Time to collect? The rise of insolvencies and debt recovery litigation

There has never been a more disruptive time for business. Brexit and the resultant uncertainty arising from the pandemic have dramatically impacted the business landscape over the last 18 months. No matter what the sector, and no matter how big or small the company, every business has been affected by COVID-19 in some way.

Ongoing economic disruption caused by the coronavirus will see unpaid business debt double to more than £8.6bn this year. According to The Insolvency Service, over 17,000 companies went out of business in 2019 and analysis by financial risk firm Red Flag Alert suggests that as a result, £4.3bn of invoices were written off and bad debt will peak in 2021 with companies facing a total of £24bn in write‐offs.

These eye-watering figures are just the tip of the iceberg for what is to come once government support and debt recovery restrictions have been removed from 30 September 2021.

In this article, Litigation Solicitor Matthew Hennessy-Gibbs and Chartered Legal Executive Ben Crowley explain why there will be a significant increase in debt recovery litigation and outline what businesses can do in order to recover monies owed.

The growing insolvency problem

The Insolvency Service statistics showed overall, company insolvencies in June 2021 were 18 per cent lower when compared to June 2019 (pre-pandemic) but 63 per cent higher when compared to June 2020. However, these figures do not show the real story. The fact that June 2021 insolvencies were lower than June 2019 is of no great surprise given the raft of Government intervention over the last 18 months.

The Government’s temporary insolvency measures, which include the restrictions on issuing of winding up petitions and statutory demands, has meant that businesses seeking to recover monies have not been able to, resulting in them having to suffer the effects of the pandemic for longer.

That is all about to change.

The measures introduced in March 2020 by the Corporate Insolvency and Governance Act 2020 are due to end on 30 September 2021. This will mean that businesses will once again have some teeth to back up their recovery processes.

Rising debt collection and enforcement

Statistically, the longer an invoice is unpaid, the less likely it will be paid at all. The temporary measures have obviously left businesses struggling to recover their debts, with some invoices likely to be outstanding for longer than 18 months.

Rising debt has become a problem for most businesses, and it is likely there will be a surge of defaults on loan repayments as businesses struggle to cope in the aftermath of the pandemic.

The UK’s high-street banks are strengthening their debt recovery teams ahead of the emergency Covid loan defaults and the UK’s four largest banks are said to have hired hundreds of new debt collection staff to their debt recovery units to address the major challenge facing them.

The new teams will be trained to exhibit empathy with business owners in difficult financial situations but ultimately, recovery will be their primary focus.

Many businesses will be in the same position as their debtors and will likely be debtors to other businesses. The ripple effect of the debt ‘crisis’ could lead to a tsunami of insolvencies. In some instances, debt collection will be even more complicated if the debtor has an ongoing trading relationship or intends to work together in the future.

What can businesses do to tighten their credit management procedures?

Now more so than ever, businesses should proactively engage with their debtors. Communication is key and will often result in a more beneficial outcome. Understanding the debtor’s position may, for example, enable instalment terms being agreed which can be beneficial to both parties. This will assist the debtor by affording more time for payment. It could also strengthen a valuable commercial relationship and build goodwill whilst at the same time ensuring that your business receives some of the money that it is owed.

Equally if the debtor will not engage, and perhaps has little intention of paying back the sums owed, it is better to have that intelligence early which will then enable your business to take immediate steps to recover the monies due.

To emerge with a stronger bottom line from the pandemic, businesses will need to utilise responsible payments handling, rigorous credit management, and effective debt recovery procedures. Cash flow and long-term profitability are more important than ever before.

With the continued easement of restrictions and the temporary measures, frustrating collection enforcement ending at the end of September, it is very likely that there will be a significant upturn in collection and enforcement activity.

Keystone Law can assist with both the development and enhancement of credit management procedures and assist your business to maximise its cash recovery. If you have any questions, please contact Matthew Hennessy-Gibbs or Ben Crowley.

Contributing Advisors