grow your business to try to recover the debt. It will increase the amount of stress, wasted time and worry that you will experience, on top of the distress of having completed a service or sold a product that you're now unlikely to be paid for.
If you are paid, you might be paid in small instalments. If you really want to see things through, you might have to commence costly, lengthy and stressful legal proceedings in order to get what's rightfully owed to you, with no guarantee that, even if a Court orders the debtor to repay you, you’ll actually be able to enforce the Order.
So, what does the Protocol actually involve? It requires you to supply the debtor with a substantial amount of information, including documents such as a Reply Form, Information sheet, Financial Statement – the list goes on and on. Don't underestimate the amount of time, anxiety and effort it will take you to find, print, scan, pack and post this paperwork! Accompanying all of this is a Letter of Claim, which, again, has to fulfil certain requirements. You'll definitely need a detail person to deal with it!
The timescales are also in the debtor’s favour. The idea is that the debtor gets at least 30 days’ notice, as well as all of the background information they could possibly need, before you can even think of taking them to Court.
If they respond to you, you then have to give them a further 30 days before you can commence Court proceedings. You might also have to give them extra time if they say that they're seeking advice on how to deal with the debt. If there's been communication between you, but still no resolution, you might then have to give an extra 14 days’ notice of commencing legal proceedings.
Take a look at the Protocol here and you’ll see what we mean...
"If it seems unfair on businesses, especially small businesses, that’s because, in practice, it probably is!"
Why bother with the protocol at all then, if it makes life so difficult for the creditor? Well, the court could penalise a party that doesn’t substantially follow it.
If it seems unfair on businesses, especially small businesses, that’s because, in practice, it probably is! There've been lots of difficulties for our creditor clients now that the new Protocol is in force. One concern that’s arisen with the prospect of all the time being granted to the debtor is that, having given the debtor sufficient warning of your intentions and a lengthy period of time to respond, they then have sufficient time to relocate and disappear (yes, we have heard of debtors doing this!)
Don’t forget, if an individual owes money to you, it’s likely that they also owe money to other people. If they do, they might be having difficulties in staying in their home (they might owe money to their landlord or mortgage company). For some unscrupulous people, the simplest answer is to move away so that they can’t easily be traced.
We had one such case, where the person’s name was very common. Let’s say it was John Smith (it wasn’t, but it illustrates the point). [Note that some of the details of the story that follows have been changed, to protect our client’s confidentiality, but they convey the essence of what actually happened.]
John Smith owed money to our client, who, out of pity for John, allowed him extra time to pay an invoice. John claimed that he was a pillar of society. He was very involved in his local community, did charitable work across the world, attended religious worship every week, worked in the caring profession – in summary, he was supposedly an upstanding citizen and extremely trustworthy.
However, he claimed that he had come upon hard times - his wife had left him and taken the children, he had lost his job through no fault of his own, he had a friend who was suffering from a terminal illness and he’d been defrauded by a close relative. He promised to pay our client’s invoice a day late, '...purely because he had to borrow the money from a friend'. He claimed that he needed the extra time to get the money together and to access his computer to make a bank transfer.
Sure enough, John kept giving excuses that all seemed reasonable at the time. Our client, being the generous and sympathetic person she was, kept giving John the benefit of the doubt and giving him extra time to pay.
Unfortunately, she did so long enough for John to move house. And, thanks to his fairly anonymous name, the fact that our client had little background information on him and the fact that she lacked the resources to track him down, our client lost all of her money.
"DO NOT OFFER CREDIT OR TIME TO PAY..."
What she learned from this is what we’ve been telling our clients to do from now on: DO NOT OFFER CREDIT OR TIME TO PAY. Ask for payment up front and, if a client is not willing to do that, then turn down the work. The risk of doing work or providing a product for no pay and the subsequent heartache of having to chase someone for a debt you may never recover is simply not worth it!
"You CAN take control..."
Does it all sound bleak? Well, you CAN take control...
Re-think the terms on which you bill.
Become more robust about being paid in advance or in fair instalments.
Review whether it’s worth the risk of dealing with individuals or sole traders.
Set up an internal system for chasing debt owed by individuals or sole traders that complies with the new Protocol.
We can also complement what you're doing by:
Drafting your contracts so that your terms of payment and debt recovery are made clear in accordance with the new Protocol.
Being your ‘on call legal department’ to negotiate advance payment with your clients so that you aren’t taken advantage of.
Helping to recover your debt via the new Protocol procedures.
Taking the matter to Court if settlement outside of Court doesn't work.
Enforcing any Court Order so that you actually get your money back.
If you’d like a free 15-minute consultation with us to discuss your debt problem, just give us a call on 0191 500 9762. We can give you general information and pointers that might help you identify a way forward…
Note that this article provides general information only. It is not intended to provide specific legal advice for any individual case. If you want tailored legal guidance on your situation, you should contact a specialist lawyer. The law, as we've described it, is correct - according to the laws of England and Wales - as at the date this article was first published.
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