COVID-19 can be ‘frustrating’
COVID-19, and the restrictions imposed by the government in an attempt to control it, have deeply affected our lives. However, it’s not just our social lives that have become frustrated. Some businesses and individuals have found themselves party to a contract they can no longer perform due to COVID-19 and the government restrictions. Whether it is an event scheduled during a lockdown that can no longer be held, a customer who you can no longer supply or transport goods to due to travel or border restrictions, or a service you can no longer provide, the ‘doctrine of frustration’ may be able to help.
The courts first recognised the doctrine of frustration in the 1800s case of Taylor v Caldwell where two parties had a contract to lease a music hall that burnt down before any concerts could be held. The court held that the contract was frustrated and the parties were discharged from their obligations under the contract.
‘Frustration’ has a very high threshold. The event causing frustration cannot be caused by either of the parties and must make contractual performance impossible, or radically alter the obligations under the contract. You cannot rely on frustration if the event has become difficult or expensive.
If you can prove frustration then you may be able to recover some or all of the money already paid under the contract. Some, or all, of any money you owed under the contract may also cease to be payable.
Contracts may also have a ‘force majeure’ clause; also with a high threshold. This clause may excuse a party from performing (in whole or in part), allow a delay in, suspend performance of or provide a right to terminate the contract. Where the clause specifically refers to government actions or epidemics it may potentially be used for COVID-19.
If you think either of these situations can give your business some relief, we’re happy to help.
Debt recovery – what is the process?
The economic fallout from COVID-19 will have many businesses facing issues with unpaid debt. As cash flows tighten, this is a good time to understand the process of debt recovery.
The exact procedures will differ depending on the agreement you have with your debtor and the type of debt, but the general process is as follows:
- Informal reminder: it is quite common for a payment to be late or forgotten; usually an email or phone call to remind the debtor is all that is required.
- Formal notice: if your debtor does not make payment for an extended period you should notify them in writing of the unpaid debt, and that they are required to make payment under the agreement or terms of trade. The notice should give a timeframe for payment to be made.
- Letter of demand: if payment is still not made, you can then issue a letter demanding the debtor makes payment or you will take legal action to recover it. This letter could provide an offer to negotiate a payment plan.
- Legal action: if still unsuccessful, then you may begin legal action to recover the amount owing. This could involve applying to the court for a judgment to recover the amount.
- Enforcement: if an order for repayment is made, then you can apply to have the judgment enforced. Possible enforcement orders could include a repayment schedule, confiscation of assets, using a debt collection agency or even the appointment of a liquidator.
In these post-COVID times, many businesses will be struggling with cash flow and the viability of their business may be in question. It pays to remember that the style and tone of communications with your debtor may make the difference between being paid or not paid.
The debt collection process can vary depending on the situation and there can be pitfalls if the process isn’t followed correctly. If you are unsure about how to proceed to recover a debt, please don’t hesitate to contact us.
‘Safe harbour’ for directors
In May, legislation was passed amending the Companies Act 1993 to help businesses facing insolvency due to COVID-19. The changes include:
- A ‘business debt hibernation’ regime that will allow businesses that meet the required criteria to place existing debts into hibernation for one month, or up to seven months if creditors approve
- Providing directors of companies facing significant liquidity problems due to COVID-19 with a ‘safe harbour’ which will, under certain conditions, relieve directors of their duties with regard to reckless trading and incurring further obligations. Directors need to be aware that this safe harbour will not release them from their other duties under the Act. The safe harbour lasts for six months from 3 April but may be extended until 31 March 2021
- Enabling the use of electronic means (such as holding meetings electronically, voting electronically or using electronic signatures) even when a business’s constitution does not allow this
- Providing relief for businesses that cannot comply with their constitutions due to COVID-19, and
- Giving Registrars (government officials responsible for the Companies Register or the Personal Property Securities Register, for example) and Ministers of the Crown the power to grant exemptions from certain statutory obligations.
If you think any of the above measures could apply to your situation, please don’t hesitate to contact us for advice specific to your business.