Insolvency action may rise as an unintended consequence of the introduction of the new Pre-Action Protocol for Debt Claims on 1 October, warns Karen Chapman from Clarke Willmott LLP.
Debt recovery specialist Karen says the Ministry of Justice’s protocol will potentially make it a longer and more onerous process to recover debts from sole traders or individuals.
“This could lead to some creditors deciding that insolvency action is preferable, despite the fact it is not a debt recovery tool,” said Karen.
Under the new protocol, when a creditor is pursuing a County Court claim against an individual or sole trader, the debtor must be allowed 30 days to reply to the letter of claim (currently 7-14 days).
The creditor will also have to supply more information and additional documents with the letter of claim.
“Despite these additional requirements on the creditor, debtors may simply go through a ‘tick box exercise’ on the new Reply form and potentially gain themselves yet more time by requesting further information or seeking debt advice.
“As a result, the process becomes longer and more onerous for creditors to recover their debts and potentially makes it easier for unscrupulous debtors to deliberately delay the process or raise spurious defences.”
By contrast, for debts of £5,000 or more and where there is no material dispute, issuing a Statutory Demand may appear a quicker and more straightforward option. (A Statutory Demand is a demand for payment in a specific form as required by the Insolvency Rules 2016).
Once a Statutory Demand is served, a debtor has three weeks to pay the debt or to secure or compound it to the reasonable satisfaction of the creditor. Alternatively the debtor can apply for it to be set-aside within 18 days of Service.
“To avoid the possibility of a Bankruptcy Order, many debtors faced with a Statutory Demand will quickly make repayment arrangements,” added Karen. “This can therefore be a relatively inexpensive and a faster way of obtaining payment/assessing a debtor’s intent to repay the debt.
“However, the purpose of a Statutory Demand is to take the first step in an insolvency action and should not be served indiscriminately.
“If the debtor fails to pay and the creditor decides to proceed with a Bankruptcy Petition, this can turn into a much more expensive route and the amount recovered is not guaranteed; it will depend on the value of the debtor’s assets, and the total amount of outstanding debts he/she has.”
Karen says issuing a Statutory Demand may seem like an easy alternative to County Court action, but there is no definitive answer. Each case should be considered on its merits and if unsure, seek the advice of a specialist debt recovery lawyer.
In the meantime, she urges businesses that deal with sole traders or individuals, or plan to do so in the future, to review their credit control processes.
“Few businesses are currently aware of the protocol, but many will be affected. Businesses should check the legal status of customers to whom they extend credit and be careful to distinguish between sole traders and partnerships or companies.
“Making any changes necessary to comply with the new protocol now will help firms to maintain their ability to quickly and effectively recover the monies owed them through the existing County Court process.”
Clarke Wilmott LLP is a national firm with offices in Birmingham, Bristol, Cardiff, London, Manchester, Southampton and Taunton.
For further information contact Karen Chapman on 0345 209 1673 or email: Karen.firstname.lastname@example.org.
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