Mountain of debt being stored up for 2021 as debtors take cover behind protections

05 October 2020

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Following the recent announcement of a further extension to the legislative ban on insolvency actions in the wake of COVID-19, creditors are facing up to the reality that significant amounts of debt will not be recovered. Darren Toombs, partner at Carson McDowell, explores the implications of these new delays.

With an extension to the legislative ban on insolvency actions, an extension to the ban on forfeiture by landlords in England and Wales now also in place in Northern Ireland, continued limited access to the courts, and the Insolvency Office and the Official Receiver finding it difficult to perform their statutory function, a situation clearly exists that is permitting a mountain of debt to grow.

I have heard the phrase “Debtor’s Charter” muttered more than once by frustrated clients and colleagues working in the same sphere as me.

But while it is true that some businesses are taking advantage of the situation when dealing with landlords and other creditors, most objective observers accept that there are genuine reasons for failure to pay in a lot of businesses.

Retail footfall in certain shops is through the floor and the entertainment and hospitality sector might already be bust but for the “eat out to help out” scheme. Other than those in home food delivery, pharmaceuticals, grocery and food retailers, PPE and sanitizing companies, it’s fair to say the majority of businesses have noted downturns well into double digits. Mark Crimmins, head of Ulster Bank, recently said the true extent of this economic crisis will not be known for months to come.

For most businesses, the situation they are in is not their fault. But equally, with protection from creditors extended to the end of 2020, it is clear that the growing boil of accumulated debt will not be lanced in this calendar year.

Creditors are talking about taking more actions to obtain judgments against businesses which owe them money. The problem with this is that while judgments are a useful tool to get payment from a debtor who denies that any liability is due, they do little to bring about payment from those who are simply saying that they cannot pay. The judgment still has to be enforced to extract payment and, with the Enforcements of Judgments Office running months behind with cases and limited in what it can do by way of physical recoveries - and the Bankruptcy Court being all but out of bounds - the problem is simply being stored up for the start of 2021 or beyond.

We all understand the issues facing the government – chief among them being that nobody can say how long this crisis will last. The Prime Minister had originally thought that we would be well through it by Christmas 2020 but now intimates that it will be at least another six months, if not more.

If extensions protecting creditors were not implemented to the end of the year, we could have seen a glut of businesses entering liquidation now or having to implement recovery strategies such as Company Voluntary Arrangements (CVAs) or administrations but then facing going out of business again in mid-2021 if the position does not improve.

But whether it is at the tail end of this year or early 2021, the mountain of debt that has built up this past six months is going to have to be addressed. It can be addressed now by debtors negotiating deals with creditors. Where payment or settlement of the debt in full immediately or over time is simply not possible due to income reduction, restructuring and recovery options should be considered. In fact, I’ve seen a lot of positive developments like this where deals have been struck to let companies in debt pay what they can, for example turnover rent deals replacing fixed rentals, rather than all of it.

Responsible directors in debtor companies will be putting plans in place to deal with the massing debt and the possibility of insolvency after protection ends. Debtors taking cover behind the temporary cover provided by the delays implemented in legislation are having their names noted in black books. No doubt many wait anxiously for what will drop through the letterbox next year.

If you have any queries the Insolvency and Restructuring, and Debt Recovery teams at Carson McDowell would be happy to help.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

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