How Covid reality is forcing landlords and suppliers to be creative on collecting debts. What is happening in the market place.

By Jim Stafford

We are seeing a different type of client during the current Covid financial difficulties than we did from the 2008 Economic Crash. Our “2008 Cohort” of clients were largely people who over leveraged themselves and were caught when the property crash occurred. Our “Covid Cohort” comprises business people in the hotel/hospitality and retail areas who, even if they were prudent business people, are being financially devastated.

We are currently handling two Covid related streams of work categories: Landlord/Tenant, and business customer/business supplier.

Landlord/Tenant work stream

We act for either Landlord or Tenant, and there is a certain “template” to be followed.

The well advised landlord will seek full financial information about the tenant, to include accounts/projections and possibly copies of recent bank statements. The landlord will then assess if the tenant has the capacity to pay. The landlord will also review personal guarantees.

As some guarantees are subject to time limits, the landlord needs to assess his options quickly.

If the tenant is unable to make full payments then the landlord can negotiate around the following options:

· Agree a rent free period.

· Defer the rent.

· Charge rent on a % of turnover.

· Have tenant abandon any break clauses.

· Extend the lease.

· Vary the other terms of the lease, such as re-locating tenant to a less favourable “pitch” within, say, a shopping centre.

· Charge interest.

If charging rent on a % of turnover basis, then the landlord needs to consider also obtaining a % of on-line sales. This particular aspect of negotiations can be tough as the tenant may have a separate company for on-line sales or may claim that the on-line sales derive from other stores.

Some retailers have considerably bumped up their on-line sales and deciding to close less profitable outlets.

In practice, we are now seeing many landlords moving away from their initial aggressive position at the beginning of the Covid crisis to a more pragmatic position of “sharing the pain.” We have seen all types of deals from one tenant only paying rates and service charges for the next 12 months, to personal guarantees being called upon.

Supplier/Customer work stream

We are providing advisory work to business customers who are unable to pay their suppliers. Many of these clients are already availing of the “debt warehousing” facilities being provided by Revenue, and they are seeking “debt warehousing” or “debt forgiveness (or a combination of both) with their own trade suppliers. In effect, we are negotiating “informal schemes of arrangement.

When seeking “debt forgiveness” from a supplier, we apply the principles of Examinership legislation i.e. we provide creditors with a better outcome than a liquidation. Another key principle is that the business must be viable after the debt forgiveness is granted. Why do creditors participate in such schemes? They receive a better outcome than a liquidation and they retain a customer going forward.

One lesson I have learnt over the years is that it is much easier to do a deal with a single creditor who is owed €500,000 than 10 creditors who are owed €50,000. The more money a creditor is owed, the more the creditor is in a type of “partnership” with the customer.

Informal Schemes of Arrangement

When a company gets into financial difficulty the directors have the opportunity to enter into an Examinership. However, Examinerships attract significant legal expense, and are therefore generally not suitable for the small/medium sized company.

Situations Suitable for Informal Schemes

Informal schemes are done outside the ambit of the courts and are particularly suitable for situations where there are a handful of large creditors. Dealing with a large number of smaller creditors would be time consuming and the risk of news of the company’s difficulties reaching the market place is increased.

Effective Communication

Effective communication is paramount for the creditors to understand how the company got into financial difficulties and for them to support any future recover plan.

Hiatus Period

Once the directors become aware of the company’s financial difficulties, they need to take steps to protect their personal position in respect of any subsequent claims for wrongful and reckless trading. Accordingly, no new supplies should be ordered by the company unless the directors believe that they have a reasonable expectation of paying for them.

First Meeting of Creditors

Once the directors have decided to try and work out an informal scheme of arrangement with their creditors, they should arrange for the preparation of a brief report which should be distributed to the major creditors. This report should contain the following:

· Reasons for the company’s current financial difficulties.

· Management accounts prepared up to a recent date.

· A listing of creditors.

At the meeting of creditors, which can be held over Zoom, a recovery plan should be presented for the creditors agreement. The recovery plan should clearly show that the underlying business is still viable, or can be made viable if certain steps are taken. The recovery plan may call for changes to the management team, the financial controls, products/market reorientation , pricing, and cost reduction. The plan will generally call for creditors to write off a portion of their debts. Apart from creditors being asked to write off a portion of their debt, they may also be asked to extend support to the company by reducing their prices for a period, providing advertising support and/or extending credit terms.

At the creditors meeting it should be made clear that the continued operation of the company will be dependent upon all major creditors accepting the recovery plan. The recovery plan should clearly show how creditors will benefit by supporting it. This can be illustrated by demonstrating the return which creditors would receive under a liquidation scenario versus the return they would receive from supporting the recovery plan.

A major disadvantage of attempting to implement an informal schemes of arrangement is that the company does not have court protection . Accordingly, if a large creditor decides not to support the recovery plan, then it can take legal action, such as a winding up petition or enforcement of a judgment debt. However, provided the company can establish trust with their creditors and the creditors act commercially, then such legal action should not occur.

New Monies

If creditors are being asked to write off a significant proportion of their debts, then in order to encourage the creditors to support any recovery plan it may be necessary to arrange for the provision of "new monies". These new monies my come from the directors themselves or from a new investor and may be used to invest directly in the business or to enable an initial dividend to be paid to the large creditors.

Creditor Priority

Not all trade creditors may be in a similar position. Some creditors may have valid reservation of title clauses in their standard terms and conditions, or personal guarantees which would enable them to partially recover some of their debt. The value of such terms need to be established and to be incorporated into any dividend scheme for the creditors.

The Revenue Commissioners

Invariably speaking, the Revenue will need to be consulted as part of any recovery plan. While the Revenue are prohibited by law from writing off taxes due, they are prepared to enter into deferred instalment arrangements in certain situations for the settlement of past liabilities provided interest is paid on the instalments.

The Bank

The bank will also need to be consulted as part of any recovery plan. Whether the bank will be prepared to write off a portion of their debt will depend on the value of the security they hold.

Monitoring

The implementation of an approved plan should be monitored, at least on a quarterly basis, and creditors should be kept informed of progress made.

Summary & Conclusion

Landlords and suppliers are beginning to show a more pragmatic approach to tenants and customers in financial difficulty.

What is worrying is that the Covid storm is not yet over, and the Brexit storm is around the corner.

Jim Stafford is managing director of Friel Stafford, a company specialising in Corporate & Personal Inosolvency.