2020 has been a tough year for many companies around the globe, and the number of bankruptcy and restructuring cases is expected to rise under the influence of COVID-19
“To minimize the risks, [companies] need to look into their financials very closely, on a daily basis, [and] look at the cash flow in and cash flow out, and the need of the cash and working capital management,” says Derek Lai, vice chair of Deloitte China. In the near future, Lai believes there will be more consolidation in the market.
But even if a company is risk-resilient enough, how do they stay immune from the financial difficulties of upstream or downstream partners? Michelle Hung, general counsel and company secretary of COSCO SHIPPING Ports, provides suggestions on what to do before, during and after entry into a contract:
(1) An adequate credibility survey should be conducted before signing the contract, to ensure the partner has the ability to perform;
(2) The contract, when signed, should incorporate appropriate protection clauses, especially regarding liability for breach of contract, to ensure the timely exercise of contractual rights in the case of the partner failing to fulfil the contract, such as entitlements to liquidated damages, exercise of security interests, suspension of service and termination of contract; and
(3) After entry into the contract, due attention should be paid to the partner’s contract performance, notably its payment of accounts payable, to ensure proper risk prevention and control. If the partner shows poor operating conditions, or defaults on payments, or even gets out of contact, collection efforts should be strengthened promptly. Where necessary, contractual or statutory rights should be exercised, including declaring accelerated maturity of accounts receivable, exercise of security interests, suspension of work, or even termination of contract in a bid to reduce losses.
Mah Soon Sin, legal director of international affairs at Haier Smart Home, says he and his team have conducted risk screening over all contracts with suppliers and clients. “Everyone was nervous when the coronavirus began spreading,” he says. “We changed the contracts with some partners that had maintained a prolonged relationship with us, such as extending the accounts receivable period from 90 days to 180 days.
“Likewise, some of our overseas factories were not sure about when to bring production lines back onstream. We talked to our clients and extended the lead time from, for example, 30 days to 90 days.”
Nevertheless, Mah says one of their overseas product dealers filed for bankruptcy liquidation. “To protect our brand image, we took over local aftersales services, stopped shipments to it, and requested payments for the goods,” he says.
As for overseas clients that are insolvent or on the brink of bankruptcy, Mah says the biggest challenge is property attachment. “Unlike due diligence, in which the investigated party provides information, now the two parties are on opposite sides, and the other party is unwilling to provide its property information, making it difficult to enforce attachment,” he says.
