Debt Recovery in the Current Crisis
The limited ability to trade due to the Covid-19 pandemic has resulted in many businesses sitting on outstanding invoices which their debtors are struggling to pay due to their considerably limited capacity to trade. In the case of cross-border European debt, enforcement has been made considerably more problematic for UK businesses due to Brexit and the loss of reciprocal enforcement of court orders across Europe, the pandemic can add another layer of complexity.
All businesses depend on adequate cash flow and non-payment of invoices inevitably causes problems. In normal circumstances, most companies would look to the legal options and take a tough stance, particularly when feelings are high. In the current challenging situation, it seems all the more imperative to obtain swift settlement of outstanding debts. However, measures have been put in place in the UK to offset any lockdown driven inadvertent breaches by directors of The Wrongful Trading Act 1986 and further measures to prevent the wholesale demise of businesses affected by the pandemic.
The UK government introduced the Corporate Insolvency and Governance Act 2020 temporarily preventing Statutory Demands and Winding-Up Petitions, protecting directors from the threat of Wrongful Trading inadvertently arising from the effects of the pandemic and allowing a business that has been subject to an insolvency procedure within the previous year to enter into a 20-day moratorium, aimed at providing businesses with some breathing space to restructure and seek additional funding. There is a provision to extend the moratorium for a further 20 days, after which the consent of a court is required for further extension.
Gonzalo Butori, a senior associate, points out “litigation is still an option but it is not the only option and in the current crisis may not be the best option. In fact, the complaint may not only pay out more money to pursue their debtor, driving their debtor to the wall will result in no money for the complaint. The failure to pay invoices may be driven by the present crisis situation rather than the usual reasons of avoidance. It is reasonable to assume that businesses can expect significant challenges before being able to resume the same level of trading as previously experienced as the world begins to rebuild.” He further commented “preserving business relationships will be very important, therefore choosing alternative dispute resolution (ADR)as opposed to litigation could be the best choice.”
Furthermore, if litigation drives a business into an insolvent situation, restructuring may not be viable, in which case the claimant loses any hope of recovery.
If an acceptable solution can be negotiated between the parties, which preserves the business relationship as well as the debtor’s business, the two companies can eventually enjoy the benefits of mutual business they previously experienced. The dispute remains private as opposed to being played out in a courtroom, open to the public and journalists.
There are three main forms of ADR related to commercial disputes:
The parties involved may very well be able to arrive at a satisfactory conclusion on their own especially if they both recognise the value of continuing to trade.
If feelings are running slightly high an impartial mediator can be jointly instructed to assist in managing the situation and ensuring that the discussions remain calm and focussed. Frequently the courts will insist that the parties employ mediation and make every effort to come to a satisfactory arrangement.
Arbitration is a more formal method involving appointing a neutral arbitrator who has specialist knowledge of the sector in which the dispute has arisen, for example, construction of engineering. An arbitrator’s final decision is legally binding and enforceable by the courts.
The lawyers in Giambrone’s litigation team frequently recommend ADR to resolve a contentious issue and in the case of debt recovery can often result in the complaint receiving the outstanding money and the debtor able to carry on trading.