The bankruptcy of a contracting party can have major consequences for entrepreneurs. When a client, supplier or business partner goes bankrupt, uncertainty often arises immediately about outstanding invoices, ongoing contracts and future obligations. In this article you will read what the bankruptcy of a contracting party means legally, what rights you have as an entrepreneur and what steps you can take to limit the damage.
What does the bankruptcy of a contracting party mean?
A bankruptcy of a contracting party occurs when the court declares a company bankrupt. From that moment on, the bankrupt party loses control over its assets and a trustee (curator) is appointed.
For business counterparties, this means, among other things, that:
- payments can no longer be made freely;
- ongoing agreements become uncertain;
- outstanding claims are not automatically satisfied;
- communication takes place through the trustee.
What happens to ongoing contracts?
In the event of bankruptcy of a contracting party, ongoing agreements remain in force in principle. However, the trustee has the authority to determine whether an agreement will be continued or terminated.
This can have major consequences for:
- long-term cooperation agreements;
- distribution and agency agreements;
- supply contracts;
- lease or service agreements.
In practice, we see that entrepreneurs often react too late, while swift legal action can be particularly important.
Outstanding invoices in bankruptcy
A frequently asked question regarding the bankruptcy of a contracting party is what happens to outstanding invoices. In most cases, these are classified as unsecured claims.
This means that:
- you must file your claim with the trustee;
- payment depends on the estate proceeds;
- the chance of full payment is often limited.
Is debt collection in bankruptcy still worthwhile?
After the bankruptcy of a contracting party, regular debt collection is in principle no longer possible. Individual enforcement actions are prohibited. Nevertheless, legal action may still be worthwhile in certain cases.
Consider, for example, situations where:
- security interests have been provided (pledge, mortgage);
- a retention of title clause applies;
- payments were made shortly before the bankruptcy;
- directors may be personally liable.
Retention of title and security interests
In the event of bankruptcy of a contracting party, a retention of title can be an important legal instrument. If correctly agreed upon, this may mean that delivered goods do not fall into the bankrupt estate.
Pledge and mortgage rights can also provide a strong position compared to other creditors.
Director liability in bankruptcy
In some cases, it is possible in the event of bankruptcy of a contracting party to hold not only the company, but also directors personally liable. This may be relevant in cases of improper management or unlawful conduct.
In such cases, recovery may still be possible outside of the bankruptcy proceedings.
Fraudulent conveyance (actio pauliana)
In insolvency situations, it regularly occurs that assets are removed just before the bankruptcy. This is called fraudulent conveyance (actio pauliana).
In certain cases, this can be reversed, which may be relevant for creditors who are disadvantaged by the bankruptcy of a contracting party.
International aspects in bankruptcy
The bankruptcy of a contracting party can be particularly complex when international trade is involved. Foreign creditors face questions about jurisdiction, recognition and enforcement possibilities.
General information about bankruptcy and creditor rights can be found at Rechtspraak.
Common mistakes when a contracting party goes bankrupt
- waiting too long to seek legal advice;
- not filing a claim with the trustee;
- not utilising security interests in time;
- not investigating director liability;
- accepting the situation while action is still possible.
What can Arslan Advocaten do for you?
Arslan Advocaten assists entrepreneurs in situations involving the bankruptcy of a contracting party. We assess your legal position, investigate recovery options and advise on strategic next steps.
Also read more about our services in corporate law, our experience with debt collection and payment disputes and international trade disputes.
Costs and litigation funding in bankruptcy disputes
In disputes concerning bankruptcy and insolvency, we do not work on a no cure no pay basis in principle. Such cases require a careful and strategic approach.
In certain cases, however, litigation funding may be considered. We work together with an independent litigation funder who, after assessment, may be willing to (partially) finance the legal costs.
For the client, this means that litigation is possible without direct financial risk.
About the author
This article was written by Onur Arslan, lawyer and founder of Arslan Advocaten. He specialises in commercial disputes, including bankruptcy matters, debt collection and insolvency disputes.
Would you like to discuss what options you have after the bankruptcy of your contracting party?