eNews June 25
In the News
June 25, 2020
|I. European Governments Make Temporary Changes to Insolvency Proceedings|
|II. Risks Surround Asian B2B Sales|
European Governments Make Temporary
Changes to Insolvency Proceedings
—Andrew Michaels, editorial associate
A month before the coronavirus reached the U.S., other countries were already feeling its impact, whether it was companywide shutdowns, school closures, job losses, and more. For commercial credit, the ability to collect payment has been quite the challenge in the U.S. and abroad, especially in most European countries where credit insurer Coface said governments are implementing “measures to support corporate cash flow” and “temporarily amending the legal framework that regulates insolvency proceedings.”
Last week, Coface released an article discussing these changes in European governments, most of which the credit insurer said require the company director to notify “the competent authority” of payment defaults within a set deadline. Insolvency proceedings will then follow. In recent months, however, numerous government bodies have proposed to amend or already amended their insolvency processes. For example, in France, the company director was previously required to begin insolvency proceedings within 45 days of payment suspension or, otherwise, become “liable for late filing for bankruptcy.” However, given the current economic climate, the French government has suspended this requirement until late August, and “the existence or absence of suspension of payments will be assessed on the basis of the company’s situation.”
“Concerning the U.K., in the margin of the entry into force of the default bill, tabled on May 20, no default proceedings may be opened by creditors,” Coface reported. “If the measures in this bill were to come into force in June, then they would expire in July.”
While the German government proposed the suspension through the end of September and, potentially, through the end of March 2021, Spain waived the requirements through the end of 2020. Coface states the Public Prosecutor’s Office is the only one that can open default proceedings in Italy through the end of June. Meanwhile, in the Netherlands, there have been no changes to insolvency proceedings as of mid-June
Coface predicts a dramatic increase in European insolvencies for the remainder of 2020 and into 2021—the least impacted country being Germany with 12%, followed by France at 21%, Spain at 22%, the Netherlands at 36%, and the U.K. and Italy both at 37%. As expected, these predictions drastically differ from about a year ago when companies’ inability to pay was rarely a reason for payment delays. For instance, the U.K. and Italy are expected to have the largest increases in insolvencies in the foreseeable future, yet both were doing relatively well in March and August of last year, respectively. None of FCIB’s International Credit and Collection survey respondents for Italy said their customers were unable to pay. The U.K. survey showed that 12% of respondents had customers unable to pay, but the majority of respondents from both countries found payment delays were typically caused by customer payment policies.
“Although insolvency forecasts are roughly in line with growth forecasts,” Coface noted, “some discrepancies are apparent. The Netherlands and Germany should be the least affected countries, with GDP in 2021 less than 2% lower than in 2019. France and Spain would do worse with GDP less than 3% and 4%. The GDP of United Kingdom and Italy will likely be respectively 5% and 6% lower compared to last year.”
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Risks Surround Asian B2B Sales
—Michael Miller, managing editor
The risks are out there every day for credit departments. It’s the job of credit professionals to discover these risks, such as nonpayment, bankruptcies and geopolitical issues, and make sure the credit that the department is extending will not go unpaid. However, the increased risks surrounding COVID-19 have not made it any easier, especially for certain countries in Asia.
Atradius reviewed business-to-business (B2B) credit risks among other items in its latest Payment Practices Barometer. The credit insurer studied different aspects involving B2B trade and supply chains for India, Taiwan, Indonesia, China, Hong Kong, Singapore and the United Arab Emirates.
“With the global economy dipping into recession, payment default risks are growing,” said Andreas Tesch, member of the management board and chief market officer at Atradius, in the release. “We expect bad debts and insolvencies to continue rising into 2021. Suppliers need to manage reduced demand and financial stress. Minimizing these burdens with thorough creditworthiness assessments and ensuring adequate financial sustainability will be key to survival for many of these businesses.”
There was one common denominator for each country in the Payment Practices Barometer: tighter credit management, hopefully avoiding bad debt and bankruptcies with their commitment. Depending on the location of the business, the tools used to mitigate risk and follow through on this commitment differ. These tools include letters of credit, credit insurance, cash payments and other payment guarantee protections.
In India, write-offs have skyrocketed, three-times higher than last year for uncollectable B2B receivables. Businesses in India are using letters of credit, credit insurance and payment bonds to secure payment. Credit management techniques include discount incentives for early payment and pre-credit assessment checks. The total value of B2B credit sales declined as well from last year. The No. 1 reason for payment delays was liquidity, and overdue invoices accounted for two-thirds of B2B credit sales’ total value. These late payments cause downstream impacts including paying other suppliers late and increased costs to track down late invoices.
Meanwhile, China has seen an increase in B2B sales on credit from last year, and payment terms are increasing. On average, terms are 39 days from invoicing compared to 26 days last year. Nearly half of B2B invoices are overdue. More than four-fifths of businesses surveyed expect to strengthen internal credit control and debt collection practices.
Elsewhere, Singaporean businesses are offering longer terms than last year (39 days vs. 29 days). This means suppliers need assistance filling the shortfall in short-term trade financing. Taiwan, Indonesia, Hong Kong and the UAE each saw B2B credit sales increase year-over-year as well
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Joint Check Agreement Causes
Big Trouble in Virginia
—Jim Harvey, Esq.
Many general contractors manage the risk of a subcontractor’s financial instability by issuing joint checks to the subcontractor and its suppliers on a project. These arrangements are usually governed by a separate agreement that sets forth the roles and rights of the parties, and limits the general contractor’s liability to sub-subcontractors and suppliers with whom the general contractor does not have a contract. A recent decision by the Virginia Supreme Court now calls into question this common practice. As a result, contractors need to review and modify their joint check agreements and procedures regarding communications with lower-tier entities to limit the risk of effectively paying twice.
In the case of James G. Davis Construction Corp. v. FTJ, Inc., 2020 Va. LEXIS 42 (Va., May 14, 2020), Davis was a general contractor for a condominium project and subcontracted the drywall work to H&2 Drywall Contractors. H&2 purchased its drywall materials from FTJ, Inc. and entered into a joint check agreement with H&2 and Davis that contained terms similar to many joint check agreements that contractors use, including:
- That any checks for materials would be made payable jointly to H&2 and FTJ;
- That Davis will only make payments to the extent Davis actually owes money to H&2 on the project;
- That the sole purpose of the agreement was to assist H&2 in making payment to FTJ; and
- That nothing in the agreement creates any contractual relationship or equitable obligation between FTJ and Davis.
Predictably, H&2 ran into financial difficulties and was unable to complete its work on the project. Davis informed FTJ to stop shipping materials and then terminated H&2. Davis advised FTJ that its past due invoices were being processed, but Davis later refused to pay FTJ once Davis determined it had incurred costs beyond the remaining subcontract value to complete H&2’s scope of work. Davis relied on the language in its joint check agreement that it was not liable to FTJ because it did not owe H&2 anything further on the project.
The Virginia Supreme Court affirmed the trial court’s determination that Davis was liable to FTJ not by contract, but by the equitable theory of unjust enrichment. Even though the costs of completing the subcontract work exceeded its value, the court found that Davis had not paid for all of the drywall and was unjustly enriched by using it for the project. Prior to this case, courts in Virginia were not receptive to such claims and generally, the only relief available was through the express agreement between the parties (breach of contract), or enforcement of a validly filed mechanic’s lien or payment bond claim. This upsets the common assumption that a party is only liable for economic loss to those with whom it contracts.
Contractors commonly seek continued performance from suppliers when a subcontractor faces trouble to keep a project on track. This has now become a more complicated and risky process.
Jim Harvey, Esq., is a partner in Vandeventer Black’s Norfolk office with a wide range of experience in construction, construction defect, surety, government contracts, land use, permitting, property damage, business and corporate disputes. He regularly appears in state and federal court as well as various arbitration panels representing the needs of contractors, subcontractors, suppliers, owners, developers, engineers, architects, insurers or sureties and their agents. For more information, go to vanblacklaw.com.
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Latin America Experiences
Worst of Both Worlds
—Chris Kuehl, Ph.D., NACM Economist
The population of Latin America is around 8% of the global population, but at the moment, this region is experiencing over half of the world’s viral infections and deaths. The economic damage has been equally disproportionate. It has left many nations in the region close to utter devastation and with no reasonable path out of the crisis.
This has come despite some very extensive lockdown efforts. Peru was one of the first nations to take action. President Martin Vizcarra was hailed for his swift response. He called out the army to enforce the lockdowns and quarantine and poured $32 billion into a rescue package designed to provide a lifeline for the population and the overall business community. Despite this effort, the country has reported 200,000 cases and a death toll that is twice that of Germany.
In stark contrast, there has been Brazil where President Jair Bolsonaro has asserted that COVID-19 is all in one’s head. The numbers that have been coming from Brazil have been 90% less than those that are coming from global health authorities. Based on reports from hospitals and health authorities, it is estimated that Brazil has 800,000 cases and has had 40,000 deaths—the highest percentage in the world. Most assert that Brazil has not reached a peak yet.
There are three factors that have made this region the most vulnerable in the world to date. The first issue is poverty. The majority of these populations are poor and live in dense and underserved slums. The instructions to practice social distancing and wear protective gear have been met with derision. Neither of these responses are possible in countries where people are so closely packed together and where people lack the ability to even acquire things like masks. The hospitals were almost immediately overwhelmed by patients needing respirators. The medical personnel often caught the virus as well. There have been acute shortages of everything needed to deal with the outbreak—from masks to testing kits.
The second factor has been political—the fact that many of the leaders in these nations have been unwilling to even acknowledge the seriousness of the issue. Bolsonaro has been labeled one of the “Ostrich Alliance” along with Daniel Ortega of Nicaragua who has asserted that only those who do not believe in his Sandinista ideology will get the virus. Bolsonaro urges people to get the virus as soon as they can and “take it like a man.” Mexico’s Andres Manuel Lopez Obrador was in that dubious collection until very recently. Even now, he has made only small gestures. He has grossly underreported the number of cases. It is asserted that there have been four times the number of deaths than have been reported. He continues to urge people to ignore social distancing as being “un-Latin.”
The third factor is the economic one, and this builds on the first. These are nations that have weak economies at the best of times. They are now very near total collapse. There is no money for government assistance or for medical attention. The rates of unemployment now exceed 40% in Mexico, Brazil, Argentina and Bolivia. The rates of joblessness in Venezuela and Nicaragua exceed 60%. The level of desperation makes it nearly impossible to address the virus in any of the ways that have been attempted in Asia, Europe or the U.S. There is no way to isolate and quarantine.
The destruction of the Latin economies poses a very serious threat to the world as a whole. The U.S. will see a massive influx of migration as people attempt to flee both the economic collapse and the ravages of the virus. The already hostile attitude toward these migrants will be intensified by the health concerns.
The output of the region is key to the global agricultural supply chain. That production has been curtailed drastically. The progress that had been made in this region has all but reversed.
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