Many companies will likely be forced to deal with debts and liquidity issues – one must act smart and promptly to keep the problems from snowballing.
Advice to creditors: Stop the snowballing effect!
Set the credit limit and ask for advance payments
First, take a good look at the credit limits you have set for your clients. In order to keep liquidity, it would be wise to set a credit limit for each client. Once the client reaches the limit, no longer provide goods or services to the client, unless advance payment is made. This will avoid larger debts and sets an alarm system in place.
Setting up guarantees and collaterals
If credit limits and advance payments are not an option, a guarantee given by a shareholder or board member on behalf of the buyer may help. Or, you could require collateral from the parent company. That way you will be more likely to receive payment and the guarantor will also be more interested in resolving any problems that may arise, as guaranteed obligations will be prioritised.
Consider sending invoices more often than once a month, allowing you to notice any payment problems sooner.
Notarially attested payment schedules
Once debts have occurred, it is advisable to communicate with the debtor in order to get a better understanding of their behaviour. If the debtor is actively dealing with payment difficulties and searching for solutions to overcome payment difficulties, the creditor could propose a long-term notarially attested payment schedule, which includes an agreement that assets would be subject to enforcement.
This will make the payment schedule legally equal to an enforceable title, able to be handed over to a bailiff for enforcement without court proceedings in case the debtor fails to pay on schedule. Although it takes longer for the creditor to receive payment, it also provides increased security and in the long run the debt will be paid. If the debtor wishes to save his company, it will give him a chance to do so.
Using right of pledge to extend payment deadlines
Another way to guarantee debts is to use the right of pledge. For example, extending payment deadlines can be tied to a mortgage on the debtor’s property or a commercial mortgage on the debtor’s enterprise. If the debtor has another firm in his name, shares can be considered as collateral. Also, a landlord can to use the right of pledge.
Conditional ownership in debtor company
In some cases, it may be a good idea to use conditional acquisition of shares in the debtor company as collateral. If the debtor fails to pay on schedule, the creditor will acquire shares in the debtor’s company as previously agreed. The agreement has to be notarially attested and signed by both the debtor and the creditor. No public record will be made of such an agreement. Of course, this is a reasonable option only if the debtor is not on the verge of bankruptcy and the shares have value.
Deliver a bankruptcy caution to the debtor
If the debtor cannot be reached, or refuses to cooperate, you may wish to serve a bankruptcy caution. In your claim, you should explain the circumstances of how the debt occurred and give a 10-day deadline to settle the debt. If the debt is due for over 30 days, you may wish to mention that this claim also serves as a warning (bankruptcy caution) that court proceedings for bankruptcy will be started if the debt remains unsettled. This usually serves as a wakeup call for debtors and they become willing to negotiate.
Advice to debtors: When facing bankruptcy proceedings, react promptly!
Creditors seldom start bankruptcy proceedings after serving a bankruptcy caution, since it does not serve their interests, but it may indeed happen. Once it does, you should present your arguments opposing the claim that the bankruptcy petition is based on, and do it within the term set by the court.
If you miss this deadline, an interim trustee may be appointed and you lose your right to oppose the claim and the court will then only assess the financial situation of your company in order to establish if the company is insolvent or not.
When doing so, the court also takes into account the claim that forms the basis of the bankruptcy petition. This means that your company can be declared bankrupt while not actually being bankrupt, since the claim itself may be unjustified. So make sure you file your arguments on time in order to avoid opening of bankruptcy proceedings.
If the claim is justified, yet you wish to save the firm from bankruptcy, pay the debt or provide collateral. If you cannot do either, you will have to convince the court of your company’s ability to satisfy claims. If you can convincingly demonstrate the circumstances, no bankruptcy will be declared.
Management’s obligations to file for bankruptcy
A company’s management must file for bankruptcy promptly but not later than within twenty days after the date on which the insolvency became evident. It is not always easy to recognize when insolvency became evident, but according to case law insolvency can be assumed if the company’s net assets are negative. If this is the case, a creditor files for bankruptcy and their claim is solid, bankruptcy will generally be declared.
If the management board fails to file for bankruptcy on time a creditor may do it instead, and this constitutes a breach of the duty of care. This means that both the bankruptcy trustee and creditors have the right to file action for damages against the board members.
Criminal liability follows if the court finds that the management has intentionally caused insolvency or concealed assets in bankruptcy proceedings, in which case imprisonment for 3 years or a fine may follow.
Advice to creditors in bankruptcy proceedings: File your claim on time and pursue the case!
To use the opportunities provided by bankruptcy and restructuring proceedings, you must act promptly and pursue your interests actively.
It is important to follow the deadline for filing your claim (usually 2 months after bankruptcy is declared), but it would be much better to file earlier, before the first general meeting. This will allow you to vote at the first creditors’ meeting, bearing an influence on its decisions.
The most important question at the first creditors meeting will be whether the court-appointed bankruptcy trustee should remain on the case and who will serve on the bankruptcy committee. As the quality of bankruptcy trustees’ work varies greatly, this will influence the results of the bankruptcy proceedings. A creditor should be active during bankruptcy proceedings, take a stand at creditors’ meetings, participate in the work of the bankruptcy committee, and cooperate with the bankruptcy trustee in order to get the best outcome from the bankruptcy proceedings.
If you feel that the process is a waste of time, don’t rush to conclusions. Each case is different, and so are the options to improve your chances.
Sometimes, a bankrupt company has conducted transactions shortly before filing for bankruptcy, harming creditors’ interests. In such cases the bankruptcy trustee has legal tools to revoke those transactions. Also, if the company’s assets have been transferred, the bankruptcy trustee may turn the claims against the company which received the assets, or it may be possible to file a claim against a member of the management. Use of such tools always helps to increase the bankruptcy estate and to satisfy the claims of creditors to a larger extent.
When can restructuring be used?
If payment difficulties are not permanent, restructuring would be the right option to choose. The key for success is the management’s faith in it and their ability to cooperate with the restructuring advisor and creditors, since this will determine the outcome of any restructuring plan.
To restructure claims, payment schedules can be put into place, deadlines can be changed, or claims can be reduced. Tax receivables can also be restructured and reduced, as the tax authority will also participate as a creditor in the restructuring proceedings.
Creditors can greatly influence the process of drafting a restructuring plan. This requires the consent of half the creditors who must represent 2/3 of the votes.
As a creditor, always find out if your claim is included in the restructuring plan, since this will determine your rights in the proceedings.