What is Bankruptcy?

Bankruptcy is declared by the court at the request of the debtor itself or of one or more creditors. Upon the declaration, the debtor loses control of its assets; the liquidator takes over and inventories the estate.

For contractual counterparties, the position depends heavily on the type of claim. Estate creditors (liquidator's costs, rent after the bankruptcy date, new deliveries) are paid first. Preferential creditors (tax authorities, employment insurance bodies) follow. Unsecured creditors (the majority of commercial suppliers and business counterparties) share proportionally in whatever remains, which in practice is often little or nothing.

Ongoing contracts are not automatically terminated upon bankruptcy. The liquidator decides which contracts to continue. Where a contract is continued, the counterperformance constitutes an estate debt and is paid. Where the liquidator refuses to perform, the counterparty has an unsecured claim. Including a bankruptcy clause in contracts (permitting immediate termination upon the counterparty's insolvency) provides faster legal certainty.

Retention of title is critical: goods delivered under a retention of title clause can be reclaimed from the estate as the seller's own property. Without retention of title, the unpaid supplier ranks as an unsecured creditor for the invoice value.

Damage limitation begins before the bankruptcy: at the first signs of financial difficulty (payment arrears, publications in the official gazette) acting quickly is essential.

The bankruptcy of a counterparty is one of the biggest risks in B2B contract relationships. Unpaid invoices, loss of delivered goods and disrupted supply chains are the immediate consequences. For SMEs with limited reserves, the bankruptcy of one major customer can trigger a serious liquidity crisis.

Preventive measures, retention of title, credit insurance, spreading debtor risk and monitoring financial warning signals, substantially reduce the damage. Acting at the first signs of payment problems, rather than waiting, is the key lesson.