Your Coronavirus Cashflow Toolbox

Last updated - 9:40am, 14th July 2020

In this article we take a look at why, when it comes to protecting yourself against bad debts and managing your commercial disputes during a global pandemic, litigation still hits the nail on the head.

What steps can I put in place to reduce the risk of debts going bad?

When faced with a bad debt you have two options: reach agreement or litigate. Often the former is preferable, but really you would rather avoid the situation altogether. For that reason, maintaining strong lines of communication with your debtors is important. Telephone calls followed by a written letter are a good way of maintaining the relationship and boosting chances that the debtor may choose to pay its debt to you over its debt to someone else. However, having a clear written record in correspondence as well as an internal log of the matter is always going help your case should it ever end up in front of a judge.If the debtor can't pay now, it might be worth discussing payment plans. Paying a large sum over a number of months is likely to be more palatable to a debtor in this climate than a lump sum. If you opt for this route, you may wish to consider whether a certain level of interest should be payable on the sum so as to ensure you don't end up out of pocket. Often documenting an instalment agreement is simple enough, however, if you have any tricky issues, Freeths are always happy to give you a steer in the right direction.

Top Tip It's important that you document any instalment agreement that you make and, crucially, that you add that if there is default with any instalment then the whole amount becomes due. Otherwise you could be faced with having to chase just the overdue instalments.

What if my debtors still don't pay, can I escalate the dispute?

Now you come to having to take formal action to recover the debt. In most cases, as a first step, you or your solicitor/debt collector will send a Letter Before Action to the defaulting party setting out your claim and giving them the opportunity to respond to it. Alternatively, you may wish to threaten to wind-up the company or make an individual bankrupt. Whether this is a route open to you will depend on the value of the debt and whether it is disputed. In addition, during COVID-19 there are extra hurdles to overcome, before insolvency proceedings can be taken, to prevent action where the reason for non-payment is COVID-19 related (see Coronavirus: Debt collections and winding up petitions).Often a Letter Before Action will secure payment, especially where the debt is not disputed. If it does not then formal court action or threatened insolvency will be the next step. If you are unsure of the right route to take, please speak to Freeths.Of course, you can issue your own claim or seek professional advice. For a bad debt this might be in the County Court Money Claims Centre (“CCMCC”). The CCMCC operates an efficient online service and as of 1 June 2020, they are still able to issue new claims on the day of receipt. Where the debt is more complicated and is disputed then it's a good idea to get advice. The Court you would choose will depend upon the nature and size of the claim. Issuing a claim is a straightforward process and has remained up-and-running during the lockdown. Even when issuing a small claim you are required to outline the particular facts of your claim.

Top Tip When seeking to recover your debts it is important to keep momentum. Do not let your debts go stale. If you do, when you start trying to recover the debt again, make sure you keep the pressure on so the debtor knows you are serious.

What are the changes to the corporate insolvency rules and how do they affect me?

The Corporate Insolvency and Governance Act 2020 is now in force. In accordance with this Act, you cannot now present a winding-up petition against a company based on a statutory demand that was served between 1 March 2020  and 30 September 2020, nor present a winding-up petition between the same dates based on the company's inability to pay its debts. That is, unless you have reasonable grounds to show that COVID-19 has had no financial impact on the company or that the debt issues would have arisen in any event. We are here to help should you have any queries regarding insolvency or bankruptcy proceedings.

My contract contains a force majeure clause, does this prevent me from taking legal action against the other party?

Not necessarily. As ever, contract is king and it depends on the wording of the clause. A force majeure clause is intended to suspend obligations under the contract where a party is prevented from performing the contract as a result of events outside of its control. This often includes events such as natural disaster, war, terrorist attack or, more relevantly, pandemic. In England and Scotland, precisely what is considered to be a force majeure event by the parties will be negotiated in the contract and the courts will give effect to the meaning of those agreed terms. See Commercial Contracts and Supply Chain FAQs and Force Majeure flowchart for further details. Speak to Freeths if you have any questions about a force majeure clause impacting your dispute.

Top Tip If there is an argument about a force majeure clause, take advice. These are complicated clauses and are not the panacea that you might think.

Are the courts still open?

Yes. Broadly speaking, since the UK was placed in lockdown in March the functioning of the courts has mirrored that of most businesses and has moved online. Telephone and video conferences are the norm and, in our experience, this has worked fairly well. See Coronavirus Dispute Management FAQs for further details. The Lord Chief Justice has made it clear that while the courts are as affected as any other service by the pandemic, the administration of justice must continue. As such, generally, while many courts are operating with skeleton staff numbers they are still contactable and processing claims. They are, of course, having to prioritise the administration of certain matters.

What are the costs involved? If the debt is less than £10,000 then the case is dealt with in the small claims court and no legal skills are required to bring the claim and many people undertake the work themselves and get advice just on tricky points. The amount of legal costs that will be recoverable from your opponent, in the event you are successful, will be fixed and can be significantly lower than any fees actually incurred. This also means that if you get it wrong then you are very unlikely to have to pay the other side's costs. If the claim is in excess of £10,000 then the general rule is that your costs are recoverable from your opponent in the event that you are successful. However, generally, you should only expect to recover around 80% of your costs on a good day. Nevertheless, the threat of having to pay your costs (as well as their own), in the event that your opponent loses, is often a useful tool in leveraging a quicker settlement - getting the cash back in your pocket quicker than waiting for trial and incurring less legal expense.

Top Tip In our experience 97% of cases settle and do not ever get to trial. Indeed the vast majority are settled by negotiation without even issuing proceedings.

I am currently engaged in litigation in the courts but the lockdown is making it difficult to meet the deadlines. What can I do?

The good news is that the Civil Procedure Rules, which govern court procedure, have been updated to take account of the difficulties facing many currently in throws of tight litigation deadlines. These updates include a new rule that, during the pandemic, the parties can agree in writing that a deadline set by a rule, practice direction or court order may be extended by up to a maximum of 56 days, provided that any such extension does not put at risk any hearing date. This should make it easier for parties to accommodate any unforeseen delays arising from the current lockdown. If you need assistance in securing or opposing an extension of time in one of your disputes, please get in touch.

How can I stay up-to-speed with the courts? While this is something that your solicitor will be on top of, the court and tribunal service is publishing weekly operational updates on court procedure during the lockdown. Likewise, the CCMCC posts its estimated turnaround times for various matters online, which can be found here. If you have any concerns about how the court is handling your matter, these are helpful resources. Alternatively, your solicitor will be able to advise.

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If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.