Covid-19 guidance for creditors: How to cure cashflow crisis
Many individuals and businesses have experienced unprecedented challenges due to the restrictions imposed by the UK government in response to Covid-19. Significant reductions in income and, in some cases, temporary suspensions of trading have led to cashflow crises. Thanks to the government’s recent easing of restrictions, businesses in the hospitality, entertainment and holiday accommodation sectors have been able to re-open in accordance with the government’s safety guidelines. Cashflow will be key to survival and many creditors will be looking to secure payment of outstanding debts as quickly and cost effectively as possible. In light of the recent changes brought about by the Corporate Insolvency and Governance Act 2020 (“the CIG Act”), creditors need to proceed carefully. This article sets out a stepped approach to assist creditors when considering their options.
Step 1: Identify the status of the debts owed to you
The starting point is to identify whether the debts owed to you are disputed or undisputed. If you know that a particular debt is disputed by the debtor, serving a statutory demand or presenting a bankruptcy or winding up petition based on a disputed debt would amount to an abuse of process and you could be hit by an indemnity costs order for the other side’s costs. In those circumstances, you should consider suing the debtor for recovery of the debt.
You also need to consider whether the debt is liquidated (for a fixed sum) or unliquidated (either because the amount can be assessed or is disputed) as this may affect how you should proceed.
Step 2: Consider nature of debtor and size of debt
If the debtor is an individual who owes you at least £5,000, you can serve a statutory demand on the debtor requesting payment of the debt within three weeks. If the debtor fails to pay the debt and fails to apply to set your statutory demand aside within three weeks, you can present a petition for the debtor’s bankruptcy.
If the debtor is an individual who owes less than £5,000, the statutory demand / bankruptcy petition route is not an option and you should consider suing the debtor for recovery of the debt.
If the debtor is a company and the company owes you at least £750, your options have now changed as a result of the CIG Act and are discussed below.
Step 3: Consider whether debts are unpaid due to Covid-19
In usual circumstances, a creditor can petition to wind up a company based on the grounds permitted in the Insolvency Act 1986. One of the grounds is that the creditor has served a statutory demand on a company for payment of a debt of at least £750 and the debt has not been repaid within three weeks. Another of the grounds is that the company is unable to pay its debts.
The CIG Act came into force on 26 June 2020 and introduced (amongst other things) temporary changes to the grounds for winding up a company to help companies survive the difficult trading conditions caused by Covid-19. Under the CIG Act, between 1 March 2020 and 30 September 2020, a creditor cannot serve a statutory demand on a company threatening to wind up a company if it fails to pay a debt. Any statutory demands served during this period will be void. In addition, between 1 March 2020 and 30 September, a creditor cannot present a winding up petition against a company on the basis that the company is unable to pay its debts unless the creditor has reasonable grounds to believe that the company’s inability to pay its debts is not due to Covid-19. Without reasonable grounds that can be supported by evidence, a creditor should consider suing the debtor for recovery of the debt.
Until at least 30 September 2020, the options available to creditors are more limited. Until that date, a creditor cannot petition to wind up a company based on a statutory demand. Further, until that date, a creditor cannot petition to wind up a company on the basis that the company is unable to pay its debts unless the creditor reasonably believes that Covid-19 is not the cause of the company’s inability to pay.
Creditors should carefully consider whether or not the debt has arisen due to Covid-19. Ultimately, the merits of pursuing a winding up petition on that basis that the company cannot pay its debts for reasons unrelated to Covid-19 will depend on the facts of each case.
Creditors also need to bear in mind that disputed debts cannot be pursued using the demand / petition route as that would amount to an abuse of process and could result in a sizeable indemnity costs order against you. That said, it is always worth considering if any part of a debt is undisputed, notwithstanding that the balance may be disputed, as you might be able to take separate action for the different parts.
Given the current circumstances, your best option may be to send a pre-action letter to the debtor threatening to issue proceedings in the event that the debt is not paid within a reasonable time period. The threat of proceedings in and of itself may prompt the debtor into action and you may be able to agree a way forward without needing to spend time and money on issuing proceedings.
Given that at any time – let alone in an economic crisis resulting from a pandemic – there is often a queue of creditors, now more than ever creditors faced with a cashflow crisis need to take swift and decisive action.
We are offering a free ten minute consultation without any obligation, so you are free to discuss your prospects for getting your debt in, on a confidential basis with us.
Click here for a briefing from our Corporate team on the Corporate Insolvency and Governance Act.
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.