The trouble with the debt recovery PAP


Gwynne: Personal guarantor treated in same way as sole trader

Guest post by Richard Gwynne, director of debt recovery at law firm Spratt Endicott

As a lawyer specialising in debt recovery, I believe it was perfectly acceptable and reasonable for a pre-action protocol (PAP) to be introduced to the debt collection process prior to court action.

The vulnerable should certainly be protected, and the PAP, which came into force on 1 October 2017, goes some way towards addressing this.

However, with the PAP increasing the level of administration required, I feel it’s a little more vigorous than is perhaps needed, when you consider all the other onerous regulations that we have to abide by when collecting from an individual before we can even contemplate proceedings.

This reservation aside, 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.

When the draft was written back in 2015/16, the PAP was aimed at consumer debt only and expressly said that it “does not apply to business to business debts”. But when it went to final draft at the beginning of 2017, the words “unless the debtor is a sole trader” were added.

This is a change that has caused a huge amount of pain for B2B creditors.

Let’s take a commercial client with a broad range of customers – sole traders, partnerships and limited companies – as an example. They now have to examine their ledger and separate out the sole traders from the rest of the portfolio and treat them under the PAP; either that, or rely on their third-party collections team to split it out for them.

In this scenario, who will ultimately pay for this unnecessary administration of the ledger(s)? The cost of the never-ending PAP letters before action (LBAs), 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.

I suspect that this shortfall will be passed back up the line on to their customers, the same people the PAP was supposed to protect.

Also, where do partnerships stand within the PAP? Are they a collection of individuals and therefore within the scope, or do we take the lead from its wording and focus on sole traders only?

Government advice to sole traders on setting up is different from the advice on partnerships. As it stands, I exclude the partnerships from the PAP.

And where does this grey area stop? Does a personal guarantor who guarantees the commercial debt of a company have to be treated in the same way as a sole trader? Based on current understanding, I would say it does, as we are now pursuing an individual and that is clearly within the remit of the PAP.

The water is muddied further here by additional levels of admin. The B2B creditor in this scenario would have to send one form of LBA to the limited company, before then sending a 30-day PAP LBA to the personal guarantor.

Or is it regarded as good practice to ‘miss out’ the LBA to the company and go straight for the guarantor? As a creditor, are we all happy that we have established the company’s inability to pay?

In this instance, it’s easy to see that the director (who is likely to be the personal guarantor) could receive one demand for payment within 14 days addressed to his company, and then another demand for payment to be paid within 30 days.

This causes a confusing circumstance, which could potentially delay the LBA to the limited company by 16 days, causing yet more delay, administration and further problems for the B2B creditor.

To summarise, I hope the PAP is revisited soon and some more input sought from the B2B community so that some amendments are made to it and we achieve a fair and consistent regime for the treatment of all.

Dare I say go back to the original draft and exclude all B2B debts?




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