Since last year, our office has seen an increase in the number of bankruptcies. Recently, credit insurer Allianz Trade also reported that it expects a further increase this year in various sectors: hospitality, transport, wholesale, retail and (in particular) construction.

Your customer’s bankruptcy often comes as no surprise. Signs of financial difficulties, such as deteriorating payment behaviour, will have been apparent to you for some time. In order to limit the negative consequences for your own business, it is essential to be prepared for a possible crisis in your business relationships. Depending on the exact agreements with your customer, you can of course demand (partial) advance payment. You can discuss this, especially if your invoices are consistently paid late. However, advance payment is not always possible for your customer. This article provides concise information on how you can legally prepare for your customer’s impending bankruptcy in other ways. A good contractual basis is often indispensable in this regard.

Retention of title

Retention of title is usually a very effective instrument. In essence, retention of title means that you remain the owner of the goods you deliver to your customer until the customer pays your invoices. If the customer goes bankrupt, the receiver is obliged to either pay your invoices or return the delivered products to you as the owner.

Retention of title must be agreed with your customer. The supplier’s general terms and conditions often include retention of title, but the question is whether those general terms and conditions have actually been agreed. The basic principle here is that general terms and conditions are legally agreed between the parties if they are provided prior to or upon conclusion of the agreement. This often goes wrong, for example because the general terms and conditions are only stated on your invoice, which is sent later. The receiver of the bankrupt customer can then invalidate the general terms and conditions, including the retention of title. You will then be left empty-handed.

The wording of a (comprehensive) retention of title clause is crucial, because it can only be validly agreed within the legal limits.

Right of reclamation

The right of reclamation can be useful if you have not stipulated a (valid) retention of title. The right of reclamation is regulated by law and therefore does not need to be agreed upon. By invoking the right of reclamation, the agreement with your customer is dissolved and the customer’s right of ownership ends. If your customer is bankrupt, the receiver will have to return the goods you delivered to your customer under that agreement to you, or the receiver will still have to pay your invoice.

The right of reclamation can only be invoked within six weeks after the purchase price for the delivered goods has become due and payable and within 60 days after the customer has taken possession of the goods. If either of these two periods has expired, you can no longer invoke the right of reclamation for that invoice/delivery.

Right of retention

In some cases, you may have goods in your possession that belong to your customer. For example, products that you are temporarily storing for the customer, or goods that the customer has brought to you for repair. Under certain legal conditions, you can refuse to release those goods in order to enforce payment. You retain this right if your customer goes bankrupt. The receiver must decide within a period set by you whether your invoices will still be paid or whether the goods in your possession will be claimed. This claim is the exclusive prerogative of the receiver. If the receiver does not make a claim, you are entitled to sell the goods and recover the proceeds. However, the trustee will usually claim the goods if they have a positive value. The trustee will then sell the goods in the interests of all creditors. On the other hand, your unpaid invoices will be given a higher priority in the bankruptcy proceedings, which means that you will be paid sooner when the proceeds are distributed.

Pledge

A pledge is a security right that you can establish on your customer’s property or claims. This gives you the right to sell those assets to another party in the event of non-payment, whereby you can recover the proceeds. In the case of a right of pledge on claims, you can proceed with collection after notifying the debtors. You can also do this if your customer has gone bankrupt; in principle, you do not need to take any action in relation to the bankruptcy. In practice, agreements are usually made with the receiver about the realisation of the pledged goods, because this is quicker and easier and usually leads to a higher return.

A pledge must be agreed with your customer in writing. The supplier’s general terms and conditions often include an obligation for the customer to establish a pledge on certain goods upon first request. On the basis of this provision, you can then require your customer to cooperate in establishing a pledge.

The right of pledge described here is only legally valid once the relevant agreement has been registered in a central register of the Tax and Customs Administration. If registration has not taken place, there is no valid right of pledge. After registration, the Tax and Customs Administration will return the agreement to you, affixed with a sticker and a signature. You must keep this original document safe, as it is the only proof of a valid right of pledge.

A major disadvantage of a right of pledge is that you are often not the first party to obtain a security interest in your customer’s property. For example, the bank often already has extensive security interests. Your lien on goods is then ineffective, because the bank’s security rights take precedence, after which there is usually insufficient collateral remaining. An alternative may be to deliver your goods to your customer already encumbered with a lien. In that case, you take precedence over the bank. Even then, the lien must be registered.

If you deliver physical goods to your customer, retention of title is usually a simpler and more valuable instrument than a pledge. If you provide services to your customer, a pledge on your customer’s property may be worth considering, but as indicated, in many cases you will not be the first.

Conclusion

When exercising the rights described above, the receiver of your bankrupt customer will require you to demonstrate exactly which goods you are claiming rights to. You can do this by using unique numbers for your deliveries, or because your customer has stored those goods separately from goods to which you have no rights. It is a good idea to include in the agreement with your customer that the customer must mark the goods to which you have rights as your property and/or store them in a specific place. You must therefore ensure that your customer does so. If, for example, in the case of retention of title, you cannot demonstrate exactly which goods are your property, the receiver will not allow you to walk away with the spoils.

Most rights that can be effective in the event of your customer’s bankruptcy require a sound contractual basis. It is therefore a good idea to review your general terms and conditions or agreements with customers (whether already concluded or yet to be concluded) in preparation for a further increase in bankruptcies. Please feel free to contact Bart Lenferink at b.lenferink@paulussen.nl or 045-560 6000.

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