The bankruptcy of a contracting party can have major consequences for entrepreneurs. When a customer, supplier, or business partner goes bankrupt, uncertainty often immediately arises regarding 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 damages.
What does the bankruptcy of a contracting party mean?
The bankruptcy of a contracting party occurs when the court declares a company to be in a state of bankruptcy. From that moment on, the bankrupt party loses the right to dispose of its assets and a bankruptcy 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 settled;
- communication goes through the bankruptcy trustee.
What happens to ongoing contracts?
In the event of the bankruptcy of a contracting party, ongoing agreements remain in existence in principle. However, the bankruptcy trustee has the authority to determine whether an agreement is continued or terminated.
This can have major consequences for:
- long-term cooperation agreements;
- distribution and agency agreements;
- supply contracts;
- rental or service agreements.
In practice, we see that entrepreneurs often react too late, whereas rapid legal action can be precisely what is important.
Outstanding invoices in case of 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 (concurrente vorderingen).
This means that:
- you must submit your claim to the bankruptcy trustee;
- payment depends on the proceeds of the estate;
- the chance of full payment is often limited.
Does debt collection still make sense in case of bankruptcy?
After the bankruptcy of a contracting party, regular debt collection is in principle no longer possible. Individual recovery actions are prohibited. Nevertheless, taking legal action can sometimes still be useful.
Consider, for example, situations where:
- securities have been provided (pledge, mortgage);
- retention of title (eigendomsvoorbehoud) applies;
- payments were made shortly before bankruptcy;
- directors can be held personally liable.
Retention of title and securities
In the event of the bankruptcy of a contracting party, a retention of title can be an important legal instrument. If correctly agreed upon, this can 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.
Directors’ liability in case of bankruptcy
Sometimes it is possible, upon the bankruptcy of a contracting party, to hold not only the company but also the directors liable. This may be the case with improper management or unlawful acts.
In that case, recovery may still be possible outside of the bankruptcy.
Fraudulent preference (Actio Pauliana)
In insolvency, it regularly happens that assets are withdrawn shortly before the bankruptcy. This is referred to as a fraudulent preference (paulianeus handelen).
In certain cases, this can be reversed, which can be relevant for creditors who are disadvantaged by the bankruptcy of a contracting party.
International aspects of bankruptcy
The bankruptcy of a contracting party can be extra complex when international trade is involved. Foreign creditors are faced with questions regarding jurisdiction, recognition, and recovery options.
General information about bankruptcy and creditors’ rights can be found at the Judiciary (Rechtspraak).
Common mistakes in the bankruptcy of a contracting partner
- waiting too long for legal advice;
- not submitting a claim to the bankruptcy trustee;
- not utilizing securities in a timely manner;
- not investigating directors’ liability;
- acquiescing while action is still possible.
What can Arslan Advocaten do for you?
Arslan Advocaten guides entrepreneurs in situations involving the bankruptcy of a contracting party. We assess your legal position, investigate recovery options, and advise on strategic next steps.
Read more about our services within corporate law, our experience with debt collection and payment disputes and international trade disputes.
Costs and litigation funding in bankruptcy disputes
In disputes surrounding bankruptcy and insolvency, we in principle do not work on the basis of free legal assistance. Such cases require a careful and strategic approach.
In certain cases, however, litigation funding can be considered. We work together with an independent litigation funder who – after assessment – may be willing to (partially) finance the legal fees.
For the client, this means that litigating is possible without direct financial risk.
About the author
This article was written by Onur Arslan, lawyer and founder of Arslan Advocaten. He specializes in commercial disputes, including bankruptcy issues, debt collection, and insolvency disputes.
Would you like to discuss what options you have after the bankruptcy of your contracting partner?
👉 View Onur Arslan’s profile and contact him directly.
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Frequently Asked Questions
What does the bankruptcy of a contracting party mean for my ongoing contracts?
In principle, ongoing contracts remain in existence, but the bankruptcy trustee can determine whether an agreement is continued or terminated. This can have major consequences for long-term agreements and supply contracts.
How can I collect my outstanding claim from a bankrupt contracting party?
You must submit your claim to the bankruptcy trustee, but payment depends on the proceeds of the estate and the chance of full payment is often limited. Regular debt collection is usually no longer possible after bankruptcy.
Are there legal instruments to protect my goods in the event of a customer’s bankruptcy?
Yes, retention of title, pledge rights, and mortgage rights can protect you by preventing goods from falling into the bankrupt estate or by obtaining stronger positions.
When does it make sense to take legal action after the bankruptcy of a contracting party?
Legal action can be useful if securities have been provided, retention of title applies, payments were made shortly before bankruptcy, or if directors can be held personally liable.
