Late payments are a serious issue for many UK businesses. Research shows that around 28 percent of UK businesses are affected by late payments, and the total value owed to small firms is estimated to be around £26 billion at any time.
If you are running a business and dealing with unpaid invoices, this problem may feel all too familiar. It can lead to stress, cash flow pressure and time spent chasing money that should already be in your account.
When payments remain outstanding, you may decide to begin legal action. If the person who owes the money is an individual or a sole trader, you must follow a specific process before starting a court claim.
This is known as the Pre-Action Protocol for Debt Claims. It sets out what you need to do, how much time the debtor has to reply and what information must be shared. It is helpful for anyone involved in debt claims, whether you are managing the process yourself or working with debt collection or outsourced credit control services, to fully understand this protocol.
What Is the Pre-Action Protocol for Debt Claims?
The Pre-Action Protocol for Debt Claims came into effect on 1 October 2017. It applies whenever a business plans to recover money from an individual. This includes:
- Consumers
- Sole traders
- Directors who have given a personal guarantee
Even if the situation appears to relate to a business debt, the protocol may still apply if the person is responsible for payment in a personal capacity.
Why the protocol exists
The protocol aims to help both sides communicate before a claim reaches the court. It encourages early discussions, gives the debtor a chance to reply and provides a fair process for sharing information.
The aim is to prevent misunderstandings and limit the number of cases that reach the court unnecessarily. The protocol also helps keep costs down for both parties and encourages reasonable conduct throughout the process.
If the rules are not followed, the court may take this into account. This can result in reduced interest, restricted court costs or delays. Following the protocol properly strengthens your position and helps move the case forward without unexpected difficulties.
What You Must Do Before Taking Court Action
You must send a Letter of Claim before taking any further steps. This letter sets out the background to the debt and gives the debtor a full picture of what is owed and why.
The Letter of Claim needs to include:
The letter must contain the amount owed, including interest and any charges. It must also describe the agreement between the parties and explain the basis of the debt. If the debt has been transferred to another company, for example if it has been sold to a third party, you need to explain when and how this happened. If the debtor has already been paying in instalments, you must explain why the current plan is no longer acceptable.
The forms you must include:
You must enclose three important documents:
- A Reply Form
- An Information Sheet
- A Financial Statement form
The Reply Form must follow the format set out in the protocol. The Financial Statement form does not have to follow a mandatory format, although an example from the Money Advice Service is commonly used. These documents help the debtor respond and explain their position, whether they agree with the debt or not.
How to send the Letter of Claim?
The Letter of Claim must be sent by post. You should keep a copy of the letter and note the date it was sent. Although recorded delivery is not required, it can help provide evidence if needed later.
The Debtor’s Response - What Happens Next
Once the debtor receives the Letter of Claim, they have 30 days to reply. If they return the Reply Form, you must allow time for the debtor to receive advice. This means giving a further 30 days from the date you receive the form. If the debtor asks for additional documents or information, you must send these within a reasonable time.
After providing the documents, you should give another 30 days for the debtor to consider their position. The purpose of this stage is to encourage communication. Many debts can be settled at this point through a payment plan or agreement.
If the debtor does not respond within 30 days
If there is no reply at all, you are allowed to begin court proceedings once the 30 days have passed. However, it is still recommended to review all paperwork carefully before issuing a claim, as mistakes can create delays or problems later.
Reaching a Solution Without Going to Court
The protocol encourages both sides to try to settle the matter before taking legal action. This may involve discussions about payment plans or reviewing a debtor’s Financial Statement to see if a realistic arrangement can be agreed. Communication at this point often prevents the need for a court claim, which can save time and cost for everyone involved.
Businesses that use our debt collection services or outsourced credit control often find that early communication is easier to manage because these services provide clear and structured contact with the debtor.
What Happens If the Protocol Is Ignored?
If you do not follow the rules set out in the protocol, the court may apply penalties. This can include reducing interest, limiting the amount of court costs you can claim or delaying the case. In some situations, the court may order the creditor to repeat certain steps, such as providing documents that should have been shared earlier.
Following the protocol correctly helps show that your business has acted reasonably and gives the court confidence in your approach.
Practical Steps for Businesses Handling Debt Claims
To help you follow the protocol correctly, here is a simple step-by-step approach.
Preparation
Gather all relevant evidence relating to the debt. This might include the original contract or agreement, invoices, statements of account, proof of delivery or service and any emails or written communication between you and the debtor. Clear evidence helps avoid disputes and provides a strong foundation for your case.
Create your Letter of Claim
Write the Letter of Claim using the information listed earlier. Make sure all personal details, dates and amounts are correct. Explain how the debt arose, outline any interest or charges and include the required forms. Give clear instructions for where the debtor should send their reply.
Send your letter by post
Send a printed copy of the Letter of Claim and keep evidence of the date it was sent. Keep copies of everything for your records.
Allow the correct time for a reply
Give the debtor their 30 days to reply, and allow further time if they ask for information or advice. Avoid rushing into court action because doing so can harm your case.
Review the situation after the reply period
If no agreement is reached after all required steps have been completed, you can prepare to issue a court claim. You must still give a final 14 day notice before filing the claim.
Taking these steps helps your business remain compliant and reduces the risk of problems later.
Understanding The Pre Action Protocol for Debt Claims
In conclusion, The Pre Action Protocol for Debt Claims provides a clear and fair process for businesses that need to recover money from individuals or sole traders. It encourages early communication, helps prevent confusion and allows many debts to be resolved without legal action.
By preparing the right documents, sending a complete Letter of Claim, allowing the correct time for replies and sharing information when requested, you give your business the best chance of resolving the issue quickly and correctly. These steps support stronger debt recovery, whether you handle the process yourself or use debt collection or outsourced credit control services.
If you need guidance with The Pre Action Protocol or support managing outstanding debts, contact My Credit Controllers for practical help and clear advice.
