The Pre-Action Protocol for debt claims was brought in with the best of intentions, with the objective being to protect the vulnerable and encourage parties to act in a reasonable and proportionate manner, while looking to foster early communication and thereby avoiding unnecessary court action. The reasoning behind this is entirely commendable and it’s a line of thinking I absolutely agree with. The vulnerable do need protecting and, indeed, the PAP does go some way towards addressing this.
However, with the PAP increasing the level of administration required from creditors, I do feel it’s implementation is a little more vigorous than is perhaps needed. As a lawyer specialising in debt recovery, I’m all too familiar with the onerous regulations we need to abide by when collecting from an individual before we can even contemplate proceedings – and this is before additional administration created via the newly realised PAP.
My reservations about its vigour aside though, I don’t believe that it was within the original brief of the PAP that a large segment of the commercial ledgers in the UK would be included as part of a bid to protect individuals.
Back in 2015/16, when the draft of the statute was initially written up, the PAP was solely aimed at consumer debt – as evidenced by the inclusion of the line “does not apply to Business to Business Debts…”. This, to me, seemed all well and good at this stage and certainly made sense given the protocol was dedicated towards protecting the individual. However, when it came to the final draft of the protocol, a draft which was issued at the beginning of 2017, the words “unless the debtor is a Sole Trader” had been added to it. This change in wording, which may only seem a slight amendment when taken at face value, has actually drastically changed the impact of the PAP, subsequently causing a huge amount of pain for Business to Business creditors in the wake of its implementation.
An example of the issues caused through the addition of that line can be taken by looking at a commercial client with a broad range of customers on its books, including a mix of Sole Traders, Partnerships and Limited Companies. The client in this instance now has to examine their ledger and separate out the Sole Traders from the rest of the portfolio and treat them under the specific requirements of the PAP, either that, or rely on their third-party collections team to split it out for them. Depending on the size of the portfolio this could potentially be a considerable undertaking.
Take the PAP a step further and consider a popular example which is currently caught by the protocol. Was it meant to include the sole trader with a business account at their local builder’s merchant? That individual, who has been running their business, in some cases for years and has been extended credit based on a business relationship, has now become vulnerable as suggested by the PAP. I don’t think it was meant to capture them.
Given the time involved to do this, who will ultimately pay for the unnecessary administration of the ledger(s)? The cost of the never-ending PAP Letters Before Action, and the possible 30, 60 or even 90 day delays in payment that affect cash flow will have to be paid for somewhere within the B2B creditor’s budget. Where does this come from? I suspect that the shortfall will be passed back up the line and on to their customers, with – somewhat ironically given the circumstances – one of the categories this will affect no doubt being the same customers that the PAP legislation had hoped to protect. A far from ideal situation, I’m sure you’d agree.
Another question I have in regards to Pre-Action Protocol, is where do partnerships stand within it? Is a Partnership regarded as a collection of individuals and therefore applicable within the PAP, or do we take the lead from the explicit wording of the statute and focus on Sole Traders only?
To try and clarify this, I’ve looked at Government guidelines surrounding the terminology of the respective enterprises. Government wording around Sole Traders gives specific advice on how to set a business up, which differentiates it from the Government guidance on Partnerships. From their guidance then, are we to presume that we take the specific wording of the PAP and exclude Partnerships? As it stands, I exclude the partnerships from the PAP?
There’s further ambiguity around Personal Guarantors (‘PG’). Does a PG guaranteeing the commercial debts of a company have to be treated in the same way as a Sole Trader? After all, they’re an individual, which means that, based on current understanding, I would say it does, as we are now pursuing an individual and that is something that’s clearly within the remit of the protocol.
The water is muddied yet further here by additional levels of admin required by the PAP and by the rules surrounding collections. A B2B Creditor in this scenario may have to send one form of Letter Before Action to the Limited Company before then sending a 30-day Pre-Action Protocol Letter Before Action to the Personal Guarantor. Or is it regarded as good practice to ‘miss out’ the LBA to the Company and go straight for the PG? As a Creditor are we all happy that we have established the Company’s inability to pay?
There’s a very good chance that the company Director (who is likely to be the PG) could receive one demand for payment within 14 days addressed to their Company and then a second demand for payment to be paid within 30 days. A confusing circumstance, which could potentially postpone the Letter Before Action to the Limited Company by 16 days, causing yet more delay, administration and further problems for the B2B Creditor. It’s a grey area within the protocol that needs clarification if we’re to facilitate a smoother process and avoid preventable admin.
To summarise, I hope the PAP is revisited soon and that more input is sought from the B2B community to try and remove the ambiguity within the statute’s wording. I believe that with a few amendments, it’s possible to achieve a fair and consistent regime for the treatment of all, while still meeting the objectives of the initial PAP proposal.
From a personal point of view, I’d be happy to go back to the original draft, excluding all B2B debts from the statute, however that’s ultimately for the lawmakers to decide – I just hope they take industry voices into account if they do revisit it in the not too distant future.
Richard Gwynne, Director of Debt Recovery, Spratt Endicott