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Insolvency law changes and credit control

15th Oct 2020
Brought to you by
Capitalise
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Earlier in the year the government announced changes to insolvency law with the Corporate Insolvency and Governance Act 2020. Although the legislation is designed to help those companies worst affected by the Covid-19 pandemic specifically, its impact is likely to be felt more widely across the broader business community. So how should leadership teams adapt their approach in response to the new rules? Nick Harvey, co-founder of dispute resolution firm, Escalate (now partnered with Capitalise to offer SMEs a debt recovery service), suggests some areas of focus.

The government’s changes to insolvency legislation were introduced to provide a lifeline for otherwise viable businesses that have encountered temporary cashflow difficulties as a result of Covid-19. Forbearance, tolerance and understanding are the watchwords here, with several measures introduced to give companies some extra time to fix their problems

What changed?

The legislation places the focus on company recovery rather than creditors realising the debts they are owed:

Companies in financial difficulty can opt for a moratorium that gives them between 20 days and a year of protection from specific creditor actions.  

Creditors are unable to present a winding-up petition on the grounds of a business’s inability to pay debts between 27 April and 30 September 2020. This will not apply where the creditor has reasonable grounds for believing that Covid-19 has not had a financial effect on the company.

From 1 March until 30 September 2020, the wrongful trading provisions have been relaxed to remove the threat of directors incurring personal liability for ‘trading while insolvent’. The government makes it clear that this should not be treated as carte blanche to carry on business recklessly.

The company’s suppliers will not be able to terminate supply contracts where a company has entered an insolvency or restructuring procedure or obtains a moratorium. 

Struggling businesses will be able to apply to a court to adopt a restructuring plan (involving debt restructuring and new financing) instead of other insolvency procedures, such as administration or liquidation.

How could the new rules affect your clients?

Whilst the Act has been welcomed by the business community as a way of preventing wide-scale business failure, some have identified a growing risk to creditors

Determining whether or not a business would still have been in financial difficulty even without the pandemic – and therefore deciding if a winding-up petition can be legitimately served - is likely to be a matter of fierce debate. 

It could be argued that the relaxation of wrongful trading provisions may encourage some directors to have a misguided notion that they can keep going because they feel they have less risk to personal exposure for their actions. 

Many businesses may baulk at the idea of having to continue to supply a client when they know that the client is in financial difficulties and may already be in arrears.

Only time will tell whether the right overall balance has been struck. In the meantime, businesses may well want to consider reviewing their credit control policies and procedures

So what can you do?

1. Plan ahead

It’s more important than ever that you have a good idea of where your clients stand in terms of their cashflow and pay particularly close attention to their list of debtors.

2. Keep in touch

Have a conversation with your clients about their debtors (or get in touch with them directly) to find out how they’re getting on and to anticipate any potential problems. And remember that the old adage of ‘a stitch in time-saving nine’ is particularly relevant, as a tricky conversation early on can prevent a potential issue from snowballing.

3. Be firm

Make sure any conversations you or your clients are having with their debtors are clear. If you’ve delivered on your side of the contract, the default position remains that you should be paid – and paid on time. Cash is king in the current economic climate – even more so since the changes to the insolvency rules - don't write off (or wait for) what your clients are owed.

4. Be fair

The reality is that many of your SME clients are going to face pressures on their cashflows. Approach the subject of introducing some flexibility when they deal with some of their most trusted clients, and they may be able to agree on an alternative repayment schedule with some of their debtors.

5. And if you’re not getting anywhere…

If you feel that it won't come to an agreement with a debtor, it may be time for expert advice. This is precisely why Capitalise has partnered with Escalate. If your client is suffering from a financial loss because of late or non-payment, don’t automatically assume the costs of recovery outweigh the benefits.

2020 has been a challenging time for many businesses. However, there are steps that you can take to protect your clients better, and there are also trusted advisors to whom you can turn for help. If your client's business is likely to be affected by any of the issues discussed in this article, or if you need some advice on tackling a commercial dispute or late payment on behalf of your client, please do get in touch with the Recovery team.

The new Capitalise Recovery product, in partnership with SRA-regulated,  insolvency specialists Escalate, provides your clients with a time and cost-effective solution for recovering bad debt. Starting with a simple referral, you can help clients in getting back what’s missing while Escalate handles the complexity, legals and workflow for you.