Ensuring cash flow during the COVID-19 pandemic

As a result of the COVID-19 pandemic businesses are having to take decisions entirely out of the norm with the objective of keeping as much cash in their business as possible. Likewise, creditors are faced with tough decisions as to how to approach debt collection with longstanding and ordinarily credit-worthy customers in circumstances where they need the cash now.

Taking a pragmatic approach

In his article, "Covid-19: Cash is king but think outside the box", Peter Singfield discussed the need for many businesses (on both the debtor and creditor side) to take a pragmatic approach and, where possible, seek to share risk rather than rushing to Court or instigating formal recovery procedures. Part of the rationale for the pragmatic approach is that in many cases it is likely to lead to a creditor getting some cash in quicker than would be the case if it had to resort to legal proceedings. There is much to be said for this approach:

• It fosters goodwill in circumstances where the pandemic will end and where the customer relationships may be crucial in the future.
• The Courts are currently over-stretched and recovery processes that would ordinarily take weeks or months are likely to take longer.
• The Courts are being encouraged to view debtors that find themselves in financial difficulty as a result of COVID-19 with some sympathy and where possible provide leeway accordingly.

In these circumstances the pragmatic approach is generally speaking, the best one. However, what if you've tried it and it hasn't worked? What if you simply can't because you need the money now? How can you get repaid?

What to expect from Government guidance

We are currently awaiting the introduction by the government of new measures designed to assist companies in temporary financial difficulty caused by COVID-19. These are expected to include a moratorium procedure which can provide a debtor company with temporary respite from creditor actions while it assesses its options. Further, a widening use of the administration procedure (which also includes a moratorium) is being advocated, which almost de-stigmatises that process as an insolvency measure and focuses on it as one about restructuring and recovery. 

We're beginning to see high street operators use administration in that way. However, these processes will not be suitable for all and unless and until a debtor company actually implements such a procedure then enforcement remains possible.

The government has also announced its intention to introduce measures to prevent commercial landlords from using statutory demands and/or winding-up petitions against their tenants during the COVID-19 crisis. It seems that these measures may include some element of court scrutiny to prevent petitions being issued if the non-payment of debts is a result of COVID-19, however, we await the details of these.   

How are the Courts operating?

What is clear is that the Courts have not closed and are doing what they can to continue. Where hearings are necessary, they are being held remotely. The Courts will be alive to those debtors in respect of which bona fide claims existed pre-COVID and which seek to use COVID as an excuse for non-payment. The ordinary recovery methods therefore remain viable options and, in our experience, where the pragmatic approach is not viable or has failed, the creditor that shouts loudest has historically been, and often is still, the creditor that is most likely to get paid.

Alternatives to traditional routes

Where enforcement is necessary, it's important for a creditor to consider whether there are any other means of recourse other than the traditional routes of statutory demands or winding-up petitions against the debtor company. For example:

• Do you benefit from any security over the company's assets or can you get some in return for not going to Court?
• Are there any parent company or director guarantees that could be relied on or provided in order to continue supply?
• Do you have any retention of title provisions in your contracts, which may allow you to collect your stock and re-sell it if there are outstanding arrears? Such clauses can be very powerful because the failure to pay even a small portion of the debt can in certain circumstances allow a creditor to recover the entirety of its stock.
• Finally, is the debt or your claim one that could be sold to a third party at a discount in order to generate immediate cash?

Whilst we strongly advocate the pragmatic approach in some circumstances the traditional one will unfortunately still be necessary, and it remains open to creditors.

For more information please get in touch.