With the possibility of the Corporate Insolvency and Governance Act 2020 (CIGA 2020) being extended into 2021 it is more important than ever before for businesses to have in place effective debt recovery measures.
New measures to ease the burden
Insolvency has always been a threat to businesses and one which creditors have sometimes used to encourage payment or negotiate a payment plan.The effect of COVID-19 has resulted in many businesses increasingly struggling to pay their debts. To ease the burden, on 26 June the Corporate Insolvency and Governance Act 2020 (CIGA 2020) came into force preventing creditors, in the majority of instances, from presenting a winding-up petition until after 30 September 2020. That ban was extended to 31 December 2020 (and there is every possibility of a further extension into 2021).
- Statutory Demands can still be served provided not with the threat of winding up, so for the time being they are of limited use.
- A winding up petition may still be presented but only if it can be demonstrated to the Court that COVID-19 has had no financial effect upon the Company’s financial circumstances, i.e. the Company would have been unable to pay its debts in any event. If the Petitioning Creditor cannot satisfy the Court then the Petition will be dismissed with possible costs orders (and even damages) being made against the Petitioning Creditor.
It is therefore very difficult for a Creditor to persuade a Court that COVID-19 has not had an effect upon a Debtor’s financial situation. If the debt significantly pre-dates COVID-19 (ie. before 2020) then it could be argued that the Debtor was unable to pay its debts irrespective of COVID-19. However, the risk of failing to persuade the Court and potentially suffering financial consequences, is likely to be sufficiently high to dissuade a Petitioning Creditor from trying.
The threat of insolvency
However, once the ban is lifted there is a very real risk that Debtors will have built up significant arrears of debt particularly so for businesses in sectors that have been most affected by the lockdown measures such as hospitality, retail, leisure. This in turn is likely to lead to an increase in insolvency including CVA’s (Company Voluntary Arrangement), Administration and of course Liquidation.
Reviewing your procedures
Therefore, it is now more important than ever to keep on top of your debtors:
- Consider requesting payment in advance of provision of services – it's better to lose the business than provide your goods/services and not be paid.
- Review your payment terms and how you chase your debtors.
- Keep the lines of communication open with your debtors
- Consider payment plans.
For further advice on credit control procedures and Debt Recovery, please contact our Debt Recovery team who will be happy to help.