Rasko Peric:
Mr Stumpf, as a lawyer and a factoring expert you are very busy during this current crisis. What are the topics and problems you are currently dealing with the most?

 

Wolf Stumpf:
The COVID-19 pandemic presents all businesses with great challenges. In the banking and financial services sector, regulatory stipulations further complicate finding pragmatic solutions to pressing issues, such as how banks can respond to deferral requests from debtors in the light of Section 18 of KWG (German Banking Act). This is where practical solutions are needed. Another focal point concerns the consultation on how to deal with clients and debtors who are close to insolvency, as presented for example in the CovInsAG (COVID-19 Insolvency Suspension Act). The legislature intends to support businesses which are in arrears with payment due to the COVID-19 pandemic by temporarily suspending the obligation to file for insolvency. According to insolvency law, the law privileges the provisioning of “fresh money” and the preservation of business relations with such companies. Other enquiries concern the insurance coverage according to the CCI (commercial credit insurance), for example, whether the COVID-19 pandemic could possibly fall under risk exclusion, such as “force majeure” or a natural disaster. Occasionally, it has been taken into debate whether to expand factoring and apply it to receivables other than trade receivables. This is how the idea emerged to finance receivables from short-time working allowance in advance.

Furthermore, there is an increasing number of enquiries from companies that currently want to use factoring as an attractive instrument for liquidity management. After all, trade receivables are assets that can be quickly converted into liquidity.

 

Rasko Peric:
The need for consultation services is currently very practically oriented. Companies and people want to talk less about theories and models and more about specific answers to pressing questions. What are your essential practical tips for the time being and also after COVID-19?

 

Wolf Stumpf:
From a purely legal perspective, the situation for factoring service providers did not deteriorate as a result of the COVID-19 pandemic. Whether it has actually improved as a consequence of the current legislation remains to be seen. I advise providers to monitor their clients and debtors more intensively. It is especially important to keep the focus on how consistent the business model of the client is and whether an increased dilution might occur due to potential supply shortages (for example because debtors may assert claims for damages). Since the legislator did not link the temporal suspension of the obligation to file for insolvency to the need for serious rehabilitation efforts, there is a considerable risk that so-called “zombie businesses” will be further “dragged along”. As a consequence, factoring service provides should exercise great care when concluding a new factoring contract and thoroughly check such businesses.

Concerning receivables from foreign debtors or when buying receivables from foreign clients, the legislature of the respective country of the debtor or client must be taken into account for the risk management.

It is also advisable to proactively check with your own CCI and, in the two-contract model, with the client’s CCI how the latter will react to extensions of payment terms for debtors. If, as a result of the COVID-19 pandemic, providers have considerable difficulties in complying with regulatory stipulations and feel that they must deviate from the law or the MaRisk (Minimum Requirements for Risk Management), it is advisable to first take a look at the homepage of the BaFin (Federal Financial Supervisory Authority), where you will find current adjustments that are acceptable to the BaFin. However, these do not always go well with factoring. If an enquiry with the BaFin is not successful or not as promptly as required, it is recommended to consult your own auditor and the legal department. Any deviation from regulatory stipulations entails risks and should therefore be well justified and appropriately documented.

 

Rasko Peric:
The development of COVID-19 involves unforeseeable risks but also opportunities – for example, with regard to the use of new technologies or the development of alternative business models. What do you think about this?

 

Wolf Stumpf:
I think that the COVID-19 pandemic will give a massive boost to digitisation. This concerns both the internal processes of providers and the growing importance of platforms that act as intermediaries between providers and interested parties, as well as platform solutions for fully digital processing of receivables purchase agreements. It remains to be seen whether factoring will also establish itself as a form of financing for receivables other than trade receivables. In addition to the factoring of short-time working allowance or other receivables for which the state is the debtor, the factoring of consumer receivables against companies could also be considered. For instance, there are already providers who buy refund claims from consumers for flight delays. With such models, however, it will always have to be checked on a case-by-case basis whether the borderline to legal services is being crossed or not. Whether the blockchain technology in factoring will benefit from the digitalisation push, I consider possible but not imperative.

 

Rasko Peric:
In your opinion, how will the much-cited “new normal” after COVID-19 look like in the factoring business?

 

Wolf Stumpf:
This will strongly depend on how fast and effectively the economy will recover. I would not dare to make that prediction. In any case, the “new normal” – if one even wants to use such a term – will on the one hand be characterised by a substantial increase in digital processes and efficiency improvements in procedures associated with them, and on the other hand will result in less personal contact. Video conferences and working from home will be on the rise in the work environment. Factoring as an attractive and reliable instrument for liquidity management and hedge against default risk will definitely gain in importance due to the crisis. However, this will also depend on the extent to which CCIs maintain and grant insurance coverage.

Should the ECB decide to purchase trade receivables to promote liquidity, this will likely result in a significant market distortion.

 

Rasko Peric:
Are you in contact with colleagues of other European countries? How does the current situation affect the factoring sector there?

 

Wolf Stumpf:
In most European countries, the working conditions in large law firms are characterised by video conferences, work from home and the need to support clients in emergency measures. Since the government in other countries established contact restrictions much earlier than in Germany, providers there have been working from home for a longer time already or have been taking turns at working at the office and at home. What I am hearing from our neighbouring countries is that the necessity for liquidity is large and that similar questions about risk management arise as in Germany.

 

Rasko Peric:
How are you as a private person dealing with the current situation?

 

Wolf Stumpf:
I am working from home and restrict my time outside to essential errands and walks in the woods. Of course the restrictions are severe and the more time they last the more difficult the situation becomes, especially since I am a social person who likes to spend time at Schützenfeste (marks-men’s fairs), to go out to eat and to drink a glass of wine with friends and family. This is now limited to video get-togethers. However, despite all uncertainties, each crisis carries with it new opportunities and I think we will come out of this stronger.

 

Rasko Peric:
Thank you very much for this interview!