Government measures to protect businesses – are you affected?

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In the current environment, a number of businesses are facing difficulties enforcing their debts or making funds available to satisfy payments that are falling due.

In normal circumstances, there are a number of methods available to businesses to put pressure on their debtors and for debtors, these can be difficult to deal with.

If you’re trying to enforce a debt or struggling to pay one, the government has introduced new legislation in the form of the Corporate Insolvency & Governance Act 2020 which may make it more difficult to recover a debt or give you some time to find the necessary funds depending on what side of the debt you find your business on.

Either way, it is useful to have an awareness of the current government guidance and the impact it may have on your business.

Statutory demands

A statutory demand is a formal demand for payment which if unsatisfied within 21 days, would give you the entitlement to apply to court for the winding up of your customer’s company.

At the time of writing, a creditor cannot petition for the winding up of a company on the basis of a statutory demand served during the period between 1 March 2020 and 30 September 2020.

There is no prohibition on serving a statutory demand during that period but it cannot be relied upon to support a winding up petition, which means a statutory demand is unlikely to have the same impact in encouraging payments as it would previously have done.

For debtors, this is good news in that it reduces the risk of a creditor being able to petition for the winding up of the business on the basis of an unsatisfied statutory demand.

Winding up petitions

In normal circumstances, if a debtor does not satisfy a debt once the statutory demand or shorter period for payment has expired, you could petition for the company to be wound up.

This is an extreme option and should not be used simply to enforce a debt. Ultimately, if a company is wound up, its assets will be divided amongst its creditors and the creditors will recover only part of the debt.

You should always exercise caution when considering petitioning for the winding up of a business but particularly during the period specified by the new Corporate Insolvency & Governance Act.

Until 30 September 2020 creditors are also prohibited from petitioning for the winding-up of a debtor company unless they reasonably believe that the company’s inability to pay its debts is not the result of coronavirus. A number of debtors will have been adversely impacted by the pandemic and proving that the reason the debtor cannot pay its debts is unrelated to COVID-19 will not be easy in most cases.

Court proceedings

It is still open to creditors in most cases to issue court proceedings in respect of an unpaid debt although consideration should always be given to whether the debtor is likely to be able to meet any court order.

Best course of action?

The appropriate course of action whether you are the debtor or creditor will depend on the circumstances – the ability of the party to repay, the contractual terms, the relationship between the parties and now, the limitations under the Act.

It is therefore sensible to take legal advice before embarking on a course of action as some of the above can have costs consequences if deployed inappropriately. And if you do have outstanding debts, it is important to start collecting these as soon as possible to give yourself the best chance of recovery.

Our dispute resolution team advise on contractual disputes including claims for unpaid sums and can provide you with advice and support. We also have an award winning debt recovery team, that can support you in pursuing debts, even during challenging times such as these.

Further information

Kelly Jordan, our head of Restructuring & Insolvency, has put together a series of plain English updates on this and other key features of the new act – a great way to get up to speed with the major changes. You can also access gov.uk for a host of factsheets on the legislation.

For more information or to discuss any issues facing your business please contact Alex Blenkinsop on 0191 211 7997 or email [email protected] for a free consultation.