UK: Softening the cliffside: what next for COVID-19 debt collection

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Since COVID-19 restrictions on businesses were first imposed in March 2020, the UK government has repeatedly extended its programs to protect debtors from insolvency and enforcement actions by their creditors . The government has now launched a consultation on what should happen next when these plans are due to expire on June 30, 2021.

With so many UK businesses, especially in the retail and hospitality industries, facing this cliff when their protection from execution by their creditors crumbles, this consultation is a great opportunity for these businesses to explain their concerns to the UK government and influence what protections can be put in place to support businesses from July 1, 2021. We are available to help our clients engage in the consultation and shape the response.

UK government launches consultation on alternative protections for debtors from July 1, 2021

By Victoria Hobbs, Matthew Pack and Anna Mikhalkovich

The UK government’s restrictions on legal remedies for debtors whose bills have gone unpaid due to the COVID-19 pandemic are due to expire on June 30, 2021. While the government has extended the expiration date three times, it It is widely predicted that this will be the last time, leaving many businesses hardest hit by COVID-19 vulnerable to further enforcement action from their suppliers, owners and service providers from July 1, 2021.

Which protections end on June 30, 2021?

While they have been used the most by businesses in the retail and consumer sector (and in particular hospitality and leisure), since March 2020, UK government moratoria have in fact protected all businesses with attributable debts or that remain unpaid due to COVID-19. and the associated restrictions.

The Government’s package of measures which will end on June 30, 2021 includes:

  1. a moratorium on forfeiture of leases for business premises – forfeiture allows a landlord to re-enter and take possession of business premises where rent is not paid;
  2. restrictions on landlords who use the collection of commercial rent arrears (referred to as CRAR), which is a simplified procedure allowing a landlord to enforce the payment of commercial rents; and
  3. a moratorium on the non-payment by a debtor of legal claims serving to demonstrate that a debtor is unable to pay its debts and therefore risks being liquidated, provided that the debt concerned has arisen or has remained unpaid due to the COVID-19. Most importantly, this applies to any debt, not just commercial rent arrears.

These and other measures have provided many companies with a vital ‘breathing space’, alongside other programs such as holidays and commercial rate relief, and have been essential in preventing insolvencies and job losses (even more important), in particular in the hotel and leisure industries. We have educated many of our clients on what could happen next – or whether the government will allow that safety net to disappear altogether.

What new solutions are proposed by the government, and which will best protect companies with large debts linked to COVID-19?

On April 6, 2021, the government launched a consultation and a call for evidence / survey to gather views from industry and interested stakeholders on what, if any, should replace these measures from July 1. 2021. You can access a full version of this consultation here.

The consultation is in part a fact-finding exercise for the government, and participants are encouraged to complete a fairly comprehensive survey on the impact COVID-19 and related restrictions have had on their business and how the removal of the measures protection will affect them from July 1, 2021.

The Consultation also proposes six options that the Government is considering to replace the current measures as of July 1, 2021. These options are:

  • Option 1: Authorize the expiration of corporate protection measures on June 30, 2021.
  • Option 2: Forfeiture becomes available again from July 1, 2021, but CRAR and protection against legal claims and liquidation requests remain for a period. Confiscation is often just as big a risk for the landlord as it is for the tenant, because in the current climate, street landlords cannot guarantee that they will get a replacement tenant.
  • Option 3: Restrict existing protections to particular businesses / industries based on the impact of COVID-19 restrictions and keep those protections in effect for a fixed additional period, which the government says could be six months. The Consultation seeks to know which industries should benefit from this continued protection, but the government indicates that it wishes to help companies such as those which “have undergone a mandatory government shutdown since March 2020 (for example, restaurants were forced to shut down their catering service)”.
  • Option 4: Encourage increased formal mediation between landlords and tenants. From the perspective of litigation lawyers, we are cautious of mandatory mediation. This would mean entering into mediation facilitated by a duly qualified neutral third party. This third party would have no decision-making power and could only encourage the parties to settle, not to enforce conditions. which can lead to costs for the disputing parties without a positive outcome in the end, as either party could likely opt out of mediation at any time, even if they are forced to start the process.
  • Option 5: Implement non-binding arbitration between landlords and tenants. This would require an accredited arbitrator to come up with a fair settlement based on evidence from both parties. A landlord could then only initiate proceedings once an arbitrator’s decision has been rendered.
  • Option 6: Implement a binding decision between landlords and tenants. While there aren’t many details on how the government is proposing this solution to work in practice, there may be something similar in mind to arbitration law in mind. construction, which is compulsory for construction disputes in England and Wales. The idea is for an independent arbitrator, competent in the sector concerned, to receive the submissions of both parties and quickly rule on the merits of the dispute and reach a decision in favor of one party. This decision is supposed to be available quickly and at a reasonable cost – although these costs can increase quickly, in our experience – and the parties are bound by this decision, unless and until it is overturned by a court. For the party sued for debts which it pays only because of cash flow problems, binding arbitration is a significant risk, especially if the arbitrator makes a decision solely on the legal situation and does not take into account business factors. k to mitigate this risk by designing a more personalized auction system, we have not yet seen.

Our thoughts – what does this tell us about the government’s strategy?

The fact that this Consultation has been launched is of course a positive step, and shows that the government does not expect all companies to be safe after the national restrictions are completely lifted by the planned date of June 21, 2021. The government appears to recognize that many businesses hardest hit by the pandemic will continue to face significant cash flow problems even after restrictions are lifted.

The fact that the government is also considering making the remedy protections more targeted according to the debtor’s industry is a clear sign that the government recognizes the scale of the mountain of debt that has grown in all chains of debt. supply and in virtually all industries and sectors during the pandemic. This could suggest that the government is preparing to withdraw its support on a set timetable while favoring certain industries for longer, much like the general roadmap to exit the lockdown, and a natural expiration of all remaining measures may well. be the expiration of the leave later. in 2021.

An alternative route that the government has not even suggested exploring is a model adopted in Australia, where reduced rent payments are imposed on defaulting tenants, so that landlord and tenant share the pain. The UK government has always been reluctant to interfere with commercial parties’ contracts and reduce rent arrears, and instead focused on limiting landlord’s remedies to assert debt. We therefore believe that this other route is unlikely to be taken by the government, as it would be a departure from its strategy to date, despite calls from several leading retailers in the UK to explore this route further. .

If you are interested in participating in the consultation and making your point of view and that of your industry known to the government, the consultation remains open until Tuesday, May 4, 2021 and is accessible here. We would be very happy to help you prepare your contributions, and the authors listed below are happy to answer any questions you have about this article.


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