Commercial recoveries and enforcement: how the change in UK enforcement rules may affect you and your business this autumn
The relaxation in restrictions that currently prevent companies from being wound up by creditors for non-payment of a debt (in certain circumstances), under emergency COVID-19 legislation, comes to an end on 30 September 2021.
The temporary measures introduced by the Corporate Insolvency and Governance Act (CIGA 2020) in June 2020 were brought in to protect businesses from aggressive creditor enforcement during the COVID-19 pandemic.
During the CIGA moratorium, generally, creditors have been unable to petition for the winding up of a debtor company or progress winding up or administration proceedings.
What are the changes?
From 1 October 2021, creditors will be able to petition companies once again, typically used as a key method of debt recovery (to be used where debts are undisputed or not genuinely disputed).
New temporary measures are being brought in to assist businesses by giving them more time to trade their way back to a better financial position before creditors can proceed with a petition.
The new legislation will:
- Help to protect businesses from creditors seeking repayment of smaller debts by raising the current threshold for a winding up petition to £10,000 or more.
- Require creditors to seek proposals for payment from a debtor and give them 21 days for a response before proceeding with a winding up petition.
These measures are set to be in place until 31 March 2022.
How will the landscape now change?
Once the moratorium is lifted, we expect to see an influx of debt claims and/or compulsory winding up orders being issued against debtors in respect of non-payment of undisputed debts. Inevitably this will lead to an increased number of insolvent companies.
Ahead of the changes, creditors should be assessing how they intend to pursue debt going forward. They should look at where problems or potential problems with recoveries may be, assess their bad debts and business relationships and see where recoveries should be made, sooner rather than later. Debtors should be mindful of any exposure and take early advice to assess their options if they are going to struggle to pay. Winding up petitions should only be used in appropriate circumstances and where debts are undisputed or not genuinely disputed.
Inevitably, the expiry of the moratorium will open up further options to make recoveries. Interestingly, there has been a significant increased use in alternative dispute resolution (ADR) over the last 18 months where substantial recoveries have been made without formal intervention to achieve an early settlement. There is no reason why the significant step forward in creditors and debtors working more collaboratively and commercially to try and achieve a resolution and recovery, should not continue.
The important common theme, regardless of approach, is to ensure that creditors and debtors are aware of their respective positions and potential exposures. They should also take positive, commercial steps to reduce their exposure to losses and seek to resolve issues as soon as possible to reduce the risk of further loss.