06 December 2016

In most jurisdictions starting liquidation or bankruptcy against a non-paying debtor might be the very last step after having exhausted all other less threatening debt recovery methods. Although the result of the liquidation is the total financial destruction of debtor, this is a very popular debt recovery tool in Hungary for those creditors who have solid claim and would like get their money fast. We summarise details in this article.

Why should you start liquidation? 

You should not start liquidation because you want to destruct the debtor financially.

You should start liquidation because you have serious reasons to 

assume that your debtor will do anything, including the payment of your invoices, to save his business by escaping liquidation.

This is the situation, when your debtor has a prospering business, that he cannot transfer from one day to another, because he has significant hard assets (e.g real-estate portfolio), or his company holds an exclusive right, that cannot be transferred easily. However, starting liquidation against a business with unpromising figures, or with easily conveyable assets is not as good idea.

Further reason to start liquidation is the fixed cost and the shorter time frame of the procedure in comparison with litigation.

When should you start liquidation?

You should start liquidation in case your claim is well founded and your debtor can be considered insolvent.

It must be noted that insolvency is not a financial, but rather a legal term. Under Hungarian liquidation act, the debtor shall be deemed as insolvent in one the following 6 (six) cases:

  1. if he fails to pay an acknowledged of non-disputed invoice
  2. if he fails to comply with its payment obligation based on an enforceable judgment
  3. the judicial execution against debtor was unsuccessful
  4. if he fails to comply with its payment obligation based on a settlement in bankruptcy or liquidation procedure
  5. if the court terminated the bankruptcy proceeding against debtor
  6. if its obligations exceed its assets in a dissolution proceedings

Among the 6 (six) cases mentioned above, the most important is the first in business relations, in other words, starting liquidation proceedings because of non-paid invoices. So in the following part of this article we will focus only on this.

Insolvency because of unpaid invoices

In order to threaten your debtor with insolvency based on non-paid invoices, the following conditions must be met:

  • having a written contract with the debtor is a must
  • the invoice issued in conformity with the contract must be due
  • a notice letter must be sent to debtor after 20 days from due date
  • the debtor acknowledged the invoice or at least failed to raise any objection against the invoice until he received the notice letter

Your notice letter should contain at least the legal title, the amount, and the due date of the claim and you shall set a final payment deadline. Given that a poorly drafted notice letter does not produce any legal effects, before sending it, we strongly recommend consulting a lawyer.

Why business owners tend to pay in such a situation?

If the above mentioned conditions are met, the court declares the debtor insolvent and appoints the liquidator.

The declaration of insolvency is published in the official company gazette, and from that point, only the liquidator is entitled to act on behalf of the debtor, he has power to manage the assets of debtor, including the full control over the bank accounts.

In addition, it is common that in commercial contracts the liquidation triggers the right of immediate contract termination by the business partner, sometimes together with the payment obligation of liquidated damages.

Risking corporate goodwill, long-term contracts and business relations because of a non-paid invoice is not an option for most business owners.

In order to escape this scenario, the vast majority of them tend to pay the creditor’s claim even if they find it unfounded. Why? Because the payment of the debt will demonstrate that the company is not insolvent, and the judge will immediately terminate the liquidation procedure before the appointment of the liquidator.

This is the reason why liquidation procedure is the most popular debt collection tool among creditors, who have a well-founded claim and want fast results, without starting a costly and longer litigation.