Suspension of payment

A suspension of payments basically means that a creditor puts its payments on "pause" and publicly announces that all payments are stopped as the company is unable to meet its obligations.

If a business cannot pay its obligations, debts or invoices when they are due, it has liquidity challenges. If the company has no immediate ability to pay these in the near future, it is considered insolvent.

To be valid, a suspension of payments had to be reported to the Bankruptcy Court.

What used to be called a suspension of payments is now legally called a reconstruction. Since 2010, the term 'suspension of payments' has therefore not been used.

However, we have chosen to describe the process of suspension of payments here, as reconstruction basically covers the same conditions.

What is the purpose of a suspension of payments?

The purpose of a suspension of payments is to inform your creditors that you are currently unable to pay your obligations and therefore put them on hold.

This gives the company's management and owners the opportunity to calm the liquidity situation and create a plan to pay off the debt - a long-term and sustainable solution to the liquidity problems.

Typically, the company will seek help from a lawyer or accountant during the suspension of payments for professional assistance.

Obligations incurred prior to the suspension of payments cannot be paid, so in practice, neither lawyers nor debt collectors can do much - including demanding payment or seizing any assets.

It is important to note that a suspension of payments is not a financial free pass and no debt or liability is written off during the period - the suspension of payments can therefore not be seen as a credit scheme or similar benefit.

What can be the outcome of a suspension of payments?

As mentioned, the purpose of a suspension of payments is to give the company's management a break from making payments to creditors.

This break should be used to make a plan for the future operations and to deal with the company's liquidity challenges.

The outcome of a suspension of payments is typically a compulsory composition, an agreement with creditors on an installment plan or a temporary suspension of payments.

If no solution is found and continued operation is not possible, a suspension of payments can also end in bankruptcy.

Today, suspension of payments is called reconstruction

Today, the term "reconstruction" is used instead of "suspension of payments" due to changes in legislation in 2010-2011.

The purpose of a restructuring is basically the same as during a suspension of payments: to get a struggling company with liquidity problems back on track.

The reorganization is also reported to the Probate Court, which has the option of appointing an auditor for the process.

If the company is unable to create a long-term stable plan during reconstruction, it will typically be declared bankrupt.