Debt Recovery and Commercial Contracts During the Coronavirus Lockdown
By Richard Cussell
It seems like no aspect of life has escaped the impact of Coronavirus/Covid-19. Public health has obviously taken priority during this time. But with borders locked down, events cancelled and offices and premises forced to close, businesses have been hit hard – particularly within sectors such as travel and hospitality.
The first issue to affect many businesses has been the immediate decrease in cash flow. Studies suggest that most UK businesses only have three months or less of cash reserves. So with no end to the Coronavirus crisis in sight, forecasting cash flow, managing invoices, settling outstanding debts, and taking all possible steps to ensure your contracts are honoured has never been more vital to keep your business ticking over.
How is the coronavirus lockdown affecting businesses?
The Government has introduced a range of measures to help businesses survive Coronavirus, including the Job Retention Scheme (employee furlough scheme), VAT deferral, business rates relief and the Business Loan Interruption Scheme. Despite this, the UK economy shrank by 5.8% in March. Sectors across the board have been affected, from services, to construction, to education, and analysts agree that the worst is yet to come.
Should you be collecting debts at this time?
When so many businesses are struggling, to what extent is it appropriate to chase your debts? The unfortunate reality of this situation is that while the Government has put in place measures to try to protect the economy, some businesses may not recover. Therefore, taking steps to protect your own business’s interests now needs to take priority.
Debt recovery during the Coronavirus lockdown
You have a variety of options open to you to recover debts and unpaid invoices, ranging from careful negotiation to robust court action:
Taking steps to reduce cash flow shortages
Keeping lines of communication open with your customers and clients is essential during this time, particularly as they are likely to be having financial worries of their own. Depending on circumstances, it may be worth preserving the commercial relationship as much as possible so you can quickly bounce back once the lockdown is lifted.
Consider reviewing your payment and credit policies before undertaking work, such as:
- Requesting customers pay you in full or in part in advance
- Reviewing and restricting your credit terms
- Issuing invoices immediately
- Providing regular account statements
- Regularly chasing invoices and providing deadlines for payment
If your invoices are going unpaid, it is time to consider legal action. Before you can take any steps to recover money through the county court, you must comply with the Pre-Action Protocol for Debt Claims that sets out the steps you should take prior to recovering the debt.
The starting point is to issue a letter of claim (also called a letter before action) that sets out how much you are owed, the basis of the debt, and the date by which you require repayment. In ordinary situations, this letter is usually all it takes to get a debtor to engage. However, if they are having financial difficulties due to Coronavirus, it may be necessary to take further action.
Money judgment proceedings
Court proceedings are still going ahead, although you may face some delays during the proceedings – according to the County Court Money Claims Centre (CCMCC), turnaround for issuing a new money claim should take around 18 days.
While some court buildings are still open, other proceedings have moved online. Wherever possible, the courts are arranging remote hearings so it is important to carefully read any directions provided to you by the court in relation to your application.
Before starting a county court money claim, it is worth considering whether the debtor is actually in a position to pay and weighing the up the potential recovery with the costs of pursuing the debt. To work out whether the debtor can pay, you could undertake private credit investigations or apply to court for an Order for Questioning that requires the debtor to provide information about their finances.
Throughout the proceedings, it is beneficial to continue negotiations to see whether the debt can be settled without the need for court intervention. If it is not possible to settle, you can ask the court to make a County Court Judgment (CCJ) for the full amount of the debt plus costs and interest.
According to the CCMCC, you can still apply for a Warrant for Control to enforce a CCJ using bailiffs. However, due to the current rules on social distancing, bailiff visits are suspended. They may still undertake enforcement work that complies with social distancing such as sending letters and making phone calls to the debtor.
This may make immediate enforcement difficult, particularly if the debtor is not engaged with the proceedings. It may therefore be worth considering other methods of enforcement.
A Charging Order secures a CCJ over the debtor’s property or other assets, such as shares. If the debtor is struggling with cash flow but has reasonable business assets, this may be your best option. Once the debt is secured you will become a priority creditor. This means if the debtor’s business subsequently goes under, you and their other secured creditors will recover your security first.
You can either choose to rest on your security until the Coronavirus crisis has eased to give the debtor an opportunity to recover or you could enforce your Charging Order by applying for an Order for Sale to force the sale of the secured assets. Alternatively, if the debtor is open to negotiation, you could agree a payment plan at this stage. Whichever option you choose will of course depend on what would be in your business’s best interests.
Another option is to issue insolvency proceedings to distribute the debtor’s assets amongst their creditors and wind up their business. First, you must issue a Statutory Demand for repayment of the debt.
If the debt remains unpaid, you can issue either:
- A Bankruptcy Petition for an individual
- A Winding Up Petition for a company
It is worth noting that until 30 June 2020, commercial landlords cannot issue a Winding Up Petition for unpaid rent. However, you can still use insolvency to pursue other unpaid commercial debts.
Commercial contracts during the Coronavirus lockdown
Enforcing or escaping a contract entered into before Coronavirus is a tricky situation. Your commercial contracts may have been interrupted for a variety of reasons, such as:
- An immediate necessity to preserve cash or an inability to pay for a contracted product or service
- An inability to fulfil a contract, for example, due to supplier issues or the inability to safely work on-site
- Delays and missed deadlines due to circumstances beyond your control
In such uncertain times, it is essential for businesses to review their contractual rights and obligations and consider what steps you can take to protect your business.
Force majeure gained media traction from the moment Coronavirus became a serious threat. Force majeure is a clause often included in contracts that releases contracted parties from fulfilling their obligations upon the occurrence of certain events. A force majeure event is one that is completely unavoidable and unforeseeable. Usually, the clause will contain a non-exhaustive list of such events, such as war or natural disaster.
It is not definite that all force majeure clauses automatically cover pandemics. Therefore, there is a risk that you could face challenge if you try to escape a contract using force majeure. Ultimately, the exact wording of the clause will define whether Coronavirus constitutes a force majeure event.
Need advice about debt recovery and commercial contracts during the Coronavirus lockdown?
These are frightening and uncertain times for us all and keeping the business ticking over is all many of us can do at the moment. For expert advice about recovering debts, enforcing contracts, or escaping contractual obligations during the Coronavirus lockdown, contact our specialist corporate and commercial solicitors in Wells, Street and Somerton now.