My Client Is In Insolvency Proceedings
Law and Tax Changes
Imagine you have a business where your product is excellent and innovative and works well. You make more and more supply commitments to your customers, and trust makes you increase credit terms with your most loyal customers.
But suddenly, one of your customers goes into insolvency. Your company’s “alarms” go off, and you don’t know how this will impact your business. What will you do now that one of your best customers has gone into insolvency?
This article will go deeper into the concept of insolvency proceedings and what you can and cannot do with this client.
What does it mean to enter into insolvency proceedings?
When a client is said to have entered into insolvency proceedings, this refers to entering into legal proceedings, either as a natural or legal person, due to an insolvency situation.
In other words, it is a person who cannot pay all of their debts and, therefore, must respond with their assets to outstanding payment obligations. The options open to a person in insolvency proceedings are to declare bankruptcy, suspend payments, or reach collective agreements with creditors to reduce or defer debts.
What can you do as a creditor of a client who files for bankruptcy?
You cannot terminate contracts
First of all, you should know that you cannot terminate the contract you have with them simply because they are in insolvency proceedings. The law requires that you continue to fulfil the contracts and commitments that you had with them so that they have the opportunity to get out of their state.
In other words, if they cannot operate normally, it would be complicated for them to overcome the situation. Therefore, they must receive supplies as usual and at the same time continue to serve their customers. That would not be possible if they are denied supplies.
Make sure you do not enter into contracts after the competition date
Please note that insolvency proceedings only modify the payment conditions of commitments prior to the insolvency situation. These commitments are affected by changes in payment deadlines and/or reductions in amounts.
It is assumed that companies entering into new commitments when a client is in insolvency proceedings do so in the knowledge of the risks involved.
Reach a friendly settlement or file a court case
If you wish to terminate a contract, you may do so if you agree with the customer or if the customer fails to comply with any of the agreed conditions that are considered grounds for termination.
These conditions may relate to failure to deliver the goods within the agreed period or failure to pay. However, suppose there is a clause in the contract that justifies the non-performance of your obligations because you are in insolvency proceedings. In that case, you should be aware that the desire to terminate the contract has no validity whatsoever.
In this case, what you should do is file a legal action in the court where the insolvency proceedings are being conducted, requesting the termination of the contract and providing the necessary documents to prove the insolvent company’s breach of contract.
Please note that filing the claim does not mean that the judge will admit it. If the judge considers that the termination of the contract would be contrary to the interests of the insolvent party, he may not admit it. That will be the case if, for example, the termination of the contract prevents the insolvent party from continuing its regular economic activity, as mentioned above.
Get expert advice
In such cases, the best thing to do is to seek advice from legal experts to help you reach the best possible agreement with a client in insolvency proceedings.
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