COVID19 impact on credit control, debt recovery and insolvency proceedings.

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In light of the COVID19 outbreak businesses are naturally focusing on cash. We are seeing a tightening of credit control practices as COVID19 creates enhanced credit risk and an influx of new instructions to commence actions to recover debtors and/or open insolvency proceedings.

There has been much talk surrounding help for businesses but at this stage nothing is certain, and it remains critical that a business deals with its current bad debtors and limits cashflow implications as much as possible. Put simply there are concerns that giving debtors time to pay may simply result in the debtor’s cash being deployed elsewhere leaving the creditor, who might otherwise have been able to secure payment, out of pocket. Whilst creditors are naturally sympathetic to the COVID19 crisis we have heard reports of debtors using it as an excuse not to pay even when they are in a position to do so.

It is our view that we will see a spike in the issue of Winding up Petitions where companies become unable to pay their debts as and when they fall due. As yet, the court have not indicated that they will be unwilling to make Winding up Orders due to the obvious disruption caused to a business and its cashflow by Covid-19, however, it is possible that the government may impose a moratorium at some point where they will be unwilling to make such an Order. We are aware that the Winding Up Petition list on 18th March 2020 was adjourned and we expect to see more adjournments of petitions.

Despite this, we expect to see a rise in demand for Winding up Petitions. This is because upon the issue of a Winding up Petition, section 127 of the Insolvency Acts 1986 provides that any transactions made post-petition are void unless validated by the Court. Section 127 impacts transactions that take place between: –

• The date on which the winding up petition is issued (formally date stamped by the court)

• The date on which the Petition is heard and a winding up order made

This means any cheques or payments made by a business during this period, any transfer of shares, any disposal of company shares or property and any payments to directors could be declared void. A subsequently appointed liquidator would then be able to reverse those transactions collecting them in so that the creditors are all paid equally under the pari passu rule that applies to insolvencies. This means that even if Winding up Petitions are adjourned repeatedly and/or a moratorium introduced realisations for creditors may be greater than if no steps had been taken to open insolvency proceedings and/or they had been delayed.

If you require further advice on issuing a Winding-up Petition and the effect of section 127, then contact Penny Daisley by email at ped@debenhamsottaway.co.uk or telephone 01727 738246. We can also advise you if your company is subject to a Winding-up Petition. If this is the case, we would encourage you to contact us for advice immediately.