Statistics show that the risk of bankruptcy is very real, especially in times of financial crisis. Even companies that have been around for years and with good reputations are susceptible to bankruptcy. With stricter lending standards and a lack of business loans, it is entirely possible that a company, though fundamentally solvent, is driven into bankruptcy due to short term liquidity problems.

What happens when bankruptcy is declared?

Under the Bankruptcy Act in the Netherlands, a debtor who fails to pay its debts and has at least two unpaid creditors may be declared bankrupt.

In declaring a company bankrupt the court will appoint a trustee (usually a lawyer) who is required to liquidate the assets of the bankrupt company and provide regular reports to the court on the progress of the liquidation. The assets of the bankrupt company must be converted into cash. After deducting the salary of the trustee and other bankruptcy costs, the rest is distributed among the creditors.

In practice, monetary distribution is only made to unsecured creditors in 6% of bankruptcy cases. Despite this fact, it is important to follow the activities of the trustee if you are an unsecured creditor and it may be advisable to participate in the winding up meeting at the end of the bankruptcy proceeding to ensure there were not sufficient assets to satisfy your dept.

What can be done?

• Repossess goods: If the creditor has sold its products under a retention of title clause, such products can be repossessed in certain circumstances. To repossess the goods, they must be individually traceable (for example being stored in marked boxes) and have not been mixed with similar products. A creditor must act quickly after the debtor has been declared bankrupt in order to exercise his right to repossess the products.
• Set-off: The creditor may offset any debts and claims against the bankrupt company and present a net debt to the trustee in the bankruptcy.
• Refrain from delivering: The creditor who is under a contractual obligation to provide goods or services to a company that has been declared bankrupt is entitled to withhold performance of his obligations until the trustee provides adequate assurance of payment for the products or services rendered.

Apart from the above, there is nothing much that can be done when a company has been declared bankrupt. The probability of recovering an unsecured debt from a bankrupt client is small.

How to prevent this situation?

The Bankruptcy Act gives a privileged position to creditors who hold a security interest, such as a mortgage lien or right of pledge. Such creditors with collateral are entitled to a separate execution of their rights, i.e. they collect as if there is no bankruptcy.

Any company may negotiate a secured interest (mortgage lien or pledge) to gain collateral for credit risks as protection against the bankruptcy of the customer and is frequently done by banks and other financial institutions. The procedure is not complicated, the costs are minimal and if it is a non-possessory pledge it will not affect the normal business operations of either the creditor or the debtor.

Bankruptcy as a business opportunity

The bankruptcy of a debtor also offers interesting business opportunities from time to time. In converting the assets of a company into cash, the trustee is looking to sell the bankrupt company's business, preferably whole or piece by piece. Anyone interested in the company's assets may enter into negotiations with the trustee purchase the assets. These sales are typically conducted at very competitive prices and allow the purchase of a company without debts or employees.

To take advantage of opportunities that arise in bankruptcy situations, it is important to act quickly and to submit a proposal to the trustee with the assistance of a knowledgeable and experienced attorney.