07 Apr Corona special | Order of payment of creditors and amendment of existing contracts
Aside from how to deal with their debtors (see our last post), our clients and business relations also wonder (i) how to deal with the (selective) payments to creditors while the company has payment problems and (ii) if it is possible to amend existing contracts.
It is quite conceivable that your company may run into payment problems as a result of this crisis or may even already have payment difficulties. It makes sense to investigate whether it is possible to partly amend contracts and whether you are allowed to make selective payments to creditors.
If your company is unable or unwilling to meet contractual obligations due to the corona crisis, you may want to know whether you can get rid of the agreed obligations. In our previous post, we advised you to check the contracts for provisions that provide for this change of circumstances. If such provisions are not included, the law may offer a solution.
The crisis gives reason to invoke force majeure in a limited number of situations, for example when a company is forced to close down as a result of which services or products can no longer be provided. In general, the paying party cannot invoke force majeure. If you cannot invoke force majeure, you may be able to invoke ‘unforeseen circumstances’. This is possible if the crisis has such an impact on your contractual obligations that it falls outside your normal business risk and as a result of which compliance is unacceptable.
If unforeseen circumstances are invoked, you can amend or dissolve the contract (in consultation with your contracting party). If your contracting party does not accept your appeal for amendment or dissolution due to unforeseen circumstances, you will have to ask the court to amend or dissolve the contract (with retrospective effect).
Selective payment occurs if the company has insufficient funds to meet all its payment obligations, as a result of which you, as a director, will have to choose which creditors you will pay (in part) with priority over other creditors. If you as a director make selective payments that leave creditors unpaid, you run the risk of being held personally liable as a director. It is important to distinguish between the different phases of the company in which payments are made. The ‘rescue phase’ is the phase in which the company has liquidity issues, but in which the financial tide of the company can still be turned and therefore a bankruptcy situation can be avoided. The ‘liquidation phase’ is the phase in which the bankruptcy of the company has been filed or in which the bankruptcy of the company is unavoidable. As the problems become more acute, higher requirements will have to be met for a selective payment to be allowed.
- If you are unable to pay your taxes and pensions, immediately report any payment default to the Tax Authorities in the rescue phase and arrange for postponement of payment. The Dutch Cabinet has taken support measures and the Tax Authorities offer the possibility: (i) of special deferral of payment and (ii) to revise provisional tax assessments. Do this in good time to avoid personal liability for you as a director.
- In principle, do not pay yourself first in both the rescue and liquidation phase. For example, in the event that you have an outstanding claim on your company as a result of a current-account relationship or a claim due to overdue management fees.
- In general, so-called selective payments (in the rescue phase) are allowed. There is no general rule according to which a company that is unable to pay all its creditors in full always acts unlawfully when it pays one creditor before it pays other creditors. Nevertheless, the conduct of the director may be unlawful in case the director has acted negligently towards unpaid creditors and a serious personal accusation may be made against the director. This is the case, for example, if the director knew or should reasonably have understood that the selective payments would result in a situation in which the other creditors remained unpaid and the company would have no recourse.
- In the liquidation phase, the payment autonomy of the director is more limited. In this situation, you as a director are not allowed to pay (i) affiliated creditors or (ii) unrelated creditors in the event that the director has a personal interest to pay these creditors before other creditors. An exception to this rule is the event that there are special circumstances justifying the selective payment, for example payment to the so-called “forced creditors”. Forced creditors are creditors such as suppliers that provide services or products that are essential to your business.
- The foregoing allows the director to give priority to paying the forced creditors in an attempt to avert bankruptcy. Without supply/services from these creditors, continuation of the business – even if only to meet current obligations – is not possible.
- In general, it is wise to be cautious when making selective payments in the liquidation phase.
Do you have questions about this article or one of our previous articles? Please contact Sara Karem (+31 6 12871576), Henk Brat (+31 6 55394459) or Sander Pieroelie (+31 6 22287865). We are of course at your side in these difficult times and you can also reach us on our mobile phone number outside the usual business hours.