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Financial Strategies in a COVID-19 World A Presentation given to the Cayman Islands Chamber of Commerce
Presented By: Sarah-Jane Allison, Shula Sbarro and Huw Moses 8 April 2020
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Overview A Financial Strategy is key to the ‘financial health’ of a business - both during/after COVID-19: • • • •
Debt Solutions for Businesses of all Sizes Collection of Debt/Enforcement Leases: Landlord & Tenant Mortgage/Personal Loans/Credit Card
Pre COVID-19: Avoiding Accumulation of Bad Debt Know Your Client
Assessing Risk: Credit Risk Policies Protect your business: comprehensive and enforceable contracts Debt Collection Policy
Current accounting and record keeping
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2. Registered Office, Address & Contact Numbers 3. Years in Business? 4. Limited Company or Sole Trader? 5. Register of Shareholders and Directors 6. Certificate of Good Standing 7. Trade & Business License
Individual
Company
1. Full Company Name
1. Full Name 2. Physical and Postal Address & Contact Numbers 3. Date of Birth 4. Photocopy of ID (Passport or Driving License) 5. Employment details
Due Diligence
Know Your Client (“KYC�)
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1. 2. 3.
4.
5.
Bank Reference Credit Report confirming rating Credit References from businesses with which they have a credit account Statement of means detailing income, assets, liabilities Cayman Islands Gazette and Court Cause List
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Reviewing AR • Not advisable to completely suspend pursuit of all debt at this stage. • Review all current agreements/contracts.
clients/customers
with
credit
• Identify debts that can still be pursued now and those which cannot.
• If contact with a defaulting client/customer can be established, make a careful note of the reason for a reduction in income, their industry, household income etc. This data will assist in determining the likelihood of them returning to be a financially good customer and to prioritise who you contact when normalcy resumes.
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Assessing Risk: Credit Policy • A credit policy is a useful tool to assess and manage the risk of extending credit to customers.
• The policy should be tailor-made to fit your business when considering cash-flow, industry norms, economic conditions, degree of risk involved, etc. • Written guidelines that set out: • terms and conditions for supplying goods/services on credit; • customer qualification criteria; • terms of repayment; and • how credit will be monitored and steps to be taken in case of delinquency (see ‘Collection Policy’) • Carefully consider creditworthiness and overall relationship with customer before offering credit. Reviewing in light of COVID-19 appropriate credit limits and repayment terms (see ‘Contractual Terms’).
Important Contractual Clauses Robustly drafted contracts can enhance the prospects of collection.
Parties to the Contract Term & Conditions
Indemnity Clause
Authorised Signatories
Get contract signed and witnessed!
Default Interest
Accurate description of goods or services
Repayment Terms Credit Limit and any other terms
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Important Contractual Clauses
Default Interest Clause
Indemnity Costs
“In the event that the customer defaults upon the terms of repayment under this agreement, the customer shall be liable to pay interest on any sums due at the rate of 10% per annum until discharged in full.”
TIP: Avoid excessively high rates of interest or finances charges which may be considered ‘penal’!
“In the event that the customer defaults upon the terms of repayment under this agreement, the customer shall be liable for all costs and expenses of collection or attempts at collection, including legal fees, on a full indemnity basis.”
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Limited Companies and Personal Guarantees
If the contracting party is a Company, the contractual liability to service the agreement will be limited to the Company’s assets and cash flow. The recovery process may be hindered by a Company which is no longer trading, has no assets or has been struck off or wound up.
A Personal Guarantee should be sought from a Director of the Company. This is a promise made by a specific person to accept responsibility for the Company’s debts in the event the Company fails to pay.
A Personal Guarantee should: be formally drafted; stipulate that the Guarantor had been given the opportunity (or waives the right) to seek legal advice; and be signed and witnessed as a deed.
Guarantees are ‘repayable on demand’. It is important to ensure valid written demand is made and properly served upon Guarantor.
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Debt Collection Policy: Review/Amend in light of COVID-19 A well-drafted internal collection policy, tailored to your business, is a useful tool to monitor account receivables and collect on overdue accounts. A collection policy: provides a consistent framework for the entire company to work from by documenting the actions and timescales to be taken; identifies the responsibilities of staff members/departments; ensures a uniform approach to treatment of customers; prevents overdue accounts being overlooked. The odds of successful collection diminish with time. If these are not in place, implement them.
Recommendation: Debt Collection Policy 0 days
• Send invoices promptly to customer. • Invoice should include payment options and reiterate important repayment terms e.g. “This invoice is payable in 14 days. We reserve the right to charge interest at 10% per annum on overdue invoices.”
15 days
• First Reminder • Polite reminder re-sending invoice and payments terms. • Follow-up by telephone to ensure invoice has been received. Important to establish if there are any customer service issues preventing payment.
30 days
45 days
60+ days
• Second Reminder • Still polite but the tone should be firmer. E.g. “Please be advised that Invoice #1234 totaling CI$, sent to you on [date], is overdue. In accordance with the terms of repayment, interest is being charged at the rate of 10% per annum. Please arrange to make payment without further delay.” • Final Warning Letter • Firm language warning that account may be passed to Attorneys for collection if balance is not discharged in full.
• Refer to Debt Collection Attorneys • Suspend further credit (if applicable)
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Clear Accounting & Record Keeping: Considering COVID-19
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Clear Accounting
Complete and accurate records prevent disputes and makes the process of enforcement easier. Keep an organized file containing signed agreements and contact information. Keep copies of invoices, dates rendered and to whom. Document any collection activity. Maintain a spreadsheet or statement of account detailing dates and rate of interest charged.
May need to add a timeframe for COVID-19 for reference later
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COVID-19: Overview of Practical Considerations
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Analyse your business’ current position and identify its critical business functions. If able to promote, move online and deliver then put this in place.
•
Implement cost-saving measures on non-essential items to preserve cash-flow.
•
Avoid and mitigate the accumulation of business debts.
•
Assess your current debt portfolio.
•
Review debt policies and business contracts (both business & customer).
•
Diarise the COVID-19 time period in your accounts/record keeping.
•
Explore ways to alleviate anticipated problems with key contracts.
•
If no risk/contingency plan in place, create one.
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Formal Demand Letters
Refer to an Attorney
Formal Demand Letter seeking repayment of principal, interest and legal fees incurred
Demand Letter served
Affidavit of Service
Payment in full or Promissory Note detailing payment arrangement
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Promissory Notes
“A signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand.” – Oxford English Dictionary
Advantages: Creates a legally binding agreement. (Useful where there is no original written contract as may include indemnity clauses and contractual interest at this stage). Cost effective alternative to Court proceedings. Formalises payment arrangement. Capable of being sued upon if breached (subject to Stamp Duty) Demonstrates a reasonable attempt to settle the debt in the event Court Proceedings have to be issued.
How to Collect Bad Debt: Issuing Legal Proceedings In light of COVID-19 restrictions: Courts operating generally as normal (utilising e-filing, online payments and virtual hearings).
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Litigation Process
SUMMARY COURT - Claims less than CI$20,000 - Cost usually fixed by the Court (Summary Court Rules) - No Filing Fees or Ad Valorem
GRAND COURT - Claims more than CI$20,000 - Costs not restricted but will be taxed if not agreed - Loser pays winner’s Court Costs - Filing Fees and Ad Valorem applicable depending upon amount of claim
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Notice of Intention to Defend/Defence filed?
NO
YES
Directions (to be sent by court) Disclosure
Application for Default Judgment 7 days
Expert Evidence
7 days
Witness Statements
Default Judgment Default Judgment personally served
Trial
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Enforcing a Judgment Once Judgment obtained the following are options for enforcement: Judgment Debtor Examination (usual first stage) Attachment of Earnings Order (Debtor required to have a job) Charging Order (Debtor required to own a property) Garnishee Order (Debtor needs to be owed money by a third party)
Writ of Fieri Facias (Bailiff to seize and sell the Debtor’s goods in order to satisfy the Judgment Debt) Bankruptcy / Winding Up Receivership by Equitable Execution Committal Proceedings (willful disobedience to, or disregard of, a Court Order)
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Leases (Landlord and Tenant)
Financial Strategy is key during and after COVID-19. What is a Lease? • A contract by which the legal registered proprietor of property (“the landlord”), grants exclusive possession of that property to another person (“the tenant”), in exchange for the tenant's periodic payment of a sum of money (“rent”). Hallmarks of a Lease: 1. Exclusive occupation of accommodation 2. Payment (rent) 3. Term i.e. period of length of tenancy •
Street –v-Mountford [1985] AC 809
Commercial Leases (equally could be used regarding residential leases) • Tenancy Agreements/Leases • Statutory & Contractual Clauses • Practical Considerations • Breach of Tenancy • Forfeiture and Remedies
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Verbal Lease – What Happens? •
If there is no written contract but the Tenant has exclusive occupation at a rent, it shall be deemed to be a periodic tenancy pursuant to section 45(1) of the Registered Land Law (‘RLL’).
•
The term of a periodic tenancy shall be the period by reference to which rent is payable and will be terminable by either party on notice no less than the period of the tenancy i.e. if rent is payable monthly, the term will be rolling monthly and the tenancy can be terminated on 1 months’ notice.
1 month
2 month
3 month
Key Clauses to Check in Light of COVID-19 Statutory Clauses Save as otherwise expressly provided in the lease, there shall be certain clauses implied which bind the parties. Section 52 RLL – Landlord’s Obligations: • Peaceful enjoyment of the Property • Not to use adjoining or neighbouring land which would render leased property unfit for purpose • Keep roof, main walls, main drains, common passages and common installations in repair • Ensure furnished dwellings are fit for habitation at commencement of tenancy • Lease may be terminated upon destruction or damage by fire, earthquake, flood, civil commotion or accidence not attributable to negligence of lessee.
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Meaning of “In Repair”
• S.54 of the RLL defines the meaning of “in repair” in the absence of an express definition in the Lease. • Breach of implied obligations may give rise to a claim for damages against the Landlord for loss of enjoyment of the Property.
Key Clauses to Check in Light of COVID-19
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Statutory Clauses Save as otherwise expressly provided in the lease, there shall be certain clauses implied which bind the parties. s. 53 RLL: Pay rent in full and on time
Pay all rates, taxes and other outgoings Farm agricultural land in accordance with the rules of good husbandry Keep all buildings and boundary marks in repair except roof, main walls, drains, common installations and commons passages Keep furniture in good condition subject to fair wear and tear Permit landlord and workmen access upon reasonable notice Repair or make good any defect or breach of agreement for which lessee is responsible Not to transfer, charge, sublease or otherwise part with possession
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Ending a Lease
Effluxion of time
Break Date
Forfeiture
Surrender by Deed
Abandonment
Surrender by Operation of Law
COVID-19: Force Majeure Clause? • The basis of the relationship between a landlord and tenant is a contractual one. • A Contractual Force Majeure Clause, if contained in the lease could, in light of COVID-19 and Government imposed restrictions be argued as a super intervening event, beyond the control of the parties, which frustrates the lease bringing it to an end. The effect of frustration is to release both parties from any further performance of the contract. • A Commercial lease will likely include a force majeure provision, as a means to allocate risk among the contracting parties, in case an unforeseeable event makes it impossible or impracticable for a party to perform. In the event that a commercial lease does not contain a force majeure clause, the impacted party will not have a contractual basis to claim an excuse for delay or nonperformance; however, it may have an equitable claim under the doctrines of frustration or impossibility.
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COVID-19: Force Majeure Clause? (Cont.) • Generally the doctrine of frustration of contract applies to leases but the principle is not often applied. In a recent UK case Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch) the frustration doctrine failed in this context. However, it is arguable that in a landlord and tenant context the COVID-19 pandemic may or may not frustrate a lease. HSM can provide any further guidance following review of your particular lease.
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Possible Pre-Enforcement: Considering COVID-19 • Commercial Landlords and Tenants should initially evaluate the current and possible future impact of the Government imposed restrictions on their business, from their respective perspectives. • Landlord: o Discussion with their lender – essential o Current terms of any mortgage and the Banks view on their commercial mortgage/loan o How flexible can the Landlord afford to be? • Tenant: o Discussion with lender – essential o Current terms of any commercial loans and their Banks view on repayment of the same o How flexible can the Tenant afford to be?
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Collaborative Approach •
•
Landlords and Tenants should discuss the lease and try to collaborate to find a mutually beneficial way forward, such as: o Re-negotiation of the lease terms o Incorporation into the lease of a period to cover the duration of COVID-19 which includes a full/partial suspension of certain obligations under the lease such as: – Rent – Penalties – Interest – Other default related fees/costs – Maintenance Whilst it is inevitable there will be contraction of businesses able to survive the current crisis, an initial collaborative approach will ease the burden. Landlord and Tenants ultimately need each other – it is mutually beneficial to find common ground.
Enforcement Summary Should there be no agreeable common ground, Landlord can proceed with enforcement. Although this is being discouraged by the Government. • Right to Forfeiture: Section 55(1) of the RLL provides the landlord has a right to forfeit the lease if the lessee: o Commits any breach of, or omits to perform any agreement or condition on his part expressed or implied in the lease; o Is adjudicated bankrupt; or o Being a company, goes into liquidation. • Landlord must served s.56 RLL Notice giving the tenant a ‘reasonable notice’ to remedy the breach before commencing forfeiture proceedings.
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Possession • If the tenant or any other occupant remains in possession of the premises upon expiration of the statutory notices, a court application must be made for an order compelling the occupants to deliver up vacant possession. • Section 55(2) RLL.
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Waiver
Relief From Forfeiture
Defences
• A common Defence to forfeiture is the doctrine of waiver as defined by section 55(3) of the RLL if lessor accepts rent which has become due since the breach of agreement or condition which entitled the lessor to forfeit the lease or has by any other positive act shown an intention to treat the lease as subsisting
• Even if a Court Application is issued for Possession, the Tenant may claim relief from forfeiture. If they are able to remedy the breach of contract by paying any outstanding sums in full, the Court has the discretion to refuse the application for Possession.
Distress or Distraint • The Landlord and Tenant Law (1998 Revision) provides for another legal remedy of distress. • Distraint does not end a lease but rather is a remedy for a lessor to be able to seize chattels up to the value of the rental arrears owed, to compel the tenant to pay up.
• Before the goods are sold a notice must be provided to the tenant laying out the amounts for which distress is levied, the authorized fees and expenses and identifying the goods which have been seized.
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Mortgages and Local Banks: Considering COVID-19
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Most banks on Island are doing some or all of the following: • KYD/USD Prime rates lowered • Lower personal lending and mortgage rates • 3 month automatic payment deferral programme on accounts in good standing/non-delinquent o All residential Mortgages o All personal loans o During this period there will be no need to pay principal /interest and penalties waived • Payment deferral on credit card for 2 months and not incur late fees • Business loans below a certain amount o May have to pay interest only for 3 months o No penalties • Business with loans over a certain amount will likely need to discuss with their lender Note: Check with your Lender as to the financial consequences.
CI Government Assistance: Considering COVID-19
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• Cabinet approved CI$3 million to assist Caymanians who are vulnerable, elderly or disabled. • Cabinet approved emergency funding for non-Caymanians for food assistance (those unable to leave and with no job). o Work permit holders with no savings/income may apply for CI$150 food vouchers from 1 April 2020 for a 2 week period until airports open or re-start job. • Encouraging residential landlords to be flexible including using security deposits in lei of rent if necessary, but no law/regulation to compel. • Cabinet has authorised a stimulus package of financial and nonfinancial support for micro and small businesses with a total value of CI$14.5 million
CI Government Assistance: Considering COVID-19 (Cont.)
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The Cayman Islands Centre for Business Development (CICBD) will be providing technical assistance and training to: • micro businesses (less than 5 employees and has a gross revenue of less than $250,000); and • small businesses (employ a maximum of 12 employees and has a gross revenue of up to $750,000). The details of the programmes are: 1. Low-interest Loans Up to $20,000 for micro businesses or up to $50,000 for small businesses (facilitated by Cayman Islands Development Bank – assist with operational cash flow). Term of 5 years with an interest rate of 1% for the first year, subject to increase thereafter. 6-month moratorium on principal and accruing interest.
CI Government Assistance: Considering COVID-19 (Cont.) 2. Technical Assistance This will provide the business with access to qualified accountants and professionals for a period of up to 1 year to assist with financial planning, document preparation, business and strategic plans, human resources, etc. 3. Training and Handholding Programme Training sessions also offered on ways to navigate the world of business post- COVID-19. Participating in at least 1 of sessions is a pre-requisite for accessing the Loan and Grant. 4. Grant Programme Businesses must have been established for 12 months prior to March 2020. Must be able to evidence COVID-19 related increase in receivables and/or decrease in sales as at March 2020. $1,000 monthly for up to 3 months. For more details, visit www.gov.ky/coronavirus or email cicbd@gov.ky.
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Other Business Considerations
Insurance – Business Continuity
Insolvency – risk of personal liability as a director of bankruptcy risk
Employment-related issues
Health Insurance Risks Contracts with third parties
Electronic Signatures
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Questions?
HSM Debt Solution Services
Revise and draft robust and enforceable Credit Applications, Agreements and Personal Guarantees Advise on creation of internal Debt Collection and Credit Policies Educate management and employees Issue Demand Letters, negotiate favourable payment plans & execute Promissory Notes Advise Clients on debt recovery and enforcement options both locally and cross-border Fixed Fee Structure
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Contact Us
Huw Moses Managing Partner E: hmoses@hsmoffice.com T: 345 815 7400
Sarah-Jane Allison Senior Associate E: sallison@hsmoffice.com T: 345 936 7437
Thank you for attending this presentation on Financial Strategies in light of COVID-19.
Tel: 345 949 4766 www.hsmoffice.com info@hsmoffice.com Shula Sbarro Associate E: ssbarro@hsmoffice.com T: 345 936 7417
Disclaimer This presentation is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this presentation without first obtaining specific professional advice. Alternative solutions also exist which may better suit the requirements of a particular individual or entity.
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