It is an understatement to say that SMEs has been hit hard by COVID-19. The unprecedented and widespread disruptions to business operations have thrown many businesses into financial disarray. SMEs often does not have deep pockets to weather a prolonged period of cessation of business operations and 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 (‘TMA’) to evade payment obligations.
This article briefly discusses the recovery of business debts, ways to manage manpower costs and dispute resolution, issues which the writer believes are at the top of the minds of most SME owners.
It is now considerably much more difficult and inconvenient to recover business debts. This is due to recent legislative intervention which aims to minimise litigation and offers a much-needed lifeline for cash-strapped businesses.
In cases where the relevant contract qualifies for TMA relief (see more here), the debtor could simply serve a notification for relief and would receive protection from legal proceedings and other actions such as repossession of goods used for trade/business sold under a hire-purchase agreement. Although the granting of TMA relief may have good intentions, it is inevitable that there would 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. If a creditor does not agree that the debtor is eligible for relief, the creditor may apply to appoint an Assessor to make a binding determination. However, that added inconvenience may well discourage SME creditors who find the hassle of applying and preparing for an Assessor’s Determination an added distraction from their already piling woes.
Even in cases where relief under the TMA is not applicable, it should be noted that the debtor must now owe at least $60,000 and be unable to pay within 6 months of being served a statutory demand before the creditor can commence an action for insolvency. In practice, debtors owing debts considerably less than $60,000 would have less incentive to pay their debts.
SMEs should brace themselves for possibly worst 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 being defaulted on.
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 instalments payment proposals rather than insisting on the full sum to be payable. To give incentive to the debtors to make prompt instalment payments, interest may be waived or reduced 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.
Managing manpower costs
Owing to the reduction/cessation of business activities, SME owners are likely to find themselves having excess manpower. SME owners 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 relief measures and grants (eg. Jobs Support Grant) 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, businesses may have to take the painful decision to terminate the services of employees made redundant by the changed business environment.
Managing contractual disputes post COVID-19
The many disputes that stems from the COVID-19 fallouts also opens up prospects of litigation as SMEs engage in legal battles and cross swords on whether a party is entitled to statutory relief under the TMA 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 and at times an amicable settlement reached via mediation and negotiation may reap even greater benefits for the busines in the long run.