Financial distress and the Coronavirus

Category: Dispute Resolution, News

The effects of the coronavirus on the economy are already widespread and it is unclear when the situation is likely to improve. Whilst the Government continues to roll out its support measures, the effect on business, across all sectors, is likely to be long lasting. Businesses are already feeling the pinch and in being prevented from ‘trading out’ of the current circumstances, many will be left with no option but to default on their obligations and a degree of financial distress.

Given such economic uncertainty, it is likely to be in a creditor’s bests interest to come to an agreement with a debtor, such as extending payment terms, rather than seeking to enforce their rights. However, it is vital that creditors consider every option available to them in protecting their interests, especially if a debtor opts to go down the insolvency route. Below, we highlight some key considerations to bear in mind, both currently and moving forward.

Force Majeure

Consider your contracts

Your contracts should be in writing, be clear, tailored to your circumstances and kept up to date. Are you relying on standard terms? If so, how are these terms incorporated? If terms are made available online, how are they drawn to the attention of your clients or customers?

Be aware of provisions giving the other party the right to assign their interests to somebody else. Do they need your permission to do so? As far as possible, you will want to limit this right.

Do your standard terms include provisions on which legal jurisdiction applies or reflect any agreement on how disputes are to be resolved? If you are contracting with a party in another country, you need to be clear on which law applies from the outset. This could save a significant amount in both time and money. Equally, setting out a clear resolution process, which may involve mediation as a first step, is likely to save on costs and may lead to an early resolution.

Consider whether your standard terms include an effective ‘force majeure’ clause. These need to be drafted very specifically, so that it is clear what you and your contracting partners agreed to. Will existing clients agree to vary existing contracts to include the same? We have advised more on force majeure clauses here.

For future contracts, consider the value in negotiating break clauses. These allow you to end the contract on notice, either at will or on a specified event, prior to the end of the contract. There are of course commercial considerations here, but flexible provisions may assist both parties and ensure performance under the contract.

Debtors and Creditors

Security

Do you hold any security over the contracting party? If so, it is important that it has been ‘perfected’, in other words created in such a way as to protect the debt and ensure that money is paid out to you ahead of other creditors.

Similarly, if a contracting party’s debt has been guaranteed by a third party, you should make sure that the guarantor is sufficiently stable to protect your interests.  

If no security is held (or no guarantee is in place), explore whether the contracting party will agree to provide security, both for any existing and future debt. This will go some way to protecting your assets and improve the chances of you recovering any debt in the longer term.

Retaining title in your goods

As far as possible, ensure that you are able to retain legal ownership of the goods you supply until such time as they have been paid for. Your standard terms will need to be clear on this and we can advise on this point if necessary. If identifying your goods and your title in those goods is made easier, this will make recovery far easy if the client or customer becomes insolvent.

Credit control

Reducing your period for payment and being active in your credit control approach will improve the speed and frequency of payments. There is no magic bullet when in comes to getting paid, but ensuring you stay on top of debts and have strong financial due diligence in place for prospective clients or customers will assist.

Set off and Liens

Do your standard terms include provisions allowing you to ‘set off’ amounts which may fall due by your business, against monies already owed to you by your contracting partner? This can be an important means to reduce your liabilities between parties. Equally, if you are in possession of the other party’s assets, you may be able to exercise a lien over their property until any debt is paid.

Insurance

Whilst relying on an insurance policy is never an ideal outcome, you should consider the availability to your business of adequate credit insurance. This might protect the business against non-payment by clients or customers.

A key question for many businesses is whether or not their current insurance policy includes business interruption insurance and, if so, whether this is wide enough to cover losses flowing from the coronavirus. Many business interruption policies do not extend to closures enforced by central government, as they are generally focused on physical damage to a business property. If you have yet to do so, you should establish whether any losses, caused by closures or other business interruption, can be recovered under your existing policy. We are happy to provide such checks for you.

Should you wish to discuss more about ways of protecting your business, negotiating with creditors or debtors or wish to take advice on recovering monies owed, please contact the Commercial Dispute Resolution team by emailing [email protected] or please call 01752 827014

content hub