Coronavirus: keep calm and carry on collecting debts

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“Cash is king” – a mantra repeated often but not in recent times has it been so critical to businesses globally on a wholesale basis. In the ordinary course a business considers cash for purchases and acquisitions but right now it is short term operations which is key.

Fundamentally, a healthy business depends on good debts being collectible (and quickly). There are a number of questions that a client will face if a debt is not paid. Why isn’t it being paid? Is the customer in trouble? Are they just pre-occupied with the crisis? How do we make ourselves the priority for being paid?

So how do we navigate this minefield?

There are a multitude of options available but in this time of crisis acting quickly will inevitably be key to the client knowing where they stand. Clients will need to know whether the debt is disputed. If it is not, and the client is simply being ignored, then threatening a winding up/bankruptcy petition (or taking steps to take that route) will be a real possibility. There may be wider reputational/ongoing relationship issues to consider - and there can be serious consequences for taking such action - so that is not a one-size-fits all approach.

If the debt is genuinely disputed then time will not be on the client’s side – it is unlikely to be resolved quickly without negotiation but there could be mutual benefits for dealing with it now rather than later. In that instance the question will be how to bring the debtor to the table and - whilst it would not be a quick process – there are ways to do that. Otherwise issuing proceedings without further delay may be the way forward. The value of the claim and the costs of bringing it will need to be assessed to see whether it is worth investing the time and money or whether it is a question of cutting losses and moving on. If proceedings are necessary the client is looking at a 18 month to 2 year time period to conclusion of trial which may be unacceptable – this may be delayed further if the Court’s begin to close. We are familiar with these commercial and practical judgments – it is not just the legal position which is important.
In either instance is there a risk that the directors can see that trouble is ahead and are wrongfully dissipating assets (potentially moving them into their own connected companies or into their spouses names)? If the client has an valid underlying claim, such as an unpaid debt, and they need to urgently protect the debtor’s assets then they will need to consider obtaining a freezing injunction. This is obviously a serious step and action which should not be taken likely. It will, however, be appropriate in certain circumstances and should not be overlooked. An order may be obtained urgently to protect the status quo and potentially to bring the debtor to the negotiating table. The underlying claim would still (usually) need take its ordinary course but it would protect the assets in the meantime.

Is the debtor in trouble?

When a debt remains unpaid it is usually market rumours or ad hoc comments from debtor’s employees that give a first real sniff of distress but how can you check? The accounts online at Companies House - whilst usually helpful - will often be out of date and will anyway not reflect the day-to-day position. If the rumour is that a debtor “has gone bust” there are checks that can be made in relation to certain insolvency processes but not all. Sometimes it is cheaper and quicker just to ask. If the debtor is involved in a process, whether voluntary or not, a creditor will have steps to take to protect their interests. For example, if a winding up petition has been issued then supporting the petition may create leverage (to get paid as a priority) in the right case. In other cases it may tie the debtor’s hands or cause an irretrievable rift so that no payment can be made. Each case turns on its facts. It is not always appropriate to use a sledgehammer to crack a nut.

Who are the other creditors? Do they have much bigger claims? Are they controlling the position now? What buttons can be pressed? All questions that will need to be answered to formulate the right approach.

What’s my leverage?

Aswell as some legal tools in the bag there will usually be commercial levers. If the client’s supply is critical to a production line or for onwards sales then deals in relation to past debt and future deliveries will be up for grabs. In construction there are processes and options – for which see our inciteful thought pieces which also deal with various contractual implications.

Can I just get my goods back?

What are the client’s trading terms? Did they include a retention of title clause? To the extent that a retention of title clause is enforceable then those rights will survive any insolvency – the client will need to show a paper trail and be able to identify the specific goods that they have supplied. Sometimes this is of little protection if the goods can’t be identified but if the debtor goes into insolvency then the client needs to notify any liquidator or administrator of their claim without delay. If the goods cant be recovered then the client will be an unsecured creditor and be paid usually pence in the pound – there is no specific time limit for then that will be.

What if i already have a judgment against the debtor?

Consider enforcement options immediately – before other creditors get to the assets. This could include anything from obtaining a third party debt order, charging order or getting the bailiffs in. The suitability of the approach will really depend on what are the debtor’s circumstances. Do they hold land/property/kit in their own name? Are they owed money from a third party who would be good for it? We are largely in the hands of the Court in processing the papers once a route has been chosen but some orders can be obtained on the papers – rather than having to go to Court.

What's the key takeaway?

Act quickly – it could save a client time and money in the long run or at least let them assess what a range of outcomes could be sooner rather than later.

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