Safeguards in the Covid-19 World – Accumulating Business not Debt
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The consequences have been sizeable and one regular issue we are seeing is suppliers being unable to comply with contractual obligations leaving them exposed to legal action. However, there are measures suppliers can take to minimise, and manage, the effects of COVID-19, so as to mitigate the risks of the current uncertain circumstances.
1) Updating Terms and Conditions (T&Cs)
COVID-19 is a major event that should prompt a review of your T&Cs, especially in respect of the following areas:
- Payment terms
46% of UK companies predict the risk to their businesses from debtors will rise over the next 12 months, an increase of 32% from 2019, with over half of businesses of the view that late payment is materially hindering strategic growth. Given the significant impact of delayed payment for goods and services, suppliers should ensure customers keep to the T&Cs and any agreed payment plans.
- Retention of Title
Retention of Title clauses (ROTs) are especially important in sale of goods contracts in order to recover goods (or payments for them) that have not been paid for in full by your customer, which may be directly because of the effects of COVID-19 or as the customer has become insolvent. ROTs are also useful where suppliers have contracted out their tooling and pressers to contractors for the purposes of manufacturing goods to fulfil obligations in third party contracts. Such clauses ensure that suppliers are able to enforce their ownership rights in the tooling and pressers in order to recover the items immediately, so production can continue elsewhere in the event the contractor becomes insolvent.
- Mediation Clauses (also known as Dispute Resolution Clauses)
The courts actively encourage parties to attempt to resolve any dispute amongst themselves. A popular form of resolution is mediation. As such, it is important for you to include a dispute resolution provision in your T&Cs that you are familiar and comfortable with, as this will provide you with an opportunity to resolve disputes at an early stage, which could save time and legal costs.
- Termination Clauses
You may wish to consider the use of Termination Clauses, which would allow you to cease the supply of goods or services in the event that the customer fails to comply with any of its obligations under the T&Cs. Termination Clauses are useful mechanisms to ensure that resources are not wasted on contracts where the risk of COVID-19 disruption is considered unreasonably high. Please note that there are presently limitations on using Termination Clauses in certain circumstances (which are addressed at section 4).
In order to avoid any disputes relating to the incorporation of amended T&Cs, it is essential to explicitly draw your customer's attention to any changes made prior to entering the contract, and to ensure that the they understand the changes and are happy to contract on those amended terms.
2) Due Diligence
Due to the seismic impact of COVID-19, completing detailed due diligence is now an integral part of a supplier's financial hygiene and planning, especially as payment trends in the UK during the first 6 months of the initial lockdown worsened significantly across the majority of sectors.
Filings at Companies House can be useful, though may not be completely up-to-date. Online credit checks are updated more frequently, and are a good indication of your customer's present trading performance. However, the most preferable enquiry is to request your customer's latest set of management accounts, so you can see how up-to-date the information at Companies House is. The management accounts will also enable you to make an informed judgment on the customer's current financial health, and the associated risk of contracting with them.
3) Practical Options
If you find yourself in the position where debtors have accrued because of the disruption caused by COVID-19, you should first look to take practical steps in attempting to realise the debt. Communication is key; corresponding early with the customer and demonstrating flexibility could lead to quicker payment especially if production and supply are ongoing.
4) Legal Options
Should you be unable to negotiate a payment resolution with the customer, there are legal options available.
Unpaid suppliers of goods or services have a statutory right to claim interest at 8.1% on overdue debts and compensation for late payment.
If there are concerns regarding the customer's solvency, then starting the insolvency process, by issuing a winding-up petition for the debt, is an option. However, in response to the COVID-19 Pandemic, the UK Government introduced the Corporate Insolvency and Governance Act 2020, which implements two important considerations relating to winding up petitions, which are presently in force until 31 March 2021, but could well be extended.
Firstly, winding-up petitions are prohibited from being presented against customers if the relevant debt is a result of the COVID-19 Pandemic. The key here is to determine whether the debt can be described as being 'COVID-19 related' as opposed to having been accrued for other reasons. This may be more complicated to establish than it sounds. Each case will turn on its own merits, though a thorough investigation of the facts behind the debt is necessary to establish whether the debt is, or is not, 'COVID-19 related'.
Secondly, the enforcement of Termination Clauses is prohibited where a customer enters into a 'relevant insolvency procedure'. A 'relevant insolvency procedure' includes a new moratorium, restructuring plan, as well as any of the established insolvency procedures, such as a CVA, administrative receivership, administration, or liquidation. This provision stops suppliers from ceasing their supply of goods or services, or from asking for additional payments, while a customer is going through the applicable insolvency process.
It is important to note that it is the rights to terminate for events occurring prior to the insolvency procedure that are suspended, and only while the insolvency procedure is in place. The prohibition does not apply to rights to terminate that arise in relation to new contractual breaches that occur after the relevant insolvency procedure begins.
A 'Small Supplier' is exempt, and therefore is able to suspend its supply of goods and services (presently up until 30 March 2021) but only if it can demonstrate that it would suffer hardship if it had to continue to maintain supply. While a 'Small Supplier' is relatively easy to identify, no guidance has been issued in relation to what would constitute hardship, but it is to be assumed that the standard to meet will be very high, as the supplier would in effect be seeking to suspend its primary contractual obligation. Individual facts and circumstances will be critical in any analysis and determination.
Conclusion
By taking the above actions, suppliers can best protect themselves during the COVID-19 Pandemic, and place themselves in a strong position to emerge in a relatively healthy financial state.