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: Since the introduction of The Corporate Insolvency and Governance Act 2020 (CIGA) in June 2020 and the date this blog was written, there have been multiple amendments and extensions to the temporary provisions intended to take account of the continuing unprecedented financial climate caused by the Coronavirus pandemic. We highlight the key updates as follows:
- ‘Suspension’ of wrongful trading liability retrospectively for the period 1 March 2020 to 30 September 2020 under CIGA 2020. Reintroduced by CIGA (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 for the period 26 November to 30 April, and subsequently extended by the CIGA (Coronavirus) (Extension of the Relevant Period) Regulations 2021 to expire on 30 June 2021.
- Restriction on the use of creditors’ winding up petitions and statutory demands retrospectively for the period 1 March 2020 to 30 September 2020 under CIGA 2020. This period has been extended on three subsequent occasions to 31 December 2020, 31 March 2021, 30 June 2021 and is now due to expire on 30 September 2021.
- Restrictions on rent-related forfeiture of business tenancies retrospectively for the period 26 March 2020 to 30 June 2020, extended on four subsequent occasions to 31 December 2020, 31 March 2021, 30 June 2021 and is now due to expire on 25 March 2022, and the period in which commercial rent arrears recovery action (CRAR) is restricted has been extended for a further nine months to 25 March 2022.
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:
- Preventing the presentation of a winding-up petition on the basis of a statutory demand, where that demand was served between 1 March 2020 and 31 December 2020 (the relevant period); and
- Preventing a creditor from presenting a winding-up petition during the relevant period, unless there are reasonable grounds for believing that:
- Coronavirus has not had a financial effect on the company; or
- the situation would have happened even if Coronavirus had not had a financial effect on the company.
Debt recovery options for creditors
In this blog I discuss the options that remain available to creditors for debt recovery.
Winding-up petition – in non-Coronavirus circumstances
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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