Business is increasingly concerned about the issues arising in the course of bankruptcy cases and the associated risks. And rightly so. Business entities often experience litigation cases in the course of their business. A plaintiff applied to the court and his opponent examined his documentation and admitted that he really was indebted to him. Or upon the proposal of the court parties entered into a settlement agreement. An ideal dispute settlement at first sight. Unfortunately, it is recent practice that litigation cases settled in this way can pose more risks than benefits to business.
It relates to the current rule stipulating that if your counterparty goes bankrupt and his other creditors consider the court order adopted upon a dispute between you to be illegal and violating their rights, they have the right to challenge it. Formally speaking it is true for any court order. But we have described the above situation for a reason. It is when two disputing entities have entered into a settlement agreement or when a defendant has admitted the claim, that a plaintiff is most vulnerable in case of defendant's bankruptcy. The fact is that each time a settlement agreement is entered into and a claim is admitted, the plaintiff's claim is not verified in full, because no reasonable and sufficient objections of a defendant come to it. The court does not examine the primary documents confirming the validity and amount of the claims, as well as the effectiveness of the business relationship between the parties. Moreover, the period for appeal of a court order by a creditor of the debtor upon his bankruptcy could be as long as a year, or two or three years, from its date.
Certainly, not every settlement agreement will be set aside, as well as not each and every decision based on admission of claim by defendant will. But there are a number of markers that should encourage a plaintiff to check whether his counterparty is highly likely to go bankrupt soon. First, there is a need to focus on the number of trials involving a defendant, his party to a case and the outcome of the other cases. It is necessary to determine whether he implemented settlement agreements with other counterparties. In addition, a request for discovery of a defendant's balance sheet and its filing in the case record could be considered the most conscientious and prudent.
The list of such tools and practices is quite extensive, but the general rule could be formulated as follows: To enter into settlement agreements in conditions of debtor's insolvency and/or insufficiency of assets is not a good idea, and, by contrast, it is recommended to provide the court with the maximum amount of evidence to justify claims, despite the admission of claim by defendant.