Dispute resolution

My debtor is (at risk of becoming) insolvent. Now what?

Published on 27th Oct 2020

As a consequence of the current Covid-19 crisis, it has become increasingly important to keep an eye on the solvency of a business partner and to be aware of the options available when being confronted with a partner who is at risk of bankruptcy or reduced financial resources. Particularly within a B2B context, companies should not be blind to the signals indicating a situation of (potential) insolvency. This is the first of three insights offering guidance on insolvent debtors.

Although not all recent bankruptcies are necessarily related to the current crisis, the general blow to the economy has put many companies to the test. Companies that already had liquidity problems have been further affected and companies that have been stable for years may suddenly find themselves struggling. Entrepreneurs and start-ups that invested heavily in their businesses have failed to correspondingly increase their revenues in these exceptional economic circumstances.

When doing business with other companies, it is critical to make up for any losses from defaults and to minimize bankruptcies. The best method is to prevent defaults by spotting the early warning signs that your business relationship is under financial pressure.
A first concern should be to look for and recognize these signals in order to take a timely approach to avoid being confronted with an unenforceable claim or complex insolvency procedures involving external judicial actors such as receivers or judicial administrators. Such proceedings require active involvement and additional resources in order to uphold a claim and furthermore cannot guarantee that a claim will be satisfied.

In order to anticipate the insolvency of a debtor, companies have at their disposal a range of options to secure their claim and to protect their position as a creditor within a possible subsequent insolvency procedure. By taking the appropriate and timely action(s), creditors can avoid being confronted with competing creditors and seeing their collateral being distributed amongst these (third party) creditors.

In this series of insights, we outline the signals to watch for and the possibilities for securing your claim. Both courses of action offer prudent preventative measures for businesses during and beyond the current financial stress caused by the pandemic.

Depending on the situation at hand, a specific course of action can be outlined so that your risks are minimalized as much as possible. Our legal experts are happy to guide you through the respective steps in order to best protect your company against the insolvency of its debtors.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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