The pandemic and associated lockdown has significantly disrupted businesses across the UK and around the world, pushing otherwise profitable companies into temporary financial distress.
Despite the government's various stimulus measures aimed at mitigating economic disruption, many businesses will struggle to preserve liquidity and continue to endure substantial losses.
How long the pandemic and its economic effects will last is unclear, and with much uncertainty ahead, maximising debt collection will be many businesses' priority to secure their interest - but also as a source of a much-needed cash flow.
What should creditors do?
Nothing, to avoid bad press?
It is easy to assume that seeking to recover debts will cause reputational damage to a creditor's business, especially during lockdown when many of their debtors are under significant financial pressure.
While the issue is sensitive, most debtors are willing to work constructively with their creditors to reach amicable solutions and avoid legal action.
However, others will be seeking to obtain as much financial assistance as possible to pay off preferential debts and close the business, so it is sensible to ascertain a debtor’s priorities before deciding on a course of action.
When evaluating the financial situation of existing and potential debtors, using credit checks involving accounts filed at Companies House can be useful, as can assessments of past track records.
Open and maintain an ongoing dialogue with debtors?
Communication is key and working together will help parties find potential solutions that enable business continuity for both sides in the future.
Creditors should try to avoid alarming debtors when contacting them, as this risks a breakdown in communication. They should also make sure to have up-to-date contact details – e.g. email addresses and telephone numbers for their debtors – to ensure efforts to communicate information do not go awry.
Communication will also enable creditors to assess which debtors are genuinely facing financial distress and those who may simply be refusing to pay.
Agree payment arrangements?
If appropriate, creditors can look to agree payment arrangements with debtors.
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This should be closely monitored, however, as circumstances may change, and a different approach might be more beneficial for both sides if the arrangement no longer reflects a debtor’s ability to pay.
Seek legal advice?
If there are any concerns about the debtor's ability to repay, obtaining professional advice early reduces the risk of expensive and time-consuming litigation in the future.
Many creditors hesitate to engage lawyers because they worry about the cost, however most lawyers will offer a free initial consultation, plus bespoke fee arrangements that will ultimately save both the creditor and debtor time and money in the long-run.
Where the debtor's insolvency risk is high and collection actions are delayed, recovery of any outstanding debts becomes impossible.
However, commencing legal proceedings gives creditors the opportunity to obtain forms of security, which could significantly increase chances of recovery if debtors are deemed insolvent in the future.
The courts also remain open for business, despite the lockdown, and are dealing with claims in the normal fashion – virtually, in some cases, or via socially distanced in-person methods where necessary.
If a creditor obtains a County Court or High Court Judgment, there are various methods of enforcement available. Enforcement officers are still seeking to collect (while adhering to government guidance on infection control), and parties can still make applications for charging orders, and other third party orders.
Finally, parties can also make use of the insolvency process where appropriate, as normal.
Outlook for debt collection as the lockdown lifts
The government is showing much sympathy and support for struggling businesses, and it is right that creditors should respect government guidance to try to come to pragmatic solutions with debtors.
However, many creditors will have their own cash flow issues resulting from the lockdown, and the government has also intimated that parties should try to meet their contractual obligations to keep payments flowing through the supply chain.
Hopefully, the difficult financial situation caused by the lockdown will soon start to be alleviated as the UK starts to return to work but, in the meantime, knowing what practical options are available and applying the right debt recovery methods at the right time is more important than ever.