5 tips what to do if your contracting party is facing bankruptcy

Economic crisis

Already in the spring of 2020, various bodies, such as the Social and Economic Council, warned that a second corona wave would have disastrous effects on the economy, pushing it into a deep depression.

That second wave is here. However, the predicted (economic) damage and pain is not yet being felt by many, even with almost daily newspaper reports of (mass) layoffs.

In fact, it has the lowest number of bankruptcies in decades, while almost all experts assume that from 2021 the number of bankruptcies will increase sharply.

The reason is the cushioning and numbing government measures that, while useful, also numb the pain and disguise the severity of the crisis.

This delay does allow you to prepare for a possible bankruptcy of one of your partners - such as customers, suppliers, buyers - and take measures.

There is every reason to do so, with another report in the Financieel Dagblad this week that manufacturing, industry and transportation in particular are going to take a hard hit.

In this article, I will provide five tips on what you can do to try to prevent or limit the damage.

Tip 1: Gather information, get to the table

Knowledge is power. Be close to the fire and get information from your contracting party.

After all, from those contacts and information, you can distill whether your contracting party is doing less and adjust your actions accordingly.

Perhaps you and your partner can still work together to find a solution.

Perhaps other actions are necessary, such as sending a summons, suspending work, initiating (collection) proceedings or preparing to exercise a lien.

Be alert to signs that things are slowing down, such as when your partner pays bills late or doesn't respond to your emails much, if at all.

Tip 2: Look in the contract

It may seem like an open door to grab the contract that was made between your partner and you and take a quick look into it if you suspect your contracting party is doing less, but it is not.

This is because what rights and obligations you have reciprocally is primarily determined by the contract you entered into with each other. You should therefore carefully align your actions with (the contents of) the contract.

Too often I see parties, without first looking into the contract, rush to initiate certain actions with all the negative consequences.

An example might be a party invoking a lien even though that right is excluded in the contract.

Another example is a party terminating the contract or suspending its obligations when it is not yet allowed to do so at all under the contract.

Acting thoughtlessly and too hastily in violation of the agreement can have major negative consequences. For example, you could potentially be liable for any damages.

The foregoing is without prejudice to the fact that some actions are more factual in nature and may be implemented to reduce the risks of harm.

For example, you can think about no longer bringing new materials to a construction site, picking up valuable materials, clearly labeling and separately packaging goods that have yet to be delivered, and not putting more than necessary time and energy into an ongoing project.

Tip 3: Stipulate collateral where possible

Collateral, in short, ensures that you get your money even if your contracting party goes bankrupt.

What is important, of course, is that the right collateral is stipulated and that this collateral is properly agreed upon ("established").

Security interests may include:

• liens;
• mortgage rights;
• principalities;
• sureties;
• guarantees.

I wrote about this at length earlier in another article: https://poelmannvandenbroek.nl/actuele-zaken/wat-zijn-zekerheden-en-wat-kunt-u-ermee/

In addition to the aforementioned securities, you can also think about retention of title, right of claim, lien, etc.

It is best to stipulate these securities at the time of entering into the agreement with your contracting party, but collateral can also be established afterwards by agreement or by applying pressure.

Which security is most appropriate - and thus makes you not suffer damages - depends on the circumstances of the case, such as, for example, the industry, the contract, the amount outstanding, your contracting party's desire to cooperate, commercial relationships, etc.

Tip 4: Dare to bark and if necessary also bite

Be sure to take action as soon as possible if payment is not made (on time) or if you get the feeling that your contracting party is struggling or is stringing you along.

In fact, experience shows that - however unsympathetic it may be - the party that barks or bites the loudest gets paid, while the party that is led astray is left unpaid.

Do not trust the proverbial blue eyes of your contracting party, but ask for underlying figures to back up his words. If your debtor is really in good faith and genuinely wants to seek a solution with you, he will hand over (financial) information if asked. Otherwise, you are being led around and it is time to bark and bite.

Which action is most appropriate depends on the circumstances of the case.

For example, for the collection of outstanding invoices, you can think of sending a summons by an attorney (which sometimes has immediate effect). If necessary, a draft bankruptcy petition can be attached to this summons.

You can also think about starting court proceedings (interlocutory or otherwise). If necessary, an attachment can be levied prior to the proceedings to secure your rights.

In short, a lot of things are possible. What fits best depends on the situation.

Tip 5: Look beyond just your contracting party

In the unlikely event that your contracting party goes bankrupt, there is very little chance that you will get any of your claim paid from the bankruptcy (at least if you have not negotiated collateral).

In fact, in more than 90% of bankruptcies, unsecured creditors like you receive nothing.

However, that does not mean that the options for getting your claim paid or damages recovered have been exhausted.

In fact, under circumstances, the director of your contracting party may be liable in private for your invoices remaining unpaid. There must then be personal, serious culpability.

The Supreme Court has explained in several judgments when this is the case. In short, there are still opportunities to collect your claim and/or recover your damages even after your contracting party has gone bankrupt.

Conclusion: there are numerous ways to limit or prevent damages in the event of an imminent bankruptcy of your contracting party

That in the short term some of your contracting parties are going to struggle very hard and eventually go bankrupt seems inevitable.

It is important that you prepare well for this situation. By taking action now, you can limit damage or even prevent it altogether.

In this article, I have provided five practical tips on what to do if your contracting party is in danger of bankruptcy.

Of course, there are many other things you can do. What exactly is possible depends on the circumstances of the case. This is something an expert can best advise you on.