Business partner in insolvency - what to do and how to insure yourself in such a case?

Business partner insolvency is every entrepreneur's nightmare. While the debtor is concerned with bare survival, you as a creditor are concerned with the payment of the debt you have against the debtor. You may never see the money in full again. But was there really nothing you could have done to prevent or at least prepare for this situation? And what to do if your business partner is already insolvent? We will answer in this article.

This article was written in 2021. If you are looking for up-to-date information on this topic, please contact us at office@arws.cz or by phone on +420 245 007 740. We will be happy to advise you.

Author of the article: ​ARROWS (Mgr. Jiří Koubek, office@arws.cz, +420 245 007 740)

At the end of this article you will find our latest publication available for download and you can watch our latest webinar.

Establishing cooperation, or caution pays off

Finding a suitable and reliable business partner is not easy. Everything can seem idyllic for quite a long time and cooperation can work. But suddenly the person in question stops paying his invoices and you find out that he is the subject of insolvency proceedings. You may not have got into this situation where your debts are not being paid at all. How? By doing basic research on the business partner before you start your own cooperation. This is not a complicated activity. A short check of the entity in the insolvency register and the central register of enforcement actions is sufficient. Alternatively, a quick check of the accounting documents in the collection of documents of the Commercial Register is not out of the question. Believe that initial caution can save you a lot of time, money and nerves in the future.

How to know if you are bankrupt

From the outside and without detailed knowledge of the property situation, it is difficult to know whether a business partner is bankrupt. Until insolvency proceedings have been formally opened with the partner and the insolvency court has determined that the partner is insolvent, you can only make assumptions. However, there are certain warning signs that should make you alert.

Typically, the person in question stops paying your invoices, fails to communicate, makes excuses why he or she could not pay, and otherwise prevaricates. In this case, it is advisable to contact other entities with which you do business and check with them to see if they are behaving similarly.

Insolvency proceedings have been initiated, now what?

First of all, you need to find out about the insolvency proceedings. It often happens that creditors do not register the existence of the insolvency proceedings at all and thus lose the opportunity to pursue their claims against the debtor. We therefore recommend that you regularly monitor the insolvency register or keep an eye on it. There are, for example, free websites that allow you to monitor specific entities. If insolvency proceedings are opened with the person concerned or if anything new happens in the proceedings already opened, you will receive an automatic notification email so that you do not miss anything.

From the creditor's point of view, the most important thing in insolvency proceedings is to file your claim properly and on time. The application is submitted to the insolvency court on a special form and the claim must be filed no later than 2 months from the date of the decision on the debtor's insolvency. After filing the claim, the creditor becomes a party to the insolvency proceedings and has the possibility to influence them.

The proper filing of a claim in insolvency proceedings also has tax aspects. First of all, the VAT Act allows the creditor to reclaim VAT from the state on claims against the debtor in insolvency proceedings under certain conditions. In addition, the creditor is able to make provisions(again under certain conditions) for the claim against the debtor in insolvency proceedings up to the balance sheet value of the unliquidated claim.

The creditor does not have to be a passive spectator

The activity of most creditors begins and ends with the filing of a claim. From that point onwards, creditors usually switch to the mode of an inactive observer and merely follow the insolvency proceedings passively. This is a great pity. Each creditor has the possibility (depending on the amount of his claim) to influence the insolvency proceedings in a more or less effective way.

All creditors have the opportunity to participate in the creditors' meeting, where the most important issues of the insolvency proceedings are usually dealt with, in particular how the debtor's insolvency will be resolved, which determines the level of satisfaction of each creditor. In addition, creditors have the opportunity to participate in the creditors' committee, which is the body that supervises the insolvency administrator's activities, approves how the debtor's assets are to be monetised and makes other important decisions.

So how do you insure yourself in the event of insolvency?

Taking the right precautions can improve your position in any insolvency proceedings and increase the chances of your claim being settled. These include, in particular, the establishment of one of the statutory security instruments such as a pledge, lien, security interest, etc., which allow the creditor to satisfy itself in the event of the debtor's default in an alternative way. If a creditor invokes such a security right in insolvency proceedings, it is considered a secured creditor. He is primarily satisfied from the realisation of the asset securing his claim. Such a creditor usually receives much more money in insolvency proceedings than other so-called unsecured creditors.

A bank guarantee is also an effective remedy and is not affected by the insolvency proceedings. A creditor can still claim payment under a bank guarantee even if the debtor is subject to insolvency proceedings. He can be sure that the bank will comply with his request. Although it is a relatively costly means of security and its use is often limited to certain sectors or types of business relations, the negotiation of a bank guarantee can certainly be recommended.

Conclusion

In today's complex times, businesses must prepare to hear the word insolvency more and more often. It is therefore important for them to know how to behave in such a situation, what to do and that insolvency does not automatically mean a write-off of the debt for them as creditors, provided they have insured themselves in time for this eventuality. And they should also know that if they were careful and followed the basic rules when entering into business relationships, they could have avoided this situation altogether.