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Debt recovery and creditor enforcement rights during COVID-19: the challenges and a proposed solution

  • 6 November 2020 6 November 2020
  • UK & Europe

  • Global Recoveries

The Corporate Insolvency and Governance Act 2020 (‘CIGA’) came into force in June 2020 and introduced significant reforms to the insolvency law of England and Wales. This article explores the temporary measures introduced by CIGA, with a particular focus on what they mean for creditors looking to recover bad debts and offers a possible solution for creditors with claims which, in current challenging times, may be written off as disproportionately costly to take forward.

Debt recovery and creditor enforcement rights during COVID-19: the challenges and a proposed solution

Limited debt recovery options and enforcement rights until (at least) 31 December 2020

Of real significance to creditors were a number of debtor-friendly measures introduced by CIGA to provide companies with breathing space during the COVID-19 pandemic. The measures significantly restrict - albeit temporarily - debt recovery options and creditor enforcement rights by making it very difficult for a creditor to present a winding up petition.

As things stand, a creditor cannot present a winding up petition based on:

  1. a statutory demand served on or after 1 March 2020; or
     
  2. any of the other usual grounds for proving that a company cannot pay its debts, unless the creditor has reasonable grounds to believe that:
     
    • COVID-19 has not had a financial effect on the company, or
       
    • the facts giving rise to the right to present a petition would have arisen even if COVID-19 had not had a financial effect on the company.

The measures will last until 31 December 2020 with the possibility of further extension if the Secretary of State deems it necessary. They have already been extended once beyond 30 September 2020. 

What does this mean in practice for creditors chasing debt?

The temporary reforms mean that there is, in effect, a blanket moratorium on winding up petitions save in the limited circumstances where there are clear reasons to show that the company's insolvency is not related to COVID-19.

In practice, the most significant consequences for creditors are:

  • Creditors cannot currently use statutory demands to threaten a company that it will be wound up if it does not pay an uncontested debt which is owed. A statutory demand therefore doesn't hold the same ‘tactical’ status it did pre-COVID - on the contrary, a debtor may be emboldened to simply ignore a statutory demand served before the moratorium expires.
     
  • For those taking formal action, a winding up petition may still be an option in limited circumstances, but serious consideration must be given as to whether it is the best option given:
     
    • There is plenty of scope for dispute on whether or not a debtor has been financially affected by Covid-19. Such a dispute could in itself lead to a complicated hearing with potentially expert and witness evidence being adduced. The insolvency process could become lengthy and costly.
       
    • Creditors may find it very difficult to satisfy the courts that the debtor company has not been financially impacted by COVID-19. In the case of Re A Company [2020] EWHC 1551 (Ch), the petitioner was unable to meet the coronavirus test notwithstanding that evidence was consistent with the company being insolvent pre-COVID. This was because the company provided evidence that its ability to return to solvency (by way of re-financing efforts) had been hampered by COVID-19. The burden was on the petitioner to show that the company would still be insolvent even if the financial effect of coronavirus was ignored. It could not meet that burden.
       
  • Creditors can still issue court proceedings and obtain a court judgment against the debtor company, yet creditors must be forward-thinking and pro-active when it comes to thinking about enforcement strategy.

    A creditor would be wise to reflect seriously on the options available given the limitations imposed on insolvency options. Some of the other options that creditors could consider for enforcement of a judgment include:

    Option 1 – Apply for a Third Party Debt Order against company money held by a third party.
    Option 2 – Take control of debtor's goods.
    Option 3 - Apply for a charging order.
    Option 4 – Attachment of earnings.

    The right option will depend on what is known about the debtor. A Third Party Debt Order may be a good option in circumstances where the creditor knows the debtor’s bank account details and/or the details of a significant contract that the debtor may have, but it offers a creditor very little if they lack that insight.

Can our debt recovery portfolio model offer a solution?

These limits on the use of traditional insolvency procedures to recover overdue debt come at the same time that the recession makes good cash-flow management crucial for corporate well-being. A solution to this conundrum is our funded claims portfolio model, in which we work with a third party funder to pursue all of a client's overdue debt claims on a “no-recovery-no-fee” basis. This model enables clients to pursue smaller claims which would otherwise be written off because it would be disproportionately costly to do so on an individual basis - instead, smaller claims are aggregated with larger claims and we use efficiencies of scale, standardised documents and our market-leading contentious expertise to pursue all the claims efficiently. The client only pays our fees if we make a recovery, and in most cases a portion of those fees are recoverable from the debtor in addition to the debt. 

In the tough economic times companies are facing, where debtors enjoy the protection offered by CIGA while creditors seek the cash which is their corporate life-blood, our funded claims portfolio offers a low-risk, practical solution. If you would like to find out more about how Clyde & Co can assist with cash flow management debt recovery, please get in touch with us to discuss your options. 

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