As a small business, cash-flow is extremely important to the daily functioning and long-term health of the business. We have all seen the consequences of late payment on our businesses.
Unfortunately, the Government has introduced a new Pre-Action Protocol for Debt Claims. A Pre-Action Protocol is a set of guidelines which you are required to do before you take a matter to Court. If you do not carry out these steps, the Judge may order you to pay the Debtors costs or put the case on hold until you comply with the Protocol. This can have a damaging effect as it further delays the payment you are waiting for and increases the costs.
Before the Pre-Action Protocol for Debt Claims
Prior to the Protocol, if you had not been paid by the Debtor, all you had to do was follow the contractual agreement i.e. if the contract said you would be paid in 60 days or the matter would be referred to an Arbitrator etc. If payment was still not made you could issue a formal letter before claim requiring payment within 21 days. If this letter before claim was unsuccessful you could then issue Court proceedings for an order for payment. Simple enough!
After the Pre-Action Protocol for Debt Claims
The Protocol came into force on the 1st October 2017. The Protocol applies to Business Creditors who are seeking payment from sole traders or individuals.
Under the new Protocol a letter before claim must still be issued, although this must now be more detailed. The Debtor then has 30 days to reply. The Debtor can now also ask for additional time to respond if they are seeking legal advice. There is a set form within the Protocol which the Debtor must complete and return. Once you have this form from the Debtor, you will have to wait a further 30 days before you can enter Court Proceedings.
You are now also under a positive obligation to take steps to settle the matter without Court Proceedings, by using methods such as mediation. If an agreement cannot be reached then you must give the Debtor 14 days notice that you are issuing Court Proceedings against them. Taking the total up to at least 64 days before you can take any action.
The downside of the new Protocol on Small Businesses
The effect of the new Protocol is that small businesses now have to wait at least 11 weeks more before they can take matters to Court. Due to the additional work involved i.e. mediation and the expertise required to draft the letter before claim, the costs have now also increased. The Protocol also seems to favour the Debtor. A well-informed Debtor can now continue to delay matters more than ever before.
How to minimise the damage?
The best way of dealing with these changes is to ensure you have an effective system in place for monitoring late payments. The sooner these are addressed, the sooner legal action can be taken if necessary.
It is also wise to ensure you speak to a Solicitor who can draft a set template letter before claim for you. This will ensure that you are able to take the initial steps yourself fairly quickly. It also means that when you refer the matter back to your Solicitor, they simply have to issue the 14 day notice to the Debtor and then start Court Proceedings. As always, staying one step ahead of the Debtor is key!
For further information or assistance please do not hesitate to contact Ms Annam Nasir, Head of Civil Litigation at Baches Solicitors on 0121 553 3286 or firstname.lastname@example.org.
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