Cash-flow and debt recovery during the Covid-19 pandemic

As we continue to follow the Government’s lockdown measures, the majority of companies, partnerships and sole-traders alike, will undoubtedly face new and unique challenges. One challenge (and perhaps the most essential) will be the sudden shortage of cash-flow arising from unpaid invoices.

In the following Q&A’s we look firstly at how to minimise potential cash-flow shortages and secondly, what to do when your credit control procedures are exhausted.

Q1. How do I reduce the risk of cash-flow shortages?

Your clients and customers will likely be encountering their own financial difficulties and it is therefore vital to keep lines of communication open. The following measures are also strongly encouraged:

• where possible, ask customers to provide payment in advance or a sum on account of full payment;
• reduce your credit terms for receiving payment;
• review credit limits offered to clients and customers;
• provide regular updated statements of account; and
• send frequent payment reminders for overdue invoices.

If you find that an invoice is not paid, then it is crucial you act quickly. There are a number of possible options open to you. You may wish to try and agree a revised payment date or payment plan with your customer and to resolve any dispute. Alternatively you may decide to threaten immediate legal action. If no agreement is reached, or any revised payment date or plan is not honoured, then you should inform the customer of your intention to pursue formal legal action and set a clear deadline for when the matter will escalate if payment is not received.

Q2. What is the first step?

The first step in debt recovery is to send a ‘Letter Before Action’ or ‘LBA’. LBA’s should comply with the ’Pre-action Protocol’ set out in the Civil Procedure Rules. An LBA should provide information on how the debt arose and the implications for not responding. Once the LBA is sent, the minimum deadlines for payment are 30 days for an individual or 14 days for a company, corporate debtor or partnership.

If you wish to seek interest on the debt (whether under any contract or statute) this should be clearly stated in the LBA, along with any claim for costs. If a contract does not include specific provision for interest on late payment, under the Late Payment of Commercial Debts (Interest) Act 1998 (as amended) you can claim compensation charges at rates between £40 – £100 per invoice on commercial debts, interest at a rate of 8.75% on any unpaid sums and where the reasonable costs of recovering the debt exceed the compensation rates of £40-£100, you can claim the reasonable costs of recovering the debt.

Q3. If the debtor does not reply to the LBA, can I still proceed with a claim during lockdown?

Yes. Creditors are still able to issue a claim via The County Court Money Claims Centre (CCMCC) or Money Claims Online. According to the CCMCC’s latest performance timetable, the turnaround for processing a claim is 17 working days.

Once a claim is issued and served, the debtor will have 14 days to acknowledge the claim or file a defence (extending to 28 days from service of the claim if the debtor acknowledges service of the claim form within 14 days but does not file a defence). If the debtor does not reply, or no defence is filed, then you will be entitled to request Judgment. If a defence is filed then the case will be transferred to a local court which will give directions on the steps to be taken leading up to a final hearing. Only essential hearings are currently being conducted, although increasingly the Courts are willing to hear cases via video link such as Skype, Teams and Zoom.

Q4. What happens if the debtor does not pay the Judgment sum?

If a judgment debt is unpaid then the following methods of enforcement action can be considered, subject to the debtor’s financial status and assets:

• Orders to obtain information on the debtor’s financial means;
• Warrant of control of the debtor’s possessions (Bailiffs);
• High Court Enforcement Agent (court appointed Bailiffs);
• Third Party Debt Order (meaning a third party, such as a bank holding funds belonging to the debtor is required to pay those funds directly to the creditor);
• Attachment of Earnings Order (meaning the employer of the debtor is required to pay part of the debtor’s salary directly to the creditor);
• Charging Order against the debtor’s assets, placing a charge over the debtor’s property or shares;
• Freezing Injunctions (freezing the assets of the individual/company including bank accounts); and
• Bankruptcy or Winding Up Petitions

According to the latest operational bulletin from the CCMCC, there is no directive to stop processing enforcement applications. However, in-person attendances from bailiffs are currently suspended, although they are continuing to accept instructions and undertake preliminary work, such as sending letters and making phone calls to debtors warning of enforcement action.

Q5. Are there any Alternatives to Court Proceedings?

Yes. A statutory demand is a precursor to commencing insolvency proceedings against both companies and individuals and is often viewed as an alternative to pursuing debtors through civil litigation. Statutory demands can be served on a company or corporate debtor where an undisputed debt exceeds £750 and on an individual where the debt exceeds £5,000. Following service of a statutory demand if an undisputed sum is not paid within 21 days, a debtor will be insolvent by virtue of the Insolvency Act 1986.

A creditor will then be free to serve either a bankruptcy petition (for an individual) or a winding-up petition (in the case of a company or corporate debtor). The Government announced that it will suspend the use of statutory demands and winding up petitions for commercial tenants who cannot pay their rent as a direct result of the coronavirus pandemic until 30 June 2020. It is widely anticipated this will apply to all corporate debts and not just solely to commercial tenants who cannot pay their rent as a result of the coronavirus pandemic. Winding up petitions can still proceed against companies and corporate debtors that are unable to pay debts for reasons other than the coronavirus pandemic but any petition will first be reviewed by the Court before being issued to check that this is the case.

Conclusion

By any measure we are living in extraordinary times in which many individuals and business will find themselves under extreme financial pressure. Communication is key, but if payment is not received it is essential that swift action is taken to ensure unpaid debts are paid or secured and to protect your own business.