As a result of the COVID-19 pandemic, the global economy has experienced a more severe slowdown than was witnessed during the 2008/2009 financial crisis. In fact, some economists predict that economies will experience the worst recession since the Great Depression of the 1920s. A key early indicator of this is the sharp decline in employment rates the world over. However, governments in many countries have moved swiftly to support households and businesses by providing a range of measures to restrict debt collection litigation during this crisis.
The comparative economic effects
A report by the Central Bank of Ireland compared online job postings on the website Indeed in April 2019 and April 2020. The study revealed that Ireland, UK and Australia have suffered the biggest decrease in job advertisements during this period. These countries are experiencing an unprecedented rise in unemployment, with households and businesses suffering financial hardship and a change in their ability to make repayments to their existing debts.
It is therefore useful to compare the range of restrictions on debt collection activity that have been put in place in Ireland, the UK and Australia during these challenging times.
The 5 main mortgage lenders namely, AIB, Bank of Ireland, KBC, Permanent TSB and Ulster Bank, all announced on 18 March 2020 that they would be offering loan and mortgage payment breaks to their customers for up to three months. The payment break of three months will not adversely impact a customer’s credit record. They also agreed to defer court proceedings including repossessions for three months.
The Banking and Payments Federation Ireland (BPFI) have subsequently confirmed that mortgage related payment breaks and deferral of court proceedings are also being made available by the non-bank mortgage lenders and main credit serving firms.
The BFPI confirmed on 30 April that the banks and other lenders have agreed to extend the three month payment break for a further three months.
All mortgage lenders are providing a mortgage holiday of up to three months for borrowers that are experiencing issues with their finances as a result of COVID-19. No additional fees or charges, other than accrued interest, should be levied as a result of the payment holiday and the payment holiday should not have any negative impact on the customer’s credit score.
The courts services in England and Wales have announced that from 27 March 2020 all on-going housing possession actions have been suspended. This also includes new cases about to go in to the system. This will initially last for 90 days but can be extended if needs be. Courts’ bailiffs have also been stayed for 90 days from 27 March 2020 from executing a warrant for possession.
The UK’s wrongful trading laws has been suspended from 1 March 2020 so that businesses can allow company directors to pay staff and suppliers, in certain situations, even if the company is facing insolvency.
Temporary changes were made to the existing insolvency laws in Australia on 24 March 2020. These changes will be in effect for six months and can be extended if needed.
Two changes have been made to statutory demands. Firstly, the minimum amount for issuing a statutory demand has been increased from $2,000 to $20,000. Secondly, the period of compliance with a statutory demand has increased from 21 days to six months. These changes only apply to statutory demands served on or after 24 March 2020.
Temporary changes have also been made to bankruptcy laws. The judgment amount at which an Official Receiver can issue a bankruptcy notice against an individual has been increased from $5,000 to $20,000. The period for compliance with a bankruptcy notice has been temporarily extended from 21 days to six months. Similar to statutory demands, these changes will only apply to bankruptcy notices issued on or after 24 March 2020.
A temporary safe harbour from insolvent trading has been introduced that provides directors with temporary protection from personal liability for any debts incurred while the business was insolvent.
Lenders have also announced a range of measures for customers in financial difficulty. These measures include interest only payments, lower repayments and deferred payments for 3 months (then a review with the option of up to 6 months).
Ireland and UK have introduced broadly similar restrictions to debt collection litigation with lenders offering payment holidays and pausing court actions. The UK has gone one step further and also announced that it is suspending certain insolvency/wrongful trading laws. Australia has introduced a wider range of measures for a longer period of time with changes to insolvency law also encompassed.
The Irish government has been rightly commended on the speed of the mitigating measures taken, in the early phases of the covid-19 crisis, including restrictions on enforcement agreed with various stakeholders. In contrast to, say, the UK position, there was clarity and consistency of communication. However, as we now approach the exit phase of some of the restrictions, households and businesses have called for greater clarity, from the Irish government, on measures sought to give them on-going protection details of which have been slow to emerge here. The Irish government can look to the actions and procedures put in place by its Australian counterparts in that regard.
What will happen later?
It is important to note that many businesses and households are increasing their debt levels during this crisis. It is important to note that the restrictions set out in this article do not cancel these debts, they merely postpone them and in many cases the customers will have increased repayments once the restrictions end.
At this stage, governments and lenders have not indicated what will happen once the time period of restrictions is up, if the situation has not improved. Given the rising levels of unemployment and consequently of debt, we may see a tsunami of debt collection litigation post COVID-19.
We are assisting our clients to obtain maximum value from any debt collection activity during the crisis by way of contract and portfolio reviews and advising around commercial leverage, which may well result in faster payment, in certain supply chains.
For more information, contact a member of our Debt Recovery team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.