The current restrictions creditors and landlords face when recovering debts

The current restrictions creditors and landlords face when recovering debts

4th October 2021, 3:02 pm

The Covid-19 pandemic has had a huge impact on all of us in almost all aspects of our life. As a result of the restrictions imposed by the Government back in March 2020, the pandemic has also been an incredibly difficult time for lots of businesses around the UK. In order to try and assist companies who faced financial difficulties as a result of this, the Corporate Insolvency and Governance Act (“The CIG Act”) and Coronavirus Act 2020 (“CVA Act”) were brought into force.  These two acts introduced various fundamental changes to the UK’s company, commercial property and insolvency laws which have been amended and added to a number of times throughout the pandemic. This article looks at the latest amendments to these Acts and the effects that this will have on companies and creditors as well as commercial landlords and tenants.

What was the CIG Act’s initial impact on Insolvency Proceedings?

Schedule 10 of the CIG Act initially introduced temporary provisions to restrict certain debt recovery Court proceedings from being issued against companies during the Covid-19 pandemic where the debt had not been paid for reasons relating to Covid-19. Originally, these proceedings couldn’t be started by a creditor from 27 April 2020 until 30 June 2020 unless the creditor could satisfy a strict coronavirus test. The expiration date of these restrictions has been extended a number of times and is due to expire on 30 September 2021.

What effect will the upcoming changes to the CIG Act have on these proceedings?

The Government have confirmed that the current measures set out above will come to an end on 30 September 2021. They are to be replaced with new “tapering” measures that aim to protect companies from aggressive creditor enforcement as the economy opens up.  The government has set out the upcoming amendments to the CIG Act which will come into force on 1 October 2021 and expire on 31 March 2022. These new measures are:

  1. A creditor of a company must provide the debtor with 21 days’ notice before being able to issue the debt recovery proceedings. Creditors will have to prove to the court that they have sent the notice, whether they have received any proposals of repayment from the company, and if so, state why the proposals are not satisfactory. The period of 21 days can be shortened in exceptional circumstances provided the Court agrees to this, although it has not been made clear what will constitute an “exceptional circumstance”.
  2. These proceedings cannot be presented for a debt that is less than £10,000.
  3. The previous restrictions will remain in force in respect of a commercial rent debt.

As such, provided the above provisions are complied with, it appears that from 1 October 2021 a creditor will now be able to utilise these additional debt recovery tools without having to satisfy the onerous coronavirus test. The technicalities of these new restrictions are unlikely to be clarified until the legislation is issued and questions remain as to whether the content and format of the 21 day notice is prescribed and whether it can be issued prior to 1 October 2021.

However, it is clear that the current measures are going to be significantly relaxed at the end of this month. This means that companies who find themselves in financial difficulty at present (and who may have previously benefitted from the above restrictions) may now need to take action (such liaising with their creditors or obtaining insolvency/legal advice) to ensure that they are either able to pay off the debts that they owe, or if not, that they don’t fall foul of any insolvency provisions by continuing to trade whilst being insolvent.

What other restrictions do landlords face in relation to their ability to recover debts from tenants?

In addition to the restriction on landlords commencing the above proceedings for the non-payment of rent, they also still face the following restrictions:

  1. Section 82 of the CVA Act suspended a landlord’s ability to take forfeiture action for business tenancies in England, so that business tenants who cannot pay any sums falling due under the lease (including rent) will be protected from forfeiture. They are also protected from bailiff’s entering the property. These measures are effective from 26 March 2020 and following a recent extension, are not due to expire until 25 March 2022. It means that no business tenant can be forced from their premises if they miss a payment during this period. Landlords may have been relying on the fact that despite these restrictions, rent continued to accrue and the tenant would therefore be liable to repay this as soon as these provisions came to an end. However, the Government have said that further legislation will be introduced shortly that will ring-fence rent arrears that have built up during this period and that Landlords and tenants will be required to come to an agreement on the treatment of those ring-fenced arrears. If an agreement cannot be reached, it appears as though some sort of binding arbitration process will be put in place that ensures a legally binding agreement is made. Further announcements on how this process will be implemented, as well as its effect on forfeiture, are expected imminently.
  2. The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 was introduced in March 2020 and increased the minimum net unpaid rent that must be outstanding before CRAR (Commercial rent arrears recovery) may take place. These restrictions have also been extended to 25 March 2022.
  3. Schedule 81 of the CVA extended notice periods in relation to possession proceedings for certain residential tenancies. Under the latest amendments, the modified notice periods will end on 30 September 2021 and revert to those in force before the pandemic with effect from 1 October 2021. However, the government will retain the power to re-introduce longer notice periods until 25 March 2022

How does this effect tenants?

Although the above restrictions still offer some comfort to tenants, it’s clear that measures are beginning to relax and will come to an end at some point in the near future. As such, simply not paying the rent is not a viable option and will only result in tenants being in serious financial difficulties in a few months’ time. As such, tenants who have not been paying some or all of their rental payments should now take action and obtain advice so that they can evaluate their position in order that they are ready for the relaxation of the restrictions.

What options remain available to Landlords?

As a result of the current restrictions, landlords may only have a few limited options available to them to recover debts due to them, such as:

  1. Debt claims in the County Court. However, in light of the above restrictions, it may be difficult to enforce any successful claim.
  2. Claims for damages
  3. Claims against Guarantors
  4. Drawing down on a Rental Deposit

Other than the above, landlords’ best bet may be to wait until the government announces further rules surrounding the forfeiture restrictions and the ring-fencing of any outstanding rent. Given how complex these provisions appear to be, landlords may want to take advice to ensure that they follow them correctly.

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