When may your lender file for your debtor's bankruptcy and can you prevent it?

Most businesses engage in the supply of goods and/or services that require payment by their customers. This is probably also true of your enterprise. It is then very likely that your company's financier - a bank or an investor - has a lien on the receivables you have from your debtors (including your customers) as security for repayment of the loans it has extended. The moment you fail to meet your obligations to the financier, the financier may proceed to enforce his lien.

In concrete terms, this means that he may then collect the claims you have on your debtors after he has notified them of his lien. From then on, the debtors are no longer allowed to pay to you, but only to your financier: the financier is, so to speak, collection authority.

What is covered by the funder's collection authority?

The Supreme Court has ruled in the past that although the financier - after notification of his lien - became authorized to collect the claim against the debtor, other powers remain with the pledgor (i.e. you) (HR Feb. 21, 2014, NJ 2015/82). These include making repayment arrangements with your debtor, agreeing to (partial) remission or dissolution of the agreement.

The Supreme Court recently handed down a judgment (HR December 9, 2016 ECLI:NL:HR:2016:2833) which determined that your lender may not only collect the receivables from your debtors, but also file for their bankruptcy if the debtors - after being summoned to do so - do not pay the lender.

The reason is - in brief - that the Supreme Court believes that all means are available to the lender to collect the claim that belonged to you prior to the communication of the lien. This therefore includes a bankruptcy filing. This can be unpleasant for you because you want to maintain the good relationship with your debtors and you may suffer substantial losses due to a possible bankruptcy of your debtor.

How can you avoid a bankruptcy filing?

The easiest way to prevent your lender from filing for your debtor's bankruptcy is to always pay the lender in accordance with the terms agreed with him. This is because in that case he may not give notice of his lien to the debtors, nor can he file for their bankruptcy if they do not pay him.

Should you be temporarily unable to meet your obligations to your lender due to liquidity problems, it is best to contact your lender in a timely manner. That way, any new payment arrangements can be made. This will also prevent your financier from notifying your debtors of his lien and filing for bankruptcy if they do not make payment.

A final way to possibly prevent your financier from filing for bankruptcy of your debtor is to contractually exclude this authority in the financing agreement. Whether this prohibition will result in your financier not doing so or in the court rejecting the bankruptcy request cannot be said with certainty, but in any case it creates a (considerable) threshold for the financier. In fact, your financier is in all likelihood liable to you for damages if he decides to file for your debtor's bankruptcy.

Conclusion

The Supreme Court recently ruled that under circumstances, your lender may file for your debtor's bankruptcy. This can be very unpleasant for you. This article provides some possible tips on how to avoid this.