Debt recovery litigation and the risk of insolvencies

Following two volatile years due to Brexit and the Covid-19 pandemic, businesses have faced disruptions like never before. The dramatic impact on businesses, both big and small, have been harmful. Only now can we see the light at the end of the tunnel.

The economic disruption caused by the pandemic saw unpaid business debt double - to a staggering £8.6 billion in 2021 alone. The Insolvency Service claimed that in 2019, 170,000 companies went out of business, resulting in over £4 billion invoices being written off.

These figures highlight the issues at hand. Since the debt recovery restrictions were lifted from September 2021 onwards, the number of companies that will go out of business will ultimately increase as we head further into 2022.

The growing insolvency issues are highlighted by the Insolvency Service statistics, with company insolvencies in 2021 being 18% lower than those in 2019. However, a staggering 63% higher in comparison to 2020. Even though these figures should not be taken literally, it is no surprise that insolvencies were lower in 2020 than in 2019, despite government intervention, as explained below.

The temporary measures introduced by the government, pursuant to the Corporate Insolvency and Governance Act 2020, which included restrictions on issuing statutory demands and winding up petitions where the reason for the unpaid debt was the pandemic, meant that businesses seeking to recover monies were not able to do so. 

In other words, business owners at risk of insolvency have had to suffer the consequences of the pandemic on their businesses for much longer.

However, changes were made on 30 September 2021, whereby the Corporate Insolvency and Governance Act 2020 ended. The impact of this was that businesses could resume their recovery processes, enabling them to recover funds outstanding throughout this period.

Debt collection

The longer an invoice is left unpaid, the likelihood of it being paid in full lessens, which could harm businesses already struggling to recover their debts. Given that some of these invoices were likely to be outstanding for over 18 months due to the pandemic, the chance of recovering these funds remains slim.

The rise in debt that businesses have suffered has become a serious issue. The likelihood of defaults on loan repayments, as the struggle continues, is high - even in the aftermath of the pandemic. As we now see the final Covid measures being scrapped, the stark reality surrounding these debts is coming to light. 

Businesses large and small will struggle to cope with these defaults and the lack of recovered monies flowing back through, resulting in potential cash-flow issues.

Highstreet banks are strengthening their debt recovery tactics, and new teams have been employed to show empathy with business owners experiencing difficulty paying off loans. However, the ripple effect of this crisis remains unknown; businesses are now in the same position as their debtors, and insolvency risk is high.

What can businesses do to tighten credit management procedures in light of this?

In light of the possible insolvency risks, businesses should proactively engage with their debtors. Communication in all aspects is crucial and, more often than not, leads to a beneficial outcome for both parties. 

Debtors who reach out and explain their circumstances are more likely to be shown empathy than those who ignore the issue at hand.

Businesses must understand their debtors' positions and have enabled payment plans and instalment terms to be agreed upon, which is likely to be the preferred repayment method compared to insolvency or even court orders being issued. 

Assisting the debtor with more time will likely strengthen a commercial relationship and build goodwill whilst ensuring businesses recover some funds owed.

However, if the debtor will not engage or has little to no intention of repaying the sum owed, it is better to have this knowledge at the outset, allowing your business to take steps to recover the monies in advance.

Businesses must utilise responsible payment handling and ensure rigorous credit management going forward. Following a challenging two years, cash flow and profitability are more important than ever before.

Contact our debt recovery solicitors

Our litigation solicitors believe in taking a sensitive, pragmatic and commercially-minded approach to all debt recovery matters. We can advise companies, creditors, directors, and shareholders on a wide variety of issues.



We have offices in Brighton, London, Eastbourne, Hastings and Uckfield, and we work with clients across the UK.