Can I recover debts from other businesses also affected by the coronavirus crisis?

We are posting a series of articles providing practical answers to questions raised recently with us. One such question is whether you can and should recover debts from other businesses also affected by the coronavirus crisis. The answer is generally yes and we explain why it is important to be proactive in reviewing your debtor position if you want to protect your own business.

Many businesses have seen incomes fall significantly and quickly during the coronavirus lockdown. Cash flow is the life blood of most businesses and while this is in short supply many may struggle to repay debts. However, your business also faces the same current difficulties as any debtors you may have and it is important that your business takes the necessary steps to protect its interests now so that it can successfully trade in the future.

There are two important reasons to be proactive on debt. Firstly, business needs good cash flow to meet its outgoings, including, wages, suppliers, and rent and, secondly, delay in pursuing recovery of debt may see your business pushed to the back of the queue behind more proactive creditors.

A debtor may also run out of money by the time it gets around to a creditor which has delayed. Even worse for your business, delay may see the debt falling into a pool of unsecured creditors claiming in the insolvency of the debtor if that debtor goes out of business further down the line.

Unsecured creditors follow after secured and preferential creditors in the payment hierarchy which means they are the last to get paid. They do not have the benefit of claims over company assets, and this means they often receive much smaller amounts compared to preferential and secured creditors.

As a creditor business you may also be able to draw on the provisions of the Late Payment of Commercial Debts (Interest) Act 1998 (as amended) which implies terms into business-to-business contracts, providing for an entitlement to recover in addition to the principal debt 8% a year interest (above base rate – simple interest), plus a fixed compensation sum for each unpaid invoice and entitlement to recover from the debtor your reasonable costs of recovering the debt if those costs exceed the compensation sums.  Please see our blog on the subject of Late Payment of Commercial Debts. 

The courts are still operating but have had to adapt to the coronavirus by taking such steps as video and telephone hearings but they still provide an avenue for redress if a debtor resists payment. The threat of instituting legal proceedings against a debtor can encourage payment because of the risk to the debtor of an increased liability for costs, and interest.

At the same time, the civil justice system also provides an avenue, if successful, for the creditor to engage various enforcements options which includes but is not limited to seeking a charging order which would provide the creditor with security for the debt. A charging order is an order obtained from a court by which the property of the judgment debtor is charged with the debt, and depending on the facts, sometimes with interest and costs.

However, each case needs to be considered on the facts. The harsh reality is if your debtor’s business is in such a precarious financial situation that your pursuing them will simply result in their collapse, and likely insolvency, then there is little point in you ‘throwing good money after bad’. It is therefore a case of judging which debtors are ‘holding back’ for their own cash flow benefit, as opposed to those who simply are unable to pay.

These are uncertain times however we continue to advise and represent our clients and we are happy to listen to your enquiries regarding debt recovery matters and any other business related concerns you may have to see whether we can help.  Please contact Harrowells Litigation and Dispute Resolution Team to find out how we can help you protect your business.