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In the event of bankruptcy, the judge appoints a trustee who liquidates the estate and pays creditors in a statutory order of priority. Suppliers (unsecured creditors) are at the back of the queue and often receive only a share. Therefore, protect yourself in advance against bankrupt customers — with an advance payment, prepayment, a pledge, or a retention of title clause.
If a customer goes bankrupt, the books are not simply closed. We explain how bankruptcy proceedings work and how you can protect yourself.
A trustee is appointed
The judge appoints a trustee, who liquidates the estate in the interest of the creditors. The trustee is therefore not their enemy, but rather their advocate — although he must abide by rules and disappoint some creditors.
The trustee is collecting money
To pay creditors, the trustee sells the assets for the highest possible price, such as inventory and buildings, at auction. He cannot simply sell everything: creditors with a pledge or mortgage can recover their claim outside of bankruptcy proceedings, and a retention of title clause can keep goods outside the settlement — an important reason to always agree on this.
Sometimes the court declares a cooling-off period, during which the trustee inventories the estate and no reliance on a retention of title or mortgage right is possible (although the Tax Authorities may seize the assets). A sale can also constitute a restart: someone purchases the assets to continue operations. Furthermore, the trustee collects outstanding receivables and may file liability claims.
Current agreements
Ongoing agreements do not expire automatically; the bankruptcy trustee terminates them, in which case damages or termination payments may be due (which are added to the debts). If there is a clause stating that the agreement automatically terminates upon bankruptcy, the trustee will invoke this to avoid a termination payment. Statutory termination rules apply to employment and tenancy agreements.
Paying creditors: the ranking
Usually there is insufficient money for everyone, so the trustee pays according to a statutory order of priority:
- Estate claims — debts arising during the bankruptcy, such as the trustee's salary and rent from the date of bankruptcy.
- Preferential claims — such as employee back wages and taxes.
- Concurrent receivables — such as outstanding invoices from suppliers. The remainder is apportioned proportionally to the receivable.
Frequently Asked Questions
As a supplier, do I get my money in the event of my customer's bankruptcy?
Often only partially. As an unsecured creditor, you are at the bottom of the ranking. With a pledge or retention of title, you are in a stronger position.
What is a restart?
A sale in which someone acquires the assets to continue operations in a streamlined form. The trustee assesses whether this is the best solution for the creditors.
How do I protect myself against a bankrupt customer?
By requesting an advance payment or prepayment, establishing a pledge, or including a retention of title clause, so that you do not end up at the bottom of the ranking.
Protection against your customers' bankruptcy
The legal experts at MKB Juristen assist you with retention of title, pledges, and strong terms and conditions. View our expertise in restructuring and insolvency or contact us.
