CIGA 2020: Understanding your options when it comes to recovering debt

Dealing with late payment is something the vast majority of business owners will have to deal with at some point. Delinquent payers cost companies millions of pounds every year, causing frustration and unnecessary work, as well as leading to serious cash flow problems, and in some cases forcing the creditor to fall behind on its own liabilities.

It is important not to let another company’s financial problems cause your company to suffer the same fate.

The longer a debt goes unpaid, the more unlikely it is to be collected in full, if at all. If you have a creditor who is failing to pay you what they owe, communication is key. If matters can be resolved without having to resort to legal proceedings this is often the most preferable – not to mention cost-effective – solution for all involved. However, in some cases, persistent non-payment of debt requires more assertive action, and there are a range of formal processes a creditor can take to enforce payment.

• Statutory Demand

A statutory demand is a formal request for payment from a creditor. It represents one of the most serious steps a creditor can take, and typically follows a lengthy yet unsuccessful attempt on the creditor’s behalf to recover the money owed.

For personal debt, a debtor must owe at least £5,000 before a statutory demand can be issued; however, for companies this it is just £750. Once presented, a debtor then has two main options: either pay the amount owed within 21 days, or else dispute the debt should they believe there is a valid reason to do so. This must be done within 18 days.

Fail to do this, and creditors can use this as evidence that the company is insolvent and petition the court to present a winding up petition under the Insolvency Act 1986.

• Winding Up Petition and Compulsory Liquidation

If the debt remains unpaid following the statutory demand, a creditor can petition the courts to have the company forcibly liquidated and this is done by issuing of a winding up petition. Once a company is presented with a winding up petition, swift action must be taken to prevent the company being wound up. The winding up petition will be advertised in The Gazette, company bank accounts will be frozen, and the debtor has a very short time during which to stop the company being liquidated.

Corporate Insolvency and Governance Act 2020 (CIGA) and Covid-19

Many companies have been kept afloat during the pandemic, thanks in part to the range of measures introduced by the government, such as state-backed loans, tax deferral schemes, and the ability to furlough staff. These schemes have been so successful that corporate insolvencies are actually lower than they were prior to the pandemic.

However, this does not tell the whole story. The Corporate Insolvency and Governance Act 2020 led to temporary restrictions on corporate winding up proceedings being taken forward on statutory demands issued between March and September 2020, which resulted in a sharp decline in the number of companies entering compulsory liquidation.

The temporary provisions are set to end on 31 March 2021, although this date has already been extended from the original 31 December 2020.

Can I issue a statutory demand or winding up petition before 31 March 2021?

In some instances, you may be able to initiate – or continue – winding up again against a debtor even with the CIGA legislation in play; however, you are only able to do this if you have reasonable grounds to believe that:

• Coronavirus has not had a financial effect on the debtor, or
• The debtor would have been unable to pay its debts even if coronavirus had had a financial effect on the debtor. 

There is no criterion given for the extent of ‘financial effect’ the Covid pandemic may have had, or not have had, on a debtor. Before pursuing winding up action in the current climate, you should take steps to ensure you have a legitimate reason to believe the debtor has not been financially or operationally affected by coronavirus. Remember that issuing a winding up petition comes with a significant cost attached, a cost which must be met by the petitioner whether the petition ultimately ends up being successful or not.

If you are keen to pursue winding up action at this time, here are some things you can consider to determine whether you have a chance of passing the ‘coronavirus test’.

• While many businesses have suffered during the coronavirus pandemic, not all have. While no sector has been fully immune to the disruption, some businesses have managed to capitalise on changing customer needs and preferences during this time, as well as the closure of rival businesses improving their market share. If you believe your debtor’s financial position may have improved, or remained consistent, you may be able to commence winding up action for non-payment of debt.
• Consider how long the debt has been outstanding and what reasons were given for non-payment at the time. If the debt is relatively new, you may have a hard time proving that coronavirus has not had an impact on the debtor’s ability to repay. However, if collection efforts to recover the money owed preceded the pandemic, and you have proof of their reluctance to settle the debt before lockdown restrictions were imposed, you will considerably improve your chances of being able to petition the courts.

If you have doubts over whether winding up action is possible while CIGA provisions remain, you can still take active steps to enhance the chances of recovering what you are owed. Remaining in regular communication with your debtor is paramount. This is beneficial on two levels: not only does it allow you to understand the financial difficulties they are facing – allowing you to manage your expectations and perhaps come to a mutually agreeable repayment plan when their situation improves – but it also shows your debtor that you haven’t forgotten about the debt and that you are resolute in your desire to collect the money owed.