Debt Recovery during and after the Pandemic
6 May 2020 by Jason Torrance
The Covid-19 pandemic and resulting lockdown has raised unprecedented challenges for businesses across the UK.
Some companies continue to operate with employees working from home, but others may have ceased to operate and we are seeing some major household retailers now ceasing to trade and making mass redundancies. Businesses’ cash flow has never been more important for their survival and especially so while the banking system and access to loans to bridge financial interruption is depressed.
Many businesses now operate on the basis that invoices are payable upon their presentation. It is therefore increasingly common for debts to rack up and in the current climate, default is rife.
Whilst this is perhaps understandable given the conditions, it is having a significant detrimental impact on cash-flow and the ultimate survival of the creditor businesses that are involved. So what are some of the options for recovering these unpaid debts?
Every matter will, of course, turn on its own facts and, be advised upon according to the terms of the goods or services contract in play and the status of the company against whom the debt is being pursued will also be a relevant factor to consider.
In the majority of these cases though, there will be found to be a viable method of debt recovery. With the costs of the exercise in the round of considerations and the available methods of enforcement liable to take different periods to discharge and have potentially different prospects of succeeding depending on the debtor’s circumstances, it is important to select an appropriate method of debt recovery early on in the process.
Depending on the size of the debt, the threat of insolvency proceedings for a defaulting business (or individual) can carry with it a big deterrent for continuing to default and/or not enter into negotiations to settle.
A Statutory Demand, which is a written demand for payment of a debt served on either a company or an individual, can be used as a pre-cursor to winding-up or bankruptcy proceedings.
Payment of unsecured debts must be made within 21 days of issuing a Statutory Demand. An unpaid Statutory Demand is regarded as evidence of the debtor’s inability to pay its debts for the purposes of insolvency proceedings. After 21 days, if a qualifying debt remains unpaid, then an application to either bankrupt an individual or wind-up a company debtor can follow.
The process has the following potential advantages:
- It does not involve the courts from the outset;
- Preparing and serving a statutory demand is quick and inexpensive.
- It can either result in prompt payment of a debt, or flush out details of any dispute or cross-claim early on.
The consequences of not making the demanded payment can, therefore, be severe for a debtor.
The court will not generally make a winding-up order against a company where the petition debt is genuinely disputed by the debtor on substantial grounds though. It may, therefore, be that if such a challenge looks likely, other routes to recovery may be more advisable.
An alternative route to recovery is to issue court proceedings using more traditional methods; by utilising a claim form (Part 7 proceedings).
The typical way to start a claim is to send a debtor a Letter Before Action (LBA), containing the concise details of the claim, pursuant to the Practice Direction on Pre Action Conduct contained in the Civil Procedure Rules.
That process seeks to elicit the response of the debtor, so that each party’s respective positions can be understood by each other in more detail, from the start.
Having information about the other sides’ case, early, can sometimes assist by bringing the parties in to view of what settlement options there could be available to them – to help avoid the issuing of the claim at court. Otherwise, it can be a way of engaging alternative dispute resolution in the case, early enough to settle matters before costs are run-up, or give the creditor the opportunity to use tactics to put the risk of having to pay a proportion of the creditor’s costs on the debtor.
Part 7 proceedings are more suitable for matters in relation to which there may be more likelihood of it being argued by the debtor that there is a dispute over there being a “debt” in the first place. There may also be arguments over a right to offset against what is owed, or a genuine cross or counter-claim which can also have sway.
If the debtor fails to act following the LBA, the next step would usually be to issue court proceedings.
Once a claim is issued, and upon allocation to track, if the value of a claim is £10,000 or less, it will most likely be allocated to the Small Claims Track and, generally, costs will not be recoverable by the winning party from the loser (unless there is a contractual right to recover costs).
If the value of a claim exceeds £10,000, a claim will be allocated to either the Fast Track or the Multi Track, under which tracks costs are recoverable by the winning party from the loser.
At this time The Ministry of Justice has advised that all bailiffs must follow the Government’s guidance during the pandemic. As a result, they have advised that bailiffs suspend all in-person visits.
The High Court Enforcement Officers Association states that all High Court Enforcement Officers (“HCEO”) members are also following this guidance.
Other methods of enforcement are still available, such as third party debt orders and charging orders.
Practical tips for Creditors
- Consider sending LBAs sooner in the credit-control process;
- Ensure contact details for customers are up-to-date, obtaining an email address where possible;
- If an agreement cannot be reached creditors should still consider taking legal action to avoid any delays caused by a post-lockdown bottleneck.
Fisher Jones Greenwood LLP’s Dispute Resolution team is able to assist clients with all their debt recovery queries and provide commercially focused, practical advice on the options available. For further advice on debt recovery please contact Fisher Jones Greenwood on 01206 700113 or email [email protected].
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