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New debt protocol warning for Businesses

28 Jul 2017

Businesses in the UK need to rapidly get up to speed with the Government’s Pre Action Protocol for Debt Claims or face the prospect of further delays to any debt recovery action they are planning and the possibility of sanctions.

The new protocol comes into force on 1 October 2017 and is designed to encourage parties to engage with one another, to act reasonably and proportionately and to try to avoid litigation. The protocol is applicable for all businesses dealing with individuals, including sole traders.

Kelly Mills, Partner at law firm DMH Stallard said:

“Under the new protocol, creditors are obliged to provide more information to debtors at an early stage in specified formats and to allow debtors more time to respond before court proceedings are issued.

Creditors are also obliged to take account of financial information supplied by debtors when seeking time to pay and to give written reasons for refusing payment proposals.

Debtors may look to use the new protocol as a means of delaying payment, which could be bad news for businesses as it will impact on cashflow.”

Recent research shows almost a third of companies are currently waiting for at least a month beyond their payment terms to receive payment, with nearly 20 per cent waiting at least double that. Furthermore, 19 per cent of SMEs affected by overdue payments admit that being owed between £20,000 and £50,000 would be enough to drive them into insolvency

Failure to comply with the new protocol could result in court proceedings being stayed, meaning further delays for the creditor, or even sanctions in terms of costs and/or interest.

There are, however, some practical steps that businesses can take to try to minimise the potential impact of the protocol.

 

Get protocol-ready with these steps

 

  1. Consider which, if any, of your customers you extend credit to – this applies both to new and existing customers. Are they really ‘good for the money’?

 

  1. Review your payment terms – are you extending credit to your customers unnecessarily?

 

  1. Invoice frequently – by doing so you will avoid extending credit unnecessarily, identify potential payment problems at an early stage and limit your exposure to debt. 

 

  1. Consider the payment methods you accept – make it as easy as possible for your customers to pay you.

 

  1. Take action promptly – the protocol allows a debtor 30 days to respond to a Letter of Claim before court proceedings are issued and at least another 30 days if the debtor then responds to that letter. So, if an invoice is not paid, take action without delay.

 

  1. Consider reducing the number of times you chase a customer for payment once an invoice becomes overdue – the sooner you send a Letter of Claim, the sooner you can issue court proceedings if necessary.

 

  1. Consider ‘front loading’ when sending a Letter of Claim – if there are documents you anticipate a debtor may ask to see, consider providing those with the Letter of Claim to try to avoid further delay down the line.

 

  1. Consider whether other means of debt recovery may be appropriate, at least in the first instance, such as serving a statutory demand or, in the case of landlords, forfeiture.

 

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