Check list: Supply Relations Risk Management

The insolvency of a business partner can have serious effects on a company. With this memo, we would like to outline the measures you can take to protect yourself against economic losses.

I. Preventive contractual measures during the non-critical period

• GTC and choice of law - Make sure that your own general terms and conditions apply, e.g. by using defence clauses. Beware of defence clauses on both sides: These can lead to the invalidity of all contradictory terms, so that statutory law may apply instead of individual contractual provisions.

If you conclude contracts with foreign contractual partners, make sure that German law applies and that German courts have exclusive jurisdiction in the event of disputes.

• Short payment terms - Agree on short payment terms. The statutory payment period is 30 days. This can be deviated from by individually agreed payment periods.
• Licence agreements - If licences granted by a licensor are of importance to you, make sure to include contractual hedging mechanisms (securing the licence through usufruct, security trusts, etc.) as part of the licence agreements. It is important for the licensee to enter into an agreement that protects him from the licensor's insolvency as much as legally possible, because the licensor's insolvency administrator often has a right not to fulfil the licence agreement.

For its part, the licensor should reserve a contractual right of termination, which it may also exercise in the event of the licensee's insolvency. Since insolvency-related terminations are not legally permissible, a contractual right of termination must be structured in a way that it is not linked to the insolvency as such (e.g. termination due to breach of contractually stipulated obligations or falling short of contractually agreed sales figures).

• Collateral - Protect yourself against bad debts by means of collateral: One way to do this is to agree on a (simple, extended or prolonged) retention of title. This will entitle you to segregation or separation (depending on the circumstances) in the event of an insolvency of your contractual partner, i.e. your goods will either not be part of the insolvency estate (§ 47 InsO) or you will be entitled to priority satisfaction (§ 49 InsO). In addition, make sure that your goods are identifiable by affixing your company name, logo and/or the respective serial number of the product so that your goods can. be identified and reclaimed in the event of a crisis. Furthermore, you can protect yourself by having your contractual partner provide collateral in the form of blanket assignments, sureties, guarantees or letters of comfort.

II. Preventive protective measures outside contractual agreements in the non-critical period

• Protect yourself against the risk of bad debts by taking out trade credit insurance. In the event of a loss of receivables, the trade credit insurance replaces the outstanding amount of receivables. In most cases, a deductible is agreed for the policyholder.
• Keep yourself informed about the solvency of your contractual partners with the help of credit agencies (Schufa, Creditreform, Dun & Bradstreet, etc.).

III. Risk Management in the event of a crisis of the contracting party

• If your contractual partner is in a crisis that may lead to insolvency, you must pay particular attention to the risks of claw-back under German insolvency law. Under certain circumstances, the insolvency administrator can later claw back payments you have received from your contractual partner.

In order to reduce claw-back risks, you should switch to payment in advance in the event of an economic crisis of your contractual partner with regard to new services. Alternatively, the payment period should be kept as short as possible (maximum 30 days; so-called cash transaction privilege). Also with regard to the payment of old claims, it is important to reduce the risk of avoidance as much as possible. You may have to take legal action to enforce your claims, e.g. by means of dunning proceedings. If you have the possibility of short-term enforcement, you should consider doing so.

• If necessary, the granting of new funds can be secured through trust structures.
• If you have several guarantees at your disposal, make sure that their use is coordinated. In individual cases, it may make sense not to use a guarantee for the time being and to use other collateral instead for the time being.
• Consider revoking any authorisations your contracting partner may have on the basis of an extended reservation of title to sell or process your goods or to collect claims.
• Under certain circumstances, it is advantageous to terminate contracts before your contractual partner files for insolvency. This may be relevant, for example, for landlords who, after filing for insolvency, are subject to a termination lock due to rent arrears from the time before the insolvency application.
• If you have taken out trade credit insurance, you must be careful to comply with your obligations under the insurance contract in order not to lose your insurance cover (e.g. report negative payment experiences).
• Late payers can pose a threat to your business. Pay attention to your own liquidity during your business partner's crisis. Seek expert advice if necessary.