THE S&B BRIEFING
Asia=s US$100 Billion (and Growing) Receivable Challenge
While Asia is the world=s largest exporter and currently exports to the United States approximately US$125 billion worth of goods per month (with exports to Europe approaching the same amount), depending on level of sophistication, location and discipline in requiring a customer to satisfy its obligations before shipping additional goods, Asian companies currently have 5% to 30% of their receivables mired in Adelinquent@ status.
Recovery of Receivables
In general, a receivable which is more than 90 days past due is classified as Adelinquent@. At that time it is imperative that a creditor proceed with formal collection activity at once. When a customer fails to satisfy its obligations to one creditor it is most likely the case that the customer is failing to pay other creditors as well. In a situation where the customer is experiencing a period of financial distress, often the first creditor to obtain a judgment and place judgment liens on the debtor=s property is the only creditor which recovers the amounts due and owing it. While the filing of a lawsuit does not preclude the parties from engaging in settlement negotiations or a formal mediation proceeding, the commencement of litigation before other creditors forces the debtor to have to deal primarily with the suing creditor.
Alternative Dispute Resolution
Similarly, if a contract between a creditor and a debtor contains a clause requiring the mediation of a dispute before the commencement of litigation, it is important that the creditor take the necessary steps to initiate the mediation process as soon as possible. If the debtor refuses to participate in the process, the creditor is free to file suit. While after the filing and service of suit a judge may order the parties to participate in the mediation contemplated by the contract, there is severe pressure on the debtor to resolve the matter on terms acceptable to the creditor as the debtor=s failure to settle will result in it immediately having to contend with the litigation.
Aggressive Litigation
Once litigation is commenced it is important for the creditor to proceed in a quick and efficient fashion. In all jurisdictions where such a remedy is available, it is preferable to file an Application for Writ of Attachment and Right to Attach Order with the court at the same time or shortly after the commencement of litigation. The issuance of such a writ enables the creditor to place a lien on all of the debtor=s assets before the entry of judgment. An attachment lien prevents the debtor from disbursing its assets during the pendency of the litigation and essentially prevents it from doing business. In such a scenario the debtor often has no choice but to seek a settlement if it wants to remain an operating business entity.
Ensuring Better Results in the Future
Notwithstanding the foregoing, the best way for a creditor to reduce the percentage of its receivables which are in delinquent status is to due its homework prior to engaging in a transaction. We would recommend, at a minimum, the following:
1. Perform a thorough investigation of the credit history of the customer and its principals (the seller must obtain written authorization from the customer and/or its principals before obtaining certain credit reports);
2. Have the customer complete a detailed written credit application which should include three trade references, at least one banking reference complete with account number(s), and copies of the customer=s most recent year-end balance sheet and profit-and-loss statement; and
3. Utilize written contracts which explicitly set forth the obligations and responsibilities of the parties and provide for the recovery of interest, attorneys fees and court costs in the event of the customer=s default in payment.
