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What now for creditors?

By CreditMan Monday, June 29, 2020

In the current climate the courts are seeking to protect businesses with Covid-19 related debts from being pursued for payment by their creditors. However, cash flow is also vital during this difficult time and recovering historic debt is one of the best ways of easing cash flow. So, what steps can creditors take to recover their commercial debts?

The Corporate Insolvency and Governance Bill:

The Corporate Insolvency and Governance Bill (”the Bill”) was published on 20 May 2020 as a result of the Covid-19 pandemic with the aim of giving companies breathing space, the ability to keep trading and explore options for rescue. The Bill includes a temporary prohibition on winding-up petitions meaning a creditor may not present a winding-up petition on or after 27 April 2020 on the basis of a statutory demand served between 1 March 2020 and the date one month after the provision came into force unless the petitioning creditor has reasonable grounds for believing that:

  • Covid-19 has not had a financial effect on the company, or
  • The ground of the winding-up petition would have arisen even if Covid-19 had not had a financial effect on the company.

What does this mean?

Creditors can continue to use the threat of a winding up petition, either by way of a notice to present a winding-up petition or a statutory demand, albeit creditors should proceed with caution. The prohibition imposed by the Bill means that a statutory demand will not carry the same weight as before. If payment is not made following service of a statutory demand that will leave creditors in a position of having to re-serve a further statutory demand once the prohibition has been lifted. The court’s interpretation of the Bill is slowly being felt with it recently being held that the evidential burden of showing that Covid-19 has affected the debtor was on the debtor, albeit the bar is relatively low. Conversely, if a creditor wants to rely on an exception to the rule, namely that the debtor would be insolvent notwithstanding the impact of Covid-19, then the evidential burden is on the creditor. Unfortunately for creditors, savvy debtors are likely to use this to their own advantage.

Concluding thoughts:

The ever-shifting legal landscape must react quicker than ever to this pandemic and related Government policy, because these sudden changes have sown confusion and uncertainty. Understandably, many creditors will be reluctant to present a debt-based winding up petition especially in circumstances where it is evident the debt has recently occurred as many businesses will be able to provide a “substantial body” of evidence to show the impact of Covid-19 on their finances.

Having said that, it’s pretty much business as usual issuing money claims in the county court, where things are more certain. Businesses should therefore start recovering their debts by issuing letters of claim – effective tools in helping settle debts or agree payment plans – which will improve cash flow. And even if they have no appetite for court proceedings at present, they can move quickly to issue proceedings later if they send a letter of claim now.

Businesses really should not think twice about acting to recover their debts, especially when the debts are evidently not caused by Covid-19. For advice or help on debt-recovery in general or during the current crisis, please contact Peter Worrall Associate Solicitor, Moore Barlow LLP.