COVID-19: IMPACT ON SUPPLIERS

The Government has now published the Corporate Insolvency and Governance Bill (the “Bill”), which will make changes to existing insolvency laws in response to COVID-19 and will significantly impact supplies of goods and services to companies in financial distress. The provisions in the Bill will apply to all the creditors and companies and suppliers may need to act urgently in order to maximise the prospects of obtaining full payment and mitigate or address the likely impact of the Bill.

Restriction on statutory demands and winding-up petitions

The Corporate Insolvency and Governance Bill proposes that on presenting petitions in the period between 27 April 2020 and 30 June 2020 there may be a prohibition on issuing a statutory demand or presenting a winding-up petition in the following circumstances:

  • Where the petitioner relies upon the grounds in section 123(1)(a) to (e) of the Insolvency Act 1986, unless the petitioner has reasonable grounds for believing that COVID-19 has not had a financial effect on the company or the facts relied upon in founding the petition would have arisen regardless;
  • Contractual rights exercisable, because the customer has entered an insolvency procedure, will become unenforceable;
  • The supplier’s right to terminate (if it has been accrued) before the customer entered into an insolvency procedure will be suspended;
  • If the petitioner relies on the ground that the company would not have been able to pay the debt as it fell due regardless of COVID-19.

All winding up petitions must contain a statement where the petitioner considers that the relevant the COVID 19 condition is met. Where applicable, if petitions are presented on or after 27 April 2020 before the force of this legislation and if the COVID-19 condition is not met, the Court may restore the position make an order that would have been made even if the petition had not been presented.

How does the Bill impact supply contracts?

These measures will likely have a significant impact on the position of creditors and their existing rights to seek repayment of overdue indebtedness. The Corporate Insolvency and Governance Bill weakens and even removes two of the most effective options available to unpaid suppliers, i.e. threat of termination of the contractual agreement and commencement of insolvency proceedings (which is a relatively cost and time effective procedure if the debt is not disputed).

If a company enters a formal insolvency process, the new pre-insolvency moratorium procedure outlined above prohibits termination of contracts on the grounds of enforcement of termination clauses in contracts which trigger upon the financial condition or formal insolvency of a debtor company. The counterparties will, therefore, have to continue to fulfil their contractual obligations.

It should be noted that this prohibition will not prevent termination for reasons of non-payment or the exercise of any other right to terminate that might exist under the relevant contract. Perhaps inevitably, that balance is likely to favour debtor companies more than creditors and that is bound to be of concern to creditors whose businesses are in need of a cash injection.

In addition to this, if the customer enters into an insolvency procedure, it may be that the unpaid supplier is obliged to continue supplying the customer, without payment of prior invoices and on existing terms.

What should suppliers do?

During these unprecedented times, suppliers may want to review their existing contractual arrangements with customers who are likely to become financially distressed.  Supplies may utilise their termination rights to negotiate new beneficial terms, such as:

  • seeking payments on account rather than payment upon receipt of the supplies;
  • arranging short term contracts with fixed termination dates which will prevent suppliers from being locked in to supply for a considerable period;
  • including an express right in the contract to withhold supply of goods and services in the event of any non-payment;
  • seeking personal guarantees from the customer’s directors or persons in-charge.

Do I have any other legal options available?

Yes. Creditors are still able to issue a debt claim via the County Court Money Claims Centre or Money Claims Online. These services usually process a claim within 17 working days.

Once the claim has been issued and served on the debtor, they have 14 days in which to acknowledge the claim or file a defence, which can be extended by a further 14 days (making it 28 days from the date of service) with an acknowledgement of service.

Do I need to follow the pre-action protocol?

The pre-action protocol does not apply to business to business debts (unless the person who owes money is a sole trader).

You- the creditor- must be a “business” claiming payment of a debt from an individual. “Business” is not defined in the Debt Protocol, therefore a creditor must be advised whether they are considered a business or not- guidance on this point is elaborated upon in Financial Services Authority v Anderson [2010] EWHC 599 (Ch).

What is the debt recovery pre-action protocol?

The pre-action protocol is in essence a rule book that a creditor must follow before a creditor commences debt recovery court action.

The overriding objective in the Civil Procedural Rules (CPR) states that wherever possible, parties in a dispute should endeavour to avoid court proceedings.

Are there sanctions for not complying with the pre-action protocol?

If you as a creditor business is owed money by an individual debtor (for example for unpaid fees), it is recommended that you seek legal advice from specialist debt recovery solicitors. Legal advice is recommended given that failure to follow the specific pre-action steps could lead to the court imposing sanctions on the non-compliant party.

Letter of Claim

We are specialist litigation lawyers who can advise you on each stage of your claim. Before court proceedings are commenced, a creditor should consider sending a Letter of Claim to the debtor.

The Letter of Claim should contained the following information:

  • the amount of the debt;
  • whether interest or other charges are continuing;
  • where the debt arises from an oral agreement, who made the agreement, what was agreed (including, as far as possible, what words were used) and when and where it was agreed;
  • where the debt arises from a written agreement, the date of the agreement, the parties to it and the fact that a copy of the written agreement can be requested from the creditor;
  • where the debt has been assigned, the details of the original debt and creditor, when it was assigned and to whom;
  • if regular instalments are currently being offered by or on behalf of the debtor, or are being paid, an explanation of why the offer is not acceptable and why a court claim is still being considered;
  • details of how the debt can be paid (for example, the method of and address for payment) and details of how to proceed if the debtor wishes to discuss payment options;
  • the address to which the completed Reply Form should be sent;
  • enclose an up-to-date statement of account for the debt, which should include details of any interest and administrative or other charges added;
  • enclose the most recent statement of account for the debt and state in the Letter of Claim the amount of interest incurred and any administrative or other charges imposed since that statement of account was issued, sufficient to bring it up to date;
  • where no statements have been provided for the debt, state in the Letter of Claim the amount of interest incurred and any administrative or other charges imposed since the debt was incurred;
  • enclose a copy of the Information Sheet and the Reply Form at Annex 1 to the Pre-action Protocol for Debt Claims; and
  • enclose a Financial Statement form (an example Financial Statement is provided in Annex 2 to the Pre-action Protocol for Debt Claims – the Statement is part of the Standard Financial Statement and can be downloaded from sfs.moneyadviceservice.org.uk).

Specialist London Debt Recovery Lawyers

We’re masters of insolvency dispute litigation. We are a specialist City of London law firm made up of Solicitors & Barristers. We’re based in the Middle Temple Inns of Court (next to the Royal Courts of Justice where the High Court and Central London County Courts are based).  We’re experts in dealing with matters surrounding insolvency in particular our team have unparalleled experience at both issuing and defending winding up petitions vigorously at the Royal Courts of Justice (Rolls Building), or the relevant High Court District Registry or County Court with jurisdiction under the Insolvency Rules. We provide a quick no cost initial telephone case review to establish whether or not we can help you; just call one of our team on 02071830529.

Want legal advice on the merits of your case?

Our simple enquiry form goes immediately to our insolvency team in Middle Temple, London. Call us on +442071830529 from 9am-6pm.

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