The UK Government’s decision to extend the temporary restrictions on statutory demands and winding-up petitions for Covid-19 related debts until 31 December 2020 offers some reprieve for hundreds of thousands SMEs.

However, statutory demands and winding-up petitions are essential to debt enforcement and insolvency proceedings.

Consequently, it’s difficult to fathom how prohibiting creditors from engaging in standard debt enforcement procedures for 6 months could result in anything but dire consequences.

Considering the circumstances, some company directors and business owners will, understandably, become desperate and make irrational decisions. They will try to obtain more credit so they can:

• Sell goods cheaply
• Increase cash flow
• Continue to trade

But this behaviour is speculative, and can easily lead to recklessness at the expense of suppliers who never receive payment. Consequently, it’s sometimes better to let 1 company fail if it means saving lots of others.

Statutory demands and winding-up petitions are essential to debt enforcement and insolvency proceedings

For example, it would be unfortunate if a struggling company collapsed in July 2020 owing creditors £100,000. But it would be much worse if that company were to:

• Continue trading until 31 December 2020
• Obtain £400,000 in credit 
• Collapse in January 2021

The Government deserves credit for taking action. But allowing hundreds of thousands of struggling and zombie companies to continue trading for an unspecified time without any debt enforcement measures is a recipe for disaster because when they fail they’re more likely to bring other businesses down with them.

The Government doesn’t want to see more people unemployed and businesses fail, but the current policy simply delays the inevitable.

This strategy could even be counterproductive, exasperating the problem like a snowball gathering momentum as unemployment increases and more businesses collapse.

It’s a cold hard truth, but sometimes it’s better to let failing companies fail. By extending the restrictions on statutory demands and winding-up petitions until the end of the year, the Government is simply kicking the can down the road, which will lead to a greater number of economic casualties in the end.

The post Creditors vulnerable without winding-up petitions first appeared on Company Debt Recovery.

While the restricted use of statutory demands and winding-up petitions will provide a lifeline for many struggling companies, the move also forces creditors chasing overdue debts into an already overburdened court system.

As it stands, the only remedy to enforce payment of a debt is through a High Court enforcement officer. You may send out a bailiff or arrange a third-party debt order.

Alternatively, you may apply to the court to put a charge on any fixed property owned by the debtor. You will get an interim charge if you already have a judgment.

But a final charge may prove more difficult to obtain. This is because all the other creditors must be notified, and any 1 of them might object.

Whereas the consequences of Formal and Statutory Demands can encourage a debtor to pay quickly, county court proceedings take much longer, especially if the defendant tries to frustrate the proceedings by filing a contrived defence.

Weak defence

If the defence is weak, you can make an application for a summary judgment. But if the defence has merit, the court will give directions to set a timetable for the:

• Exchange of evidence
• Taking of witness statements
• Preparation of a trial

This process usually takes around 6 to 12 months. But a determined defendant can easily string that out for 12 to 18 months or more.

With only 54% of court and tribunal buildings in England and Wales currently open, legal experts predict the backlog of cases that built up during the first half of 2020 could take up to 12 months to clear.

In the long run, the changes being introduced to Her Majesty’s Courts & Tribunal Service, including video and phone calls, benefit everyone as better use of technology should vastly improve productivity.

But for now, creditors chasing overdue debts are faced with little option but to litigate and accept that payment is many months away.

The post Congested courts the only option for debt enforcement first appeared on Company Debt Recovery.