Dangerous objects of wildlife often indicate danger by their bright and unusual colors. In business, everything is different: a “toxic” counterparty may outwardly look quite reliable - an office, a website, an established reputation. But the financial condition of companies changes, the intentions of managers change, debts appear, and sometimes a desire to withdraw assets.

The principle of “trust, but verify” should apply not only to new, but also to partners who seem to have already proven their reliability. It is important to check each new counterparty, as well as old counterparties, for “bankruptcy toxicity” every six months or a year.

An imprudently concluded transaction with a bankrupt or even a future bankrupt can be costly. Let's look at the dangers of such transactions:

1. The counterparty is already in bankruptcy

there is a high probability that such a partner will not be able to fulfill contractual obligations: the goods will not be paid for or delivered, the service will not be provided, the work will not be completed, or the quality of the product (work, service) will not be up to par;
after the opening of bankruptcy proceedings, the manager of the bankrupt company can at any time refuse the concluded civil law agreement, which has not yet been fulfilled by the parties.

Recommendation: it is better not to enter into a contractual relationship with a company that is already in bankruptcy.

2. The counterparty is in a pre-bankruptcy state

after the commencement of bankruptcy proceedings, its transactions at the request of the manager may be declared invalid by the court;
You can challenge transactions concluded by a future bankrupt company six months, a year and even three years before the initiation of bankruptcy proceedings, as well as transactions concluded after the commencement of bankruptcy proceedings;
your company risks returning everything received to the bankruptcy estate.

Recommendation: you should avoid concluding transactions not only with a company in bankruptcy, but also with one that is just on the verge of bankruptcy.

The main question: how to recognize the “bankrupt toxicity” of a partner in time? How can this be done when the need to purchase or sell goods, work, or services is high, deadlines are running out, and the prospect of concluding a seemingly profitable contract is so tempting?

The Corporate Law, M&A practice provides you with a short and clear checklist for checking a counterparty for bankruptcy toxicity.

Check if the company is currently in bankruptcy

You can find out whether a legal entity is in bankruptcy in the Unified State Register of Bankruptcy Information by searching on the appropriate website.

If a legal entity is in bankruptcy, then the same search query on the website will make it possible to see exactly what procedure (protective period, bankruptcy proceedings, reorganization or liquidation proceedings) is open in relation to the legal entity. This is important because each of the bankruptcy procedures has its own specifics, which determine the following:

what is the scope of the company’s legal capacity at the moment;
what restrictions and prohibitions apply;
who has the right to make transactions on behalf of the company.

How to recognize signs of impending bankruptcy of a business partner?

Predicting the bankruptcy of a legal entity that is coming in three years or even “just” a year is very problematic. But over a shorter time period, for example, several months or even six months, it is possible to recognize formidable signs. Here are some ways.

1. Voluntary liquidation of a legal entity.

Often during the liquidation process it turns out that there are not enough funds to satisfy the claims of creditors.

How to check? A search query on the Unified State Register portal will make it possible to check whether a potential counterparty is in liquidation.

Please note: it is not worth entering into contractual relations with a company being liquidated, not only because the matter may end in bankruptcy, but also because the company being liquidated has the right to enter into only those transactions that are necessary to carry out the liquidation procedure; making other transactions is prohibited. Transactions made in violation of this prohibition are void and will be invalid from the moment they are completed.

2. Accounting statements

As part of KYC, it is advisable to request from the future counterparty current (as of the last reporting date) financial statements that were submitted to the tax authority: balance sheet and profit and loss statement. Yes, the business partner is not required to provide these documents. But if it does, you will immediately see:

negative capital;
critical receivable;
zero liquidity;
a sharp drop in revenue.

These are direct markers of approaching insolvency.

3. Contract price

A proposal from a new counterparty to enter into a purchase and sale agreement, provision of services, or contract at a price significantly lower than the market price should raise red flags. This fact may indicate:

desperate financial situation;
an attempt to urgently raise money;
formation of deliberate bankruptcy schemes.

If such a transaction is recognized as suspicious, the manager has the right to demand that it be declared invalid and that what was received be returned.

4. Enforcement proceedings

We also recommend checking the presence of debts under executive documents (this can be done in the register if you have a name and UNP).

A large number of unclosed enforcement orders may become the basis for the counterparty to go into bankruptcy, either on its own initiative or at the request of one of these creditors.

So, how to protect yourself from “toxicants”?

Check the company registries for signs of bankruptcy and liquidation.
Analyze financial statements (at least at a basic level).
Avoid transactions with counterparties in liquidation or bankruptcy procedures.
Be careful with “too good price” offers.
Include additional protection mechanisms in the contract (guarantees, security, stages of execution).

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