29 August 2016

Caution with deliveries on credit

Acceptance of payment for delivered goods – What is at issue?
A debtor having financial difficulties is often no longer able to pay all outstanding bills. If he pays invoices for goods that have already been delivered and there are indications of financial difficulties, the creditor is well advised not to unconditionally accept payment but to first make inquiries about the debtor's actual financial situation. Doctrine and jurisprudence consider the payment of outstanding debts as fundamentally harmful to creditors if the debtor is not able to also settle all of his other financial obligations when due. If, subsequently, the debtor is declared bankrupt, if a seizure is executed, or if debt restructuring proceedings occur, a previously rendered payment can be challenged and the creditor can become obliged to return the received payment which will then form part of the enforcement proceedings.

When is a business transaction or a payment by the debtor contestable?
Within the framework of a voidability for intent, business transactions that were entered into or payments made by the debtor within the five years immediately preceding the seizure, the opening of bankruptcy proceedings or the initiation of debt restructuring proceedings are contestable if they were entered into or rendered, respectively, to the detriment of one or more creditors and the debtor's malice was apparent to the beneficiaries.

What are indications of financial difficulties?
Whether a payment received from the debtor can be challenged within the framework of a voidability for intent depends – among other things – on whether the debtor acted with malice that was apparent to the beneficiary. The decisive factor is whether the beneficiary could have recognized – acting with due and reasonable care and attention – that other creditors could possibly be financially disadvantaged as a consequence of the payment. Generally, no one needs to worry about whether a business transaction or payment is to the detriment of his contractual partner's creditors. However, if there are – clear – signs that creditors are being favoured or disadvantaged, respectively, a diligent inquiry may be required from the beneficiary. Decisive is whether the favoured creditor was bound to become suspicious considering the circumstances of the individual case, in particular, the nature and the duration of the contractual relationship between the parties. Recognisability can basically be affirmed if the creditor is aware of the debtor's adverse financial circumstances, if the debtor has repeatedly been in arrears with payments during the previous business relationship and made requests for respite, if he stopped the payments, or if the deterioration of the debtor's business has been public knowledge. If such signs are present, the beneficiary has to inform himself about the debtor's financial situation, for example by requesting an excerpt from the debt enforcement register or by getting information on the financial situation direct from the debtor himself.

It is the beneficiary's knowledge at the point in time when the payment is made that is decisive. If the beneficiary only receives the information afterwards, or the debtor's malice only becomes recognisable afterwards, it is without harm to the beneficiary.

What to do if the contractual counterparty is in financial difficulties?
If a party recognizes signs that their contractual counterparty has, or may have, financial difficulties, it is advisable, on the one hand to gather information on the counterparty's financial situation and on the other hand to perform (equivalent) obligations only against advance payment or simultaneously quid pro quo.

Our insolvency law team will be happy to answer any questions.

Authors: Thomas Weibel, Claudia Walz

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