Coronavirus: Debt Recovery, Insolvency and Cash Flow

It is no secret that businesses will now need to focus heavily on their cash flow and in doing so, consider debt recovery. In this time, it is clear that supply chains have been disrupted, there is an increased risk of customers facing financial difficulties and businesses need to find innovative ways to continue trading.

One way to improve cash flow is to reduce your businesses debt exposure, where possible. This can be done in two ways:

  1. Reduce risks in respect of future trading;
  2. Collect current debt where possible.

Businesses will need to review any work in progress that can be billed and converted into cash. Consideration will also need to be given as to whether they can continue to trade using their “standard” payment terms or whether, for example, they should amend their payment terms so to obtain full payment upfront or alternatively, agree a reduced period for payment. A review of the businesses customer contracts will be necessary to identify what steps need to be taken to permit this.

In relation to existing debts, the advice in a more stable climate is to take action swiftly – the older the debt, the more difficult it is generally to collect. As it stands, arguably, it is as likely that more recently raised invoices will be difficult to collect. Ultimately, it depends on who the customer is and how they have been impacted by the Coronavirus outbreak.

The key will be improving your internal credit control processes so to increase contact with your customers. This will allow you to understand your customers’ financial position, assess whether they are able to pay, ensure that you are on their account team’s radar and assess whether a payment plan should be agreed. Needless to say, where a payment plan is agreed, it should be carefully monitored and follow up calls made where there is a default.

Unfortunately, there are those that may use this period as an excuse not to pay their debts even though they are able to. Increasing contact during the credit control period will allow you to assess whether your customer is a genuine “can’t pay” or a “won’t pay”.

For “won’t pay” debtors, a business should do what it can to push the debt to the top of their customer’s list – e.g. serve a Letter Before Claim promptly in respect of the debt or issue court proceedings or a statutory demand. These steps may encourage the debtor to pay.  What if it doesn’t?…

Court proceedings can be issued as it stands and where Judgment is obtained, enforcement through High Court Enforcement Officers is still an option albeit using remote enforcement methods whilst lockdown ensues.

If your debtor is a company, it may be that issuing a winding up petition is the right option for you. This is an option where a customer is unable to pay its debts as and when they fall due. As it stands, whilst the court has adjourned the winding up list until June 2020 (meaning that a Winding up Order cannot be made before then), there are advantages to lodging a winding up petition now. Section 127 of the Insolvency Act 1986 states that any disposition of a company’s property, transfer of shares or, alteration of the status of the company’s members will be void if they were made after the issue of a winding up petition. Where a customer may look to transfer its assets to a new entity, pay its directors, shareholders, group companies or other debts before yours,  presenting a winding up petition would be sensible given the protection section 127 provides to creditors.

You would need to assess whether presenting a winding up petition will increase the financial return to you. This will need to be assessed on a case by case basis.

Woodfines Solicitors has a Debt Recovery and Insolvency team. If you have any concerns or queries regarding outstanding debts, please do not hesitate to contact us at detrecovery@woodfines.co.uk

Likewise, if you need advice regarding amending your customer contracts to reduce your exposure for future business, please contact our Commercial team at businesslaw@woodfines.co.uk

-Natasha Stroud