Business adjustments and considerations in times of financial concern or distress
As this is a fast moving topic, please note that this information is current as at 08/07/20. For further information, please contact Andrew Davidson.
This article was co-authored by Rebecca Boothby, Trainee Solicitor.
I am owed money but I’m not sure I want to enter proceedings right now. Could the threat of proceedings be enough without having to actually start (and fund) them?
Often going in hard will work, using a solicitor’s letter usually. Before taking any action, however, consider what wider impact and consequences that action may have on your business and relationship with the debtor. Be wary of threatening your debtor with debt recovery proceedings unless you are willing to follow through with the threat, as this could seriously damage your bargaining position in the event that they call your bluff and you do not actually want (or cannot afford) to proceed. Consider when to make that threat - immediately or use other approaches first. Consider the costs of bringing proceedings as against the sum sought and the inherent risks, as, if you lose the proceedings you will be liable to pay your opponent’s costs.
But what if I know the opponent has no cash and I do not want to be drawn into protracted proceedings?
If your debtor really has nothing, walking away is really the only option. If it is a matter of extracting the money owed from assets, one option is insolvency proceedings. Insolvency proceedings are not intended to be used as a debt recovery vehicle, but the threat of insolvency proceedings alone might be enough to get the debt settled. To be clear, this is a nuclear option, with little to no chance of maintaining or rebuilding a commercial relationship. We would still recommend that you are wary of making threats that you are unable to follow through.
What happens if I follow through with a debt claim but the opponent just ignores it?
When a claim is made it can either be admitted (and therefore paid), defended (either on the basis that the debt is not owed, or that it has already been paid in whole or part), or ignored. When an issued claim is ignored, you can apply to the court for a judgment in default. If you are successful, you can then think about enforcement of the judgment debt.
How do I decide how to deal with the debt that is owed to me?
This entirely depends on your commercial priorities. If you want to chase the debt as a matter of principle, or to send a message, and are willing to make the financial commitment to do this, then you can threaten proceedings (knowing that if it comes to it you will follow it through). Consider the “arguable” defence that may be raised to prolong proceedings and increase the expense. If you want to maintain a business relationship with the opponent once the issue is resolved, it would be better to negotiate and try reach a settlement agreement, if possible, before issuing a formal claim. Ultimately, if none the approaches work, you may even consider writing off the sum as a bad debt. The business relationship may seem to be preserved, but you may be storing up problems in relation to future work.
How much will court proceedings cost me?
For claims of £10,000 or less, the small claims court allows parties to pursue their claims without the risk of paying the opponent’s legal costs other than fixed commencement and hearing costs, as they are not recoverable and the parties are encouraged therefore not to use solicitors. Otherwise, the cost depends mainly on how long the claim is contested. If neither party backs down, you could proceed all the way to trial. Funding this can be costly and often involves not just solicitors but barristers too. Clearly, where a relatively small amount is claimed, it can become cost prohibitive. To avoid this becoming the case, throughout proceedings parties are encouraged to try to settle the debt. Compromise in the face of all the various factors pertaining to a dispute, notably costs, is often the commercially sensible option. If you are entering into settlement discussions, always ensure that communications with your opponents (either written or oral) are stated as being “Without Prejudice” or “Without Prejudice Save as to Costs”, so that the later proceedings are not prejudiced by these negotiations.
What costs would I be able to get back if I proceed to trial and win, or else get judgment in default?
The amount will vary, firstly, depending on the amount you’re seeking to recover. For claims under £10,000.00 proceeding in the small claims track, your costs would be limited to those fixed commencement and hearing costs. There are limits on cost recovery for claims proceeding on the fast track, i.e. claims with a value of £10,000.01 to £25,000 and for larger claims or more complex claims you should work on an anticipated recovery of about 70%. Please note the court has discretion in this regard and will take into account the parties’ approach in the proceedings, offers, refusals to mediate, and issues/claims on which you were unsuccessful. Also, remember to factor in the potential costs of enforcement in the event that you get judgment, as now more than ever judgment debtors will be reluctant to pay.
Can I still enforce a debt now, during the pandemic?
There are usually multiple methods of enforcing a debt. Recently, the Coronavirus Act 2020 (the Act) has been introduced to help struggling businesses under threat of debt demands and therefore, enforcement options are currently more limited. Statutory demands might be the first port of call when chasing a debt, but the Act has introduced a blanket ban on the service of statutory demands as a precursor to winding-up petitions between 1 March 2020 and 30 September 2020. This deadline may also be extended further. You also cannot commence winding up proceedings based on the company's inability to pay its debts unless you have reasonable grounds for believing that COVID-19 has not had a financial effect on the company or the debt issues would have arisen anyway. It is therefore important to consider the business you’re aiming at - you will be the best judge of what their financial position and response is likely to be.
But what if the debtor company is perfectly able to pay its debts/the debt issues pre date COVID-19?
Some debtor companies are unfortunately using the present situation and the Act as a shield to paying their debts. The Act limits what we can do. In a recent case of ours, although we could not serve a statutory demand, we targeted individual directors by making an application for the directors to attend court for questioning regarding their financial status, assets and so on. We also carried out searches in relation to the company assets, with a view to obtaining charging orders over the properties they owned. Before we got that far, these initial actions prompted payment of the debt.
So, if you can show the company had no intention of ever repaying the debt in the first place the court may take your side, but otherwise, you can use other methods to make it clear that after the pandemic you will take action, and in the meantime will do what you can (such as summoning them to court for questioning).
Some enforcement applications are also still being accepted by the court such as charging order applications, bailiff (writs of control or delivery), attachment of earnings applications and more. Our enforcement team is operating on all of these fronts and will be happy to help.
I am a landlord and am owed rent arrears. What should I do?
Some businesses are unfortunately struggling to pay rent due to being closed or operating on a limited basis during the pandemic. The Coronavirus Act 2020 has created a moratorium around tenants so that landlords cannot forfeit any lease due to failure to pay rent due to COVID-19. Although tenants are not obliged to pay now, we recommend that landlords still communicate with tenants regularly to update them as to the amount that is due and accruing. It is best to maintain an open dialogue and come to an agreement with the tenant in order to maintain the business relationship.
So am I best to just wait until after the pandemic to enforce my debt?
It is true that there are more limited options in terms of enforcing debts at the moment, but certain strategies can be taken, depending on the individual business and circumstances. If you have good business relationship that you would like to preserve, it may well be best to come to an agreement which means that you will get your money back in due course. Although getting money back now seems key, it’s also important not to underestimate the importance and value of longstanding business relationships in this climate.