# Bankruptcy

Source: https://contracko.com/glossary/bankruptcy

# Bankruptcy

A court-ordered liquidation procedure that seizes a debtor's assets for the benefit of creditors.

## Definition

Bankruptcy is a court-ordered general seizure of all of a debtor's assets, administered by a trustee for the collective benefit of creditors, and governed in the Netherlands by the Bankruptcy Act (Faillissementswet). It is declared where a debtor has stopped paying and has more than one creditor. Unlike suspension of payments, which aims at restructuring, bankruptcy targets liquidation, though a going-concern sale of the business remains possible.

## Example

> After the company stops paying multiple suppliers, the court declares it bankrupt and appoints a trustee to liquidate the assets.

## Why this is a business risk

When a key customer or supplier enters bankruptcy, the financial impact on your business can be immediate and severe. Outstanding receivables become unsecured claims in the estate with limited prospect of recovery, while the bankrupt supplier's failure to perform triggers its own cascade of operational disruption. Contracts that automatically terminate on insolvency may leave you without a critical service at the worst possible time. Businesses without robust monitoring of counterparty financial health often only learn of a bankruptcy after it is too late to protect their position.

## How to manage it

- Include a retention-of-title clause in supply contracts so that goods delivered but unpaid remain your property and can be reclaimed from the estate.
- Monitor the financial health of significant counterparties periodically: a sudden change in payment behaviour, credit rating or public filing is often an early warning sign.
- Check whether your contracts have a change-of-control or insolvency-termination clause that lets you exit before the estate freezes performance.
- Credit-insure key receivables so that if a significant customer is declared bankrupt, the insured portion of the debt is recoverable.
- Avoid relying on a single supplier for critical services; diversify supply chains to reduce the operational impact of one counterparty's insolvency.

### How Contracko helps

Contracko's contract repository lets you quickly identify all active contracts with a specific counterparty when a bankruptcy is announced, so you can assess exposure and act on termination or retention-of-title rights without delay. The AI review layer surfaces insolvency and change-of-control clauses across your portfolio, giving you advance visibility of which contracts carry automatic termination rights and which do not.

## Legal references

- Fw art. 1 Bankruptcy Act: declaration of bankruptcy

Unless marked otherwise, references are to Dutch law (Burgerlijk Wetboek, the Dutch Civil Code); EU instruments such as the GDPR apply across the EU. This is general information, not legal advice. Other jurisdictions treat these concepts differently. Verify the current text and your situation with a qualified lawyer.

## Relevant for

[Financial Services](https://contracko.com/industries/financial-services)[Logistics & Distribution](https://contracko.com/industries/logistics)[Retail & Wholesale](https://contracko.com/industries/retail-wholesale)[Construction](https://contracko.com/industries/construction-industry)

## Related clauses

- [Termination for Cause Clause](https://contracko.com/clause-library/termination-for-cause)
- [Retention of Title](https://contracko.com/clause-library/retention-of-title)
- [Change of Control Clause](https://contracko.com/clause-library/change-of-control)

## Related terms

- [Suspension of payments](https://contracko.com/glossary/suspension-of-payments)
- [Bailiff's writ](https://contracko.com/glossary/bailiffs-writ)
- [Notice of default](https://contracko.com/glossary/notice-of-default)
- [Retention of title](https://contracko.com/glossary/retention-of-title)

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## Frequently asked questions

Common questions about this term.

- **Q:** What is the difference between bankruptcy and suspension of payments?
  **A:** Surseance van betaling is a temporary moratorium aimed at restructuring and survival, while bankruptcy is a liquidation procedure that generally winds the business up for the creditors.

- **Q:** Does retention of title survive the buyer's bankruptcy?
  **A:** Yes. A valid eigendomsvoorbehoud lets the seller reclaim unpaid goods from the estate, which is why suppliers rely on it as protection against insolvency.

- **Q:** Can contracts with the bankrupt party be terminated immediately?
  **A:** Not automatically under Dutch law unless the contract contains an insolvency-termination clause. The trustee (curator) can choose to continue performing contracts if it benefits the estate. A well-drafted termination-for-cause clause that expressly covers insolvency gives the non-bankrupt party a clear exit right.

- **Q:** What is the order of creditor priority in a Dutch bankruptcy?
  **A:** Secured creditors (such as mortgage holders and pledge holders) rank first and recover from their collateral outside the general estate distribution. Preferential creditors (including the tax authority and UWV) rank next. Ordinary unsecured creditors share what remains pro rata and often recover little or nothing.

- **Q:** How does a bankruptcy affect a running contract for ongoing services?
  **A:** The trustee can decide to honour or disclaim ongoing contracts. If the trustee continues the contract, the resulting obligations are estate debts with preferential ranking. If the trustee disclaims the contract, the non-bankrupt party has a claim in damages as an unsecured creditor for the resulting loss.

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