eNews July 20, 2017


Receipt Under Section 503(b)(9) Means Actual Physical Possession of Goods: A Victory for the Trade

The United States Court of Appeals for the 3rd Circuit, in In re World Imports Ltd., recently held that a debtor, World Imports, had received goods when the debtor or its agent physically received the goods, not when the goods were delivered to a common carrier for shipment. This decision was made in conjunction with determining the allowed amount of trade creditors’ Section 503(b)(9) administrative priority claims for goods purportedly received by World Imports within 20 days of its bankruptcy filing.

Two Chinese vendors, Haining Wansheng Sofa Co., Ltd. (“Haining”) and Fujian Zhangzhou Foreign Trade Co., Ltd. (“Fujian”), sold goods to World Imports. All of the goods were based on FOB (free on board) terms in which the risk of loss passed to World Imports when the goods were loaded on board the ships at the named ports of shipment in China. While the goods were delivered to the carriers more than 20 days before the Chapter 11 filing, World Imports received the goods within 20 days of the filing date.

The bankruptcy court held Haining and Fujian were not entitled to Section 503(b)(9) priority claims for the shipments. The court determined the meaning of the term “received” should be gleaned from the Convention on Contracts for the International Sale of Goods (the “CISG”), a treaty to which the United States and China are parties, instead of U.S. state law, the Uniform Commercial Code (“UCC”). While the CISG does not define “receive,” it incorporates Incoterms (International Commercial Terms) that reflect current trade practices. The bankruptcy court, relying on the CISG and the FOB Incoterm, ruled World Imports had received the goods when they were loaded on the vessels in China. Thus, the court concluded World Imports received the goods more than twenty (20) days before its bankruptcy filing, and the Chinese vendors thereby were not entitled to priority status under Section 503(b)(9). The district court affirmed the bankruptcy court’s holding.

The 3rd Circuit rejected the lower court holdings. Instead, the court relied on the dictionary definition of “receive” as taking physical possession of the goods and the UCC’s definition of “receipt” in Section 2-103(c) as “taking physical possession of [the goods].” It also distinguished between receipt and delivery or transfer of title/risk of loss. The court concluded a buyer could not receive goods in the possession of a common carrier when the seller still retains the ability to stop delivery of the goods. Also, a common carrier is not an agent of the buyer that would confer the buyer with constructive possession of the goods. Finally, the court applied the UCC’s definition of receipt to Section 503(b)(9) based on the interrelationship between Section 546(c) of the Bankruptcy Code governing reclamation and Section 503(b)(9), and a prior 3rd Circuit decision that applied the UCC’s definition of receipt to reclamation rights.

The 3rd Circuit’s ruling—which is binding in Delaware, New Jersey and Pennsylvania—is undoubtedly very favorable for trade creditors. In those jurisdictions, it will result in larger Section 503(b)(9) priority claims because a debtor will be deemed to have received goods on the later date of physical possession instead of the earlier date of delivery of goods to a carrier.


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Prompt Payment Interest Rate Drops

Construction companies that do business with federal agencies will see less interest money in the second half of 2017 when an agency fails to pay promptly following the delivery of property or service. The prompt payment interest rate dipped from 2.5% in the first six months of the year to 2.375%.

“Money is cheap right now,” said Chris Ring of NACM’s Secured Transaction Services (STS). The reason for the interest fluctuation is due to the cost to borrow money, he explained. The Prompt Payment Act is different than filing against a bond and the Miller Act, noted Ring. Prompt payment does not force the check to be written, but it assesses a penalty for not getting paid on time.

“How much of a penalty is it? Not much at all,” Ring said. The rate is established by the Treasury Department under the Contract Disputes Act and the Prompt Payment Act. The interest will be paid to the business regardless of whether they have requested the payment or not. According to the U.S. code, “The interest penalty shall be paid for the period beginning on the day after the required payment date and ending on the date on which payment is made.”

There are several ways to determine an “on-time” payment, which includes an agency making the payment on the date specified on the contract. On-time payments can also be paid:

  • In accordance with discount terms when the vendor has offered a discount and the agency has accepted those terms.
  • On an accelerated schedule when the conditions for accelerated payments apply.
  • 30 days after the agency has received a proper invoice.

It is also important to make sure invoices sent to the agencies are filled out properly, or the business runs the risk of delaying the process. The payment period begins when the agency has the proper invoice, which means late payment interest is pushed back. An agency has seven days to return the improper invoice to the business.

If the agency does not pay the required interest as stated in the Prompt Payment Act, the business should contact legal counsel to determine a course of action. An agency can withhold the payment to a prime contractor if it is found the contractor has failed to pay subcontractors in accordance to their contract. However, it is important to note the Prompt Payment Act does not require a federal contractor to pay interest on late payments to subs, according to the Bureau of the Fiscal Service and the Treasury Department.


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Risks Rise in Asia-Pacific Corporate Payments

Overdue payment risks continue to increase in the Asia-Pacific region, while the average number of overdue payment days has lengthened and more companies are experiencing overdues past 120 days.

In credit insurer Coface’s latest payment survey of the Asia-Pacific region, 64% of the companies surveyed experienced overdues in 2016. The survey covered nearly 2,800 corporate entities in eight markets, including China, Australia, India, Japan and Singapore. More than a quarter of respondents experienced ultralong overdues last year, and those recording overdues over 120 days were up more than 4% from 2015 to 12.5%. The increase in nonpayment risk was most notable in China, followed by Thailand and India. Improvements were seen in Singapore and Hong Kong.

“2017 is set to be another challenging year,” said Carlos Casanova, economist at Coface. “Overall company payment experience in the eight selected regional economies is likely to remain weak.”

This week, China announced that its gross domestic product rose 6.9% in the second quarter from the previous year, the same rate as the first quarter, Reuters reported. This may lead the country to reach its growth target and “give policymakers room to diffuse financial risks,” Reuters added.

“Chinese authorities have shown an adroit ability in recent years to tweak macroeconomic policies in an attempt to stabilize GDP growth,” according to Wells Fargo Securities in a recent report. “By and large, they have succeeded in this objective.”

“The good news is that this pace of growth … will mean that China will have improved over the previous year for the first time since 2010,” said NACM Economist Chris Kuehl, Ph.D. “Earlier in the year the government tried to restrain the markets by putting pressure on the banks, but that slowed the economy too much and most of these restrictions have been lifted—resulting in a nice little surge and growth numbers that have been better than anticipated.”

Construction is the riskiest sector in the Asia-Pacific region, followed by industrial machinery and electronics. Demand is likely to stagnate for the remainder of the year due to weaker capital spending in the region. Deflationary pressures in the region’s main markets could further squeeze margins, Coface said.

The percentage of respondents experiencing an increase in overdues in the IT/Telecoms sector rose from the year before. Relief may come from public infrastructure investments, including China’s Belt and Road initiative. Competition in IT, along with deteriorating liquidity conditions, will likely encourage merger and acquisition activity in 2017, according to Coface.

A boost in commodity prices has helped the performance of metals, though it remains one of the riskiest sectors. A rise in M&A activity in the sector is expected, as well as closures for China’s “zombie” enterprises.


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Bad Debt Among U.K. SMEs Could Mean Economic Downturn

Bad debt among small- and medium-size enterprises (SMEs) is on the rise in the United Kingdom. This large jump in the last year signals a possible downturn in the U.K. economy.

Bad debt, or unpaid invoice write-offs, has skyrocketed 70% in the second quarter of 2017 compared to last year, according to Bibby Financial Services. Research also showed a decline in investments among SMEs. The average bad debt for an SME in the U.K. is at more than $26,000.

More than a quarter of survey respondents said the uncertain economic outlook was preventing them from investing. Rising costs and a desire to build cash piles were a close second and third, respectively, said Bibby Financial Services. SME investing slipped roughly $47,000 during the second quarter of this year compared to 2016.

“SME activity is often a barometer of wider economic performance,” said Bibby Financial Services Global CEO David Postings in a release. “Data showing rising bad debts amongst SMEs could indicate a buildup of pressure in supply chains throughout the country,” he added. “It is possible that this is a sign that the U.K. is heading for a recession, but it’s still too early to call.”

Two general elections and a referendum were among the items cited by Postings as a reason for SMEs’ lack of investing. “Once a greater degree of political stability emerges between the U.K. and the [European Union], SMEs will begin to regain their confidence.” A $390 million business-rates relief fund is still not in place months after its announcement in the spring budget.

Nearly one in three respondents to the survey called for a lower business rate. “Small business confidence is down for the first time since the EU Referendum—this is due in no small part to surging operating costs, which are now at their highest in four years,” said Federation of Small Businesses (FSB) National Chairman Mike Cherry. One in five SMEs would consider shutting down if business rates increased, according to an FSB survey from February.

The U.K. entered a deal with the country’s largest banks this month to extend millions of dollars to small businesses. “Providing that finance to suppliers as well as exporters means spreading the benefits of global trade, supporting more jobs and growth for companies large and small,” said International Trade Secretary Liam Fox in a Bloomberg article.

Bibby Financial Services surveyed 1,000 SMEs in May and June to provide data for the research. There are 5.4 million SMEs in the U.K.



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Sovereign Ratings Turn Positive While Debt Remains High

After a record year for sovereign downgrades, the sovereign rating outlook has reached a turning point. With 17 sovereigns on negative outlook and nine on positive, a marked change has occurred from 2016, when the negative-to-positive ratio was 26-to-5, according to Fitch Ratings’ midyear sovereign review.

“Factors that support the improvement in sovereign credit fundamentals include a synchronized pickup in world GDP growth forecast for 2017 and 2018, a recovery in cross-border trade volumes, the stabilization of commodity prices, albeit at a lower level, and a global macroeconomic policy backdrop that remains broadly accommodative,” said James McCormack, global head of sovereign and supranational ratings at Fitch. “The biggest constraint on ratings is high and still-rising government debt levels, evident in both developed and emerging markets, leaving sovereigns exposed to a change in the global interest rate environment.”

A positive trend in the rating outlook for developed markets stems from country-specific developments rather than cross-regional improvement in creditworthiness, Fitch said. The political environment is more stable in Europe, for example, leading to a more benign outlook in the short term. However, uncertainty remains in regards to policy changes in developed markets. Brexit negotiations represent a material risk to the U.K. and changes in U.S. tax and trade policies remain unclear, Fitch said.

After four years of general improvement, most sovereigns are expected to see deterioration in their primary fiscal balances in 2017. More than 20% of sovereigns will reach their highest level of government debt as a share of GDP this year, using the period from 2000 to 2017 as the basis for comparison, Fitch said.

Short-term debt repayments are a risk to emerging markets, according to the Institute of International Finance (IIF), as reported by Reuters. Global debt levels have reached a record $217 trillion, rising $3 trillion from a “borrowing spree” in the developing world. By the first quarter of 2017, global debt amounted to 327% of the world GDP and the rise was driven principally by borrowing among emerging markets. Total debt in developing countries amounts to $56 trillion.

According to Fitch, emerging markets last year ran their largest aggregate annual current account deficit (CAD) since 1998, due mostly to a drop in commodity prices, a narrowing in China’s surplus and abundant global liquidity conditions. Fitch estimates that emerging market CAD will enlarge to $59 billion this year, $106 billion in 2018 and $143 billion in 2019.



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