eNews June 11
In the News
June 11, 2020
Credit Professionals Dealing with Challenging Times
—Michael Miller, managing editor
During this unprecedented time, impacted companies are re-evaluating how they are doing business. Some companies are changing drastically, while others are not making many changes. The industry, sector and location of the business determines what steps need to be taken as the world continues to recuperate. Along with businesses, credit departments have also been greatly impacted, and there’s new data to back this notion.
According to NACM’s latest COVID-19 survey from early June, slightly under 12% of respondents reported seeing no impact from the pandemic. Increased digital communication was the largest impact seen by credit departments with more than 67% of respondents seeing an increase. As the months have passed, credit departments have started working better together. In March, only 7% of respondents reported improved workplace process efficiency. Now, nearly a quarter or respondents in the latest survey said their credit department had improved in this area.
Credit departments have also seen a decrease in payment terms extension requests. Just under a third of departments reported customers are not requesting/demanding an extension of payment terms in the June survey. In April, terms extension was requested by under a quarter of customers. However, when customers are looking for an extension, many credit departments are proceeding with caution and on a case-by-case basis. Others reported putting customers on a credit hold or extending terms a standard length to all customers. “New credit applications that are received are being reviewed with higher standards,” said Christina Knowles, credit manager with Faribault Foods. “All new customers are receiving terms of cash in advance and, after a few orders where credit is shown to be worthy, then terms take effect.”
One of the biggest changes during this time involves the credit decision-making process. Credit departments are taking more time and are looking for higher creditworthy customers. They are also implementing stronger credit investigations—the top response at more than 62%. However, a fifth of respondents reported they have not re-evaluated credit risks, and three-fifths said they have not requested updated financials since mid-March. Former NACM-National Chairman Kenny Wine, CCE, said he’s continuing his normal processes; however, “we are relying on trade references more with short-term decision-making.”
Despite reports of payment struggles across the board, more than half of respondents in June said they have not had any customers file for bankruptcy. Just over a third said they have had less than five customers file. “No bankruptcies as of yet, but I am expecting a few,” said one credit professional in the food industry. “We have been gentle about pushing for money. Some of our customers surprised us by immediately (when they got their SBA money) paying their balances. Some paid as soon as they opened or, at least started paying, and only a small amount closed their doors or refused to pay.
Payment Problems Persist in China
—Andrew Michaels, editorial associate
Economists and credit professionals around the world have come to a similar consensus about the coronavirus’ impact on business in the foreseeable future. Although health care, cleaning/disinfectant products, etc. are in high demand, other businesses are busy addressing internal and external issues, such as working from home as well as customer requests for credit and payment extensions. Among them is China, ground zero of COVID-19, which is currently combating its latest challenge in the form of payment delays.
On June 2, credit insurer Coface released its China Payment Survey 2020 reviewing the prior year’s payment behavior and expectations for the remainder of 2020. The survey included responses from more than 1,000 Chinese companies.
According to the latest findings, in 2019, payment delays exceeding 120 days increased 6% over 2018, while average credit terms exceeding 120 days increased 3%. The latter has increased over the past two years, with twice as many respondents offering average credit terms exceeding 120 days in 2019 than in 2017.
“More ominously, the proportion of respondents experiencing ultra-long payment delays (ULPDs, over 180 days) that exceed 10% of their annual turnover increased to 27% in 2019, up from 21% in 2018,” the report states. “When these constitute a large proportion of total annual turnover, a company’s cash flow may be at risk, which is worrisome in case of exogenous shocks like COVID-19.”
The study also notes that companies’ decisions in 2019 may very well impact their operations this year and moving forward. For example, 40% of respondents said no credit management tools were used last year to address cash flow risks, while only 17% utilized credit insurance. Coface anticipates a 1% decrease in China’s growth this year in addition to increased payment delays.
A June article from South China Morning Post further analyzed the Coface report, highlighting how the payment struggles are hurting small- to medium-sized enterprises (SMEs). At the forefront of the article was fabric and furniture manufacturer Xie Jun and his business in Zhejiang. Waiting 60 to 90 days for payment was common, Xie said in the article, but now, the wait has reached the seven-month mark.
“We can do nothing about it,” Xie said in the article. “Since February, it has been said that all small- and medium-sized enterprises have resumed production, but in fact, everyone has a serious shortage of orders and cash flow. How can we pay suppliers on time? Triangular debts among SMEs will be more severe than ever this year.”
This aligns with Coface’s findings regarding the 37% of respondents who said they waited more than four months for payments in 2019, even before COVID-19.
“Since last year, we have suffered a lot from a longer and longer extension of payment terms,” added electrode manufacturer Hu Maosheng. “Especially during the epidemic, the problem became more severe than in the same period in 2019.”
Unexpected events can catch companies off guard. Although planning for them might be difficult, it’s not impossible. Join Work With Agility’s Alan Gleeson and Parachute360’s Lyle Deitch as they present Planning for the Unexpected: Coping with Uncertainty at 10 a.m. ET, on June 18. This webinar will provide an overview of black swan events and their characteristics, including:
- Steps for Managing Uncertainty
- Business Continuity
- Risk Mitigation Beyond Just Credit Evaluation
- Scenario Planning
After successful completion of the course and final exam, you will receive the FCIB’s Certified International Credit Professional (CICP) designation. Early rate good until April 10. For more information and to register, please visit FCIB.
What Is a Bankruptcy Proof of Claim and Why Is it Important?
—Michael Brandess, Esq.
Filing a proof of claim is the most fundamental defensive action a creditor can take in a company’s bankruptcy case. It is a creditor’s means of asserting how much it is owed and whether its debt should be prioritized over other creditor claims. In many instances, a creditor cannot participate in a bankruptcy case or receive a distribution without filing a proof of claim.
Do I need to file a claim?
During the bankruptcy case, debtor companies are required to publicly file their schedules—a list of all their assets and liabilities. Liabilities include all the company’s debts, including their trade payables. For each scheduled claim, the debtor must list the name of the respective creditor and the amount purportedly owed. Heading into bankruptcy, a debtor company will likely have maintained records regarding its existing debts, but the accuracy of these records is often suspect, if not altogether incorrect.
In Chapter 11, a creditor need only file a proof of claim if there is some discrepancy in the debtor company’s schedules—such as the amount owed to the creditor or the priority asserted. If the claim is altogether missing from the schedules or is designated as contingent, unliquidated or disputed, the creditor must also file a claim. However, if the creditor agrees with the information listed on the schedules, no claim need be filed.
In a Chapter 7 liquidation, creditors are required to file proofs of claim in order to receive distributions regardless of what the company lists on its bankruptcy schedules.
How to I prepare and file my claim?
In filing a proof of claim, a creditor must fill out and sign the proof of claim form, which can be found on the bankruptcy court’s website. The form includes sections that ask for basic information, such as contact information and the amount of the claim. If a creditor’s claim is entitled to elevated priority, the creditor should fill out the corresponding portion of the claim.
In addition to the form, a creditor should additionally attach some evidence of the amount owed—such as invoices or a contract. Once completed, the claim must be filed with the bankruptcy court. Many courts now accept electronic submission of proofs of claim on the courts’ respective websites.
The bankruptcy court will generally establish a deadline by which time creditors must file their proofs of claim. It is important that creditors comply with this deadline. This is referred to as the claims bar date. A late-filed claim might be subject to disallowance on the basis that it is late—rendering the claim unpayable. But a claim that is timely filed can be amended after the claims bar date. Therefore, filing a claim before the claims bar date is more important than filing a perfect claim.
A claim is deemed “allowed” once filed unless it is objected to. Although a proof of claim has been filed, it is possible that the debtor or a successor trustee might object to the claim for any number of reasons. Should that occur, the creditor will generally be given an opportunity to defend the claim and rectify any outstanding issue (such as a mistake or providing missing information).
Will I get paid what I’m owed?
At the conclusion of a bankruptcy case, few companies pay their creditors in full. Those payments that are made are done so in accordance with a priority system codified under the Bankruptcy Code called the Absolute Priority Rule. The Absolute Priority Rule follows the following distribution waterfall:
- Secured claims on account of the value of their collateral;
- Administrative priority claims, which is largely made up of parties providing goods or services to the debtor company’s estate during the bankruptcy case (such as landlords, professionals and trade creditors who transact with the company during the case);
- Priority claims (largely comprised of taxes);
- Unsecured claims (such as trade creditors); and
This means that trade creditors won’t receive a distribution on their claims until all secured claims, administrative claims and priority claims have been paid in full.
My claim is on file, what next?
Filing a proof of claim entitles a creditor not only a right to a distribution, should one be made, but also a right to participate in the bankruptcy case. For instance, a creditor with an allowed claim is entitled to vote on a debtor’s bankruptcy plan—which will include terms of payment to creditors.
In any event, filing a proof of claim is a simple and cost-free way for a creditor to protect its interests during a debtor company’s bankruptcy.
Michael Brandess, Esq., is a partner at Sugar Felsenthal Grais & Helsinger LLP in Chicago. He represents both healthy and distressed companies, and their principals, as they endeavor to conquer new goals and address material challenges. Michael has taken clients through complex sales, acquisitions, restructurings and liquidations across the country.
NACM/FCIB Webinars—Information, Ideas and Innovation
Without the Inconvenience
Part I: Risk Mitigation in Supply Chain Contracts: Protections for Failure to Perform
- As COVID-19 continues to cripple the U.S. and world economies, many businesses question whether those within their supply chain can or will perform under their contracts.
- The law provides rights to companies facing such uncertainty, including the right to demand adequate assurance of performance.
- Even before performance under a contract is due, a party that cannot or will not perform can anticipatorily breach a contract. The counterparty can then exercise its rights and remedies without delay.
Across the world, the business interruptions caused by COVID-19 and related shutdown orders have forced many companies to adapt and others to fold entirely. As some businesses struggle to stay afloat, contracts with those in their supply chains may hang in limbo. If your company has not been affected already, it will likely face similar issues as shutdowns continue and insolvencies begin to rise. Insolvency, other financial issues, and business slowdowns and changes could hinder your customers’ or suppliers’ abilities to perform under existing contracts, and it’s important to understand your rights and obligations in this situation.
One main purpose of any contract is to provide some assurance that the parties will perform as agreed. But as many businesses face economic hardships, you may wonder about your customers’ or suppliers’ abilities to fulfill their contractual obligations. Fortunately, in these uncertain times the Uniform Commercial Code (UCC) provides some protections for transactions involving sales of goods (not services) in the United States, and the United Nations Convention on Contracts for the International Sale of Goods provides parallel protections and remedies for global supply chains. Here are some questions to consider.
Did a customer or supplier “anticipatorily repudiate” the contract?
UCC § 2-610 addresses “anticipatory breaches” or “anticipatory repudiations,” situations in which a customer or supplier, either by words or actions, indicates that it cannot or will not comply with its contractual obligations before the time for performance is due. For example, a supplier may tell you that it will not deliver goods unless you are willing to pay a higher price. Or, it may stop manufacturing certain products you agreed to purchase to focus on other products or projects, like hand sanitizers or face masks. Or, a customer tells you it can’t meet the agreed payment terms. Whether any of these actions constitutes an anticipatory repudiation is highly fact-dependent and hinges on the circumstances and language that the customer or supplier uses when expressing its intent to not perform. For example, a delivery delay is usually not an anticipatory repudiation unless the contract contains a “time is of the essence” clause.
It is critical that anticipatory repudiation be based on more than mere uncertainty. An anticipatory repudiation exists when a reasonable person can conclude that its counterparty cannot or will not perform under the contract based on the counterparty’s overt acts or communications. For you to show that an anticipatory repudiation exists, the customer or supplier must have overtly acted or communicated in a way that substantially impairs the contract’s value and renders its performance reasonably impossible or that demonstrates its intent not to perform or continue performing when performance is due. A party’s general financial trouble is usually not sufficient, but some courts have found that issuing a notice of a plant closure was enough to constitute an anticipatory repudiation. An anticipatory repudiation gives you rights even before a breach occurs. You may, in all cases, suspend your own performance. You can also either await the supplier’s or customer’s performance or cancel the contract and resort to the remedies available for a breach. However, because it is often unclear whether a party can or will perform under the contract, you can quickly become the breaching party if you wrongfully conclude that there has been an anticipatory repudiation. To avoid this risk, the UCC allows you to demand “adequate assurance” that the supplier or customer will perform as agreed.
Part II of this supply chain protection article will be featured in next week’s eNews.
This article is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.
Reprinted with permission from Thompson Hine, a full-service business law firm.
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