It is an understatement to say that Small-and-Medium Enterprises (SMEs) have been hit hard by COVID-19. The unprecedented and widespread disruptions to business operations have thrown many businesses into financial disarray.
SMEs often do not have deep pockets to weather a prolonged period of cessation of business operations. Hence, it is understandable that SME owners are concerned about manpower costs, cashflow liquidity and the survival of their business.
The impact of COVID-19 has dealt a double whammy to SMEs—on the one hand, business operations have been forced to scale down or to cease completely, thus decreasing revenue.
On the other hand, it is not difficult to imagine that SMEs are facing many attempts to delay or deny payment from debtors and this is not helped by opportunistic debtors abusing the relief conferred by the COVID-19 (Temporary Measures) Act 2020 (CTMA) to evade payment obligations.
This article discusses:
- The CTMA relief for SMEs owing debts
- The recovery of business debts owed to SME owners
- Possible responses to debt recovery difficulties
- Ways to manage manpower costs
- Possible options for resolving contractual disputes,
Relief for SMEs That Owe Debts and are Covered by the COVID-19 (Temporary Measures) Act 2020
The CTMA aims to minimise litigation and offers a much-needed lifeline for cash-strapped businesses.
In cases where the relevant contract qualifies for CTMA relief (see more here), the debtor could simply serve a notification for relief to receive protection from legal proceedings and other actions, such as repossession of goods used for trade/business sold under a hire-purchase agreement.
Recovery of Debts Owed to SME Owners
Although the granting of the CTMA relief may have good intentions, there would inevitably be many debtors out there who would opportunistically use the statutory moratorium as an excuse to defer their payment obligations, hoping that the debts would be forgotten.
However, if a creditor, in this case, the SME owner, does not agree that the debtor is eligible for relief, the creditor may apply to appoint an Assessor to make a binding determination on this issue.
If the Assessor determines that the debtor is not covered by the CTMA, then he/she will not qualify for the relief. The creditor is then free to commence bankruptcy proceedings against the debtor.
Regardless, SME owners should brace themselves for possibly worse days to come. SMEs with business dealings largely based on the giving of trade credit are likely to be affected the worst as payment obligations are defaulted on.
Possible Responses to Debt Recovery Difficulties
In the face of increased difficulty to use the legal process to enforce payment of debts, SME owners may wish to consider proposing/agreeing to instalment payment proposals if they are unable to make full repayment in light of COVID-19.
To give incentive to the debtors to make prompt instalment payments, SME owners who are creditors can consider waiving or reducing interest for debtors who comply with such instalment plans.
SME owners may also consider engaging the services of debt recovery companies as a last resort in cases where the debtors are believed to possess the financial means to pay but are dragging their feet on doing so.
Managing Manpower Costs
Owing to the reduction/cessation of business activities, SME owners are likely to find themselves having excess manpower. They could try to manage such costs by introducing temporary wage cuts and/or requesting employees to go on unpaid leave.
SME owners should also keep abreast of the various support measures such as the Jobs Support Scheme and Enhancements to Wage Credit Scheme rolled out by the government to assist SMEs.
SME owners should also try to adapt to changed circumstances and make relevant modifications to their business model to allow their existing employees to continue to be assets to the business.
As a last resort, SMEs may have to take the painful decision to terminate the services of employees made redundant by the changing business environment.
Managing Contractual Disputes During COVID-19
The many disputes that stem from the COVID-19 fallout also open up prospects of litigation as SMEs engage in legal battles and cross swords on whether a party is entitled to statutory relief under the CTMA, or whether the COVID-19 pandemic qualifies as a force majeure event or an event of frustration to relive the party of its contractual obligations.
In the protracted and costly litigation process, it is not inconceivable that some SMEs may not even survive to see judgment, or they may be compelled to compromise their claim to manage rising legal costs.
Therefore, it is important for SMEs to obtain legal advice in order to decide whether it is commercially viable to commence or continue litigation especially when the outcome is uncertain.
SME owners would do well to recognise that protracted and costly litigation are often a Pyrrhic victory at the end of the day. At times, an amicable settlement reached via mediation and negotiation may reap even greater benefits for the business in the long run instead.
[This article is for general information only and does not constitute legal advice. Please contact the team at Silvester Legal LLC if you require any form of assistance]