The first rule of business is to stay in business. The key to staying in business is to have enough money in your pocket to pay for things when you need to. Simple. But what do you do when you aren’t getting paid?

As ever prevention rather than cure is best, by ensuring ,among other things, that your credit control includes clear policies, robust paperwork, correct invoice stationery including the stated credit terms etc (see our earlier detailed guide) this all helps you to get paid in full and on time and is the key to keeping afloat, but that can be easier said than done at the best of times. 

As we all know, these are not the best of times with many businesses facing difficulties. When that happens en masse, and there are major breakdowns in cash flowing along the supply chain, the knock-on effect can have disastrous consequences for businesses that don’t have financial buffers. 

So far we have not seen this come to pass but as various temporary supports come to an end in an ever changing landscape, the slowdown of cash flowing through the system is a strong possibility.

In this blog, we want to focus on the next stage of credit control, when you have to move into debt recovery either instructing third party providers or undertaking the role yourself, and how your business can increase the chance of getting paid – even when there are legal barriers to recovering debt.

The Government is protecting debtors

The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020. Measures introduced by the Act were intended to relieve the burden of debt during the COVID-19 crisis, allowing businesses to focus their efforts on continuing operations and avoiding insolvency.

The Act offers protection for debtors who are facing a financial crisis as a result of adverse trading conditions throughout the pandemic. Good news for those already in financial crisis, enabling them to hang onto funds a little longer. Bad news for those who are providing goods and services on a credit basis who may wish to employ more aggressive action to recover debt(perhaps when agreed payment plans fail), or exercise termination rights within supply contracts.

The scope of the reforms

The Act has introduced reforms to insolvency legislation, which are intended to be both temporary (as a specific response to the global coronavirus pandemic) and permanent.

The permanent reforms involve the following changes:

● Termination clauses in supplier contracts will cease to apply on insolvency.

● A company will be able to benefit from a moratorium from creditor action without entering into administration.

● A new restructuring procedure will be introduced.

The temporary COVID-19 reforms included:

● Restrictions on the use of statutory demands and winding-up petitions.

● Relaxation to the rules under which businesses can apply for a moratorium until March 2021.

● Suspension of liability for wrongful trading.

The Act prevents suppliers holding the threat of termination over a company to agree to contractual terms more favourable to the supplier, but these new provisions only apply to contracts for the supply of goods and services and the Act makes clear thatthese do not extend to loan or invoice finance agreements, both specifically referenced as exclusions.

With the use of winding up petitions under restriction, and debtors protected under relaxed rules in obtaining moratoriums which authorise delay or withdrawal of payment, what exactly does this mean for businesses who aren’t being paid?

Creditors must also be protected, or face their own financial consequences

These reforms have the potential to impact businesses and individuals who may now struggle to get paid by debtors who have been affected by COVID-19. The reasons why debtors can’t or won’t pay really do little to mitigate the impact of not getting paid. The risk is that financial difficulties will spread through the supply chain, much like a virus.

What action can still be taken?

It is still possible, and advisable when required, to send out standard Letters Before Action and even LBAs that threaten the use of winding up petitions, though these must have adaptations that reflect the specificities of the Act.

It is also still possible to serve statutory demands, though the effectiveness of these is limited if the debtor is savvy and aware of the implications of the new Act.

The issuing of County Court and High Court claims is still happening and the Act does not prevent this nor the enforcement action that becomes available as a result of securing a judgement. So this would be probably the best route to explore, even if it’s with an understanding that it might not yield immediate results.

The best plan of action if a credit arrangement has become untenable would be to proceed with obtaining judgements then sit on them until things go back to normal. Or as normal as it’s going to get. You could then proceed as before (e.g. with a winding-up petition). At least with a judgment in your back pocket, you will be ahead of other creditors who might not have taken any action in this interim period. You should, theoretically, be relatively at the front of the queue.

As for issuing a winding-up petition against a debtor who you believe cannot pay, it’s still possible though there are new considerations to be made at this time. Legal, ethical, financial and even with potential implications for your business’ reputation.

Previously, any shame associated with a winding-up petition or other aggressive debt recovery action would have been felt solely by the debtor. But these are not normal circumstances. The impact of 2020 has been felt in virtually every industry, and many small businesses have suffered greatly. Aggressive debt recovery action at this time could be perceived as insensitive by customers and competitors alike. Even the judge handling a petition could decide that the timing is inappropriate, lumbering you with the costs of the action you’ve started.

Think through your options carefully. As always in credit management and debt recovery, communication is the most important aspect of managing problems. Keep in regular contact with your debtors, encourage and reward transparency and openness from both sides, and approach money matters with empathy and humanity at the heart of your decisions. Balance is crucial and your decisions could literally mean business failure or business survival to people who were once your customers and allies. Another prevailing theme of 2020, #BeKind, certainly springs to mind – though of course not to the detriment of your own business’ survival prospects.

Looking to the future

2020 has been a tough one. It’s likely you are aware of COVID casualties, either medical or financial ones and as we try to get on with life as much as possible, difficult decisions have to be made, but perhaps with new perspectives and a layer of empathy and understanding. 

The Government have done huge amounts this year to protect small businesses as much as possible, and we should bear the intentions in mind when making decisions on recovering debt. Though when compassion is not a luxury your business can afford, it’s good to know that some action is still available while we wait for conditions to improve.

As we approach the New Year, we are cautiously optimistic about the future. New hope in the form of various vaccinesbodes well for the future, but we must not forget that though it has been dwarfed by the pandemic and financial crisis, Brexitstill looms and its impact as yet unknown. It may not be time to celebrate just yet, but I think this New Year’s eve we can quietly chink our champagne flutes as we say goodbye to 2020 and welcome 2021. We wish you all a very Merry Christmas and a happy, healthy, safe and prosperous New Year.