Covid-19 debt recovery: How can I make a claim during the pandemic?

While the government’s temporary rules seek to protect businesses during troubled times, curbing Covid-19 debt recovery measures is increasing the pressure on many. We take a look at the new legislation and at what options are available for those who are seeking payment from debtors.

With many businesses struggling to survive the continuing commercial turmoil, Covid-19 debt recovery has become a difficult proposition. The government is endeavouring to strike a balance between protecting commercial enterprises from winding-up petitions, while still allowing some options for those who are owed money and are also in difficulty.

The Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act 2020 (the Act) came into force on 26 June 2020, bringing both permanent and temporary changes to UK insolvency rules. The Act implements suggestions contained in a 2018 consultation paper as well as measures drafted in response to the Covid-19 outbreak.

Temporary measures

The main temporary measure introduced by the Act which will affect debt recovery is a restriction on the use of statutory demands and winding-up petitions. This is currently set to run from the period 27 April 2020 to 31 December 2020 but could be extended.

Where a debt is unpaid because of reasons relating to Covid-19, a winding-up petition cannot be presented while the temporary restriction is in force unless the creditor has reasonable grounds for believing that:

a) Covid-19 has not had a financial effect on the debtor’s business; or

b) The debtor would not have been able to pay its debts in any event, even if Covid-19 had not had a financial effect on its business.

The definition of ‘financial effect’ is likely to be any worsening of an organisation’s financial position because of the pandemic.

A winding-up petition cannot be presented during the period of temporary restrictions where that petition is based on a statutory demand issued on or after 1 March 2020.

Permanent measures

The main permanent measure that will have the most impact on Covid-19 debt recovery during the pandemic is the ability of directors to implement a moratorium on creditor action without being in administration.

The moratorium will prevent certain creditor enforcement action during a specified period, with the intention of allowing a company to restructure and avoid administration.

The moratorium period can be implemented by directors and will initially last for 20 business days, with the option to extend it for a further 20 business days.

If creditors consent, the moratorium can be extended for up to twelve months. If an application is made to the court, the court can extend it indefinitely.

A company is still required to pay certain debts during the moratorium period, to include new liabilities, rent, certain payments to employees and debts under financial and lending contracts. Non-payment of these will end the moratorium.

What are the options for debt recovery?

Easing the strain on some businesses can increase problems for others as their ability to collect monies owed to them is curtailed. The remaining options may assist, although it may be necessary to adopt a pragmatic view. Some debtors may simply be unable to pay at present, and in that event, there is little to be gained from debt recovery action and a better course may be to explore alternative options.

Informal agreements

Keeping your relationship with debtors civil, honest and open is recommended during a time when creditor action is curtailed and court waiting times are long. By discussing the situation and exploring alternative solutions, you may, in any event, end up in a better position than if you had sought the winding-up of a business.

An example is the payment of commercial rent. New tenants may be in short supply for the foreseeable future. By negotiating with an existing tenant you may be able to re-schedule payments or even agree a temporary holiday in return for an extension of the lease period.

If you are able to agree on a solution, it is important to seek legal advice and have the agreement put into writing for both parties to sign to avoid misunderstandings or a dispute at a later date.

Letter of Claim

Sending a solicitor’s letter of claim can be effective in prompting a debtor to respond. This would set out the current amount of the debt, set deadlines for payment or response, notify the debtor of the amount of interest and compensation which would be sought in the event of non-payment of the debt and explain the consequences of failing to pay.

Alternative Dispute Resolution

This is similar to an informal agreement but will be guided by an expert in dispute resolution who will attempt to find a solution that both parties can agree upon. It is generally more cost-efficient than litigation as well as being considerably quicker, particularly in the current climate.

Issuing a Claim

Although courts are dealing with a backlog of cases, they remain open and debt recovery proceedings can be issued, although this is unlikely to be a quick solution at present.

If a judgment in favour of a creditor is obtained, there are various methods of enforcement such as obtaining a charging order, attachment of earnings order, winding up petition (subject to the above) and instructing enforcement agents (bailiffs) to collect goods although attending premises has been restricted.

Assessing your options

With many unknowns in the commercial world at present, seeking expert legal advice can help you understand your options and find the solution that is best for you and your business. Taking action sooner rather than later is advisable, particularly if there is a risk that the debtor will become insolvent. If you are in negotiation with the debtor early on, you stand a better chance of recovering at least some of what is owed to you.

Get in touch with us

We have wide-ranging experience in commercial litigation and partnership disputes, and were named as the ‘Commercial Disputes Specialists of the Year” in the Corporate Livewire Innovation & Excellence Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5. 

If you would like to talk to one of our expert legal team about any queries you may have regarding a covid-19 debt recovery and options available to your during the pandemic, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030 and we’ll be happy to help.

The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.