Debt recovery for creditors during this pandemic is harder than ever. The Corporate Insolvency and Governance Act (CIGA) came into force on 26 June 2020 and introduced a number of temporary and permanent reforms. The objective being to support businesses and help the economy during this pandemic.
STOP PRESS: Following the publication of this blog in November 2020, the government announced a further extension to all temporary restrictions and other provisions under CIGA until 30 June 2021. Although this decision was apparently made on 22 March it was not announced and published until late afternoon on 24 March 2021, just 7 days before the restriction upon the use of new statutory demands and creditors’ winding up petitions was due to expire, and notwithstanding that the government had labelled the previous extension in December as ‘final’. It follows that creditors who have been out of pocket in many cases for more than a year will be unable to bring plans to enforce relevant debts to fruition for at least a further 3 months. The suspension of damages flowing from wrongful trading (which was due to expire on 30 April) is also extended to 30 June 2021.
The original measures were due to expire on 30 September 2020 but the UK Government has extended some of these to 31 December 2020. Creditors have been left scratching their heads as to what options may be available to them to recover the monies owed to them from companies.
Insolvency proceedings were often used by creditors to recover outstanding sums. However, the extension of CIGA provisions continue to restrict this as follows:
In this blog I discuss the options that remain available to creditors for debt recovery.
Under section 123(1)(e) of the Insolvency Act 1986 it is still possible to wind a company up without first presenting a statutory demand if it is “proved to the satisfaction of the court that the company is unable to pay its debts as they fall due”. However, the court would need evidence that the company is cash flow insolvent – and that the insolvency was not Coronavirus related and would have occurred regardless of the pandemic. Whilst it does depend on each individual case, in many instances this will be a testing hurdle for a creditor to clear. However, where the evidence supports it, this option allows for a non-Coronavirus related winding-up petition to still be presented.
There are currently no restrictions on commencing court proceedings in England and Wales for a debt recovery claim. This process does have longer timescales and is likely to be more expensive than issuing a statutory demand and winding-up petition once the claim has concluded. However, if successful, you would have a judgment against the debtor company that could be enforced in the normal manner (such as through a charging order or writ of control). The debtor would also have the opportunity to defend the claim.
If the debtor does not comply with certain court deadlines at an early stage of the claim, the creditor could also apply for a default judgment which stands as an enforceable court judgment. Furthermore, if the debtor files an obviously weak defence, the creditor may be able to obtain summary judgment. These methods would allow the claim to be disposed of at an earlier stage, saving not only time but costs to the creditor.
Significantly any judgment, whether obtained on a default or summary basis, or following a court judgment, would be enforceable against the debtor company, and if unsatisfied could be used as the basis for a winding-up petition notwithstanding the current restrictions under CIGA.
Whilst the UK Government has stated that the support is aimed at those struggling the most during the pandemic, some companies may seek to take advantage of CIGA restrictions by not making payments towards their debts, despite having the funds to do so, for the sake of protecting cash in these uncertain times. Therefore, creditors may want to try to negotiate a settlement of the debt, perhaps by agreeing a payment plan. In doing so, a creditor might use the threat of court proceedings as leverage. If successful, this would ensure that some, if not all, of the debt can be recovered and the creditor can maintain its cashflow. However, this could be a slow process and unlikely to do well against an obstinate debtor.
If you wish to discuss any issues raised in this blog, please contact me on 02380 482171 and I would be happy to talk through the most appropriate options for you.
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