The reason for the non-payment of a credit to the seller can sometimes be the foreign buyer’s bankruptcy. The bankruptcy risk is normally covered by state-supported export credit agencies (ECAs) and private insurance companies as a commercial risk, as explained in our eLearning course Export Credit Insurance. However, it can be unclear when the insured seller becomes eligible to receive indemnification from the ECA or private insurer for the loss caused by the non-payment of the credit by the bankrupt foreign buyer.

This question arises because the bankruptcy proceedings are complex and usually take a long time. A bankruptcy proceeding starts by filing a bankruptcy petition in a court. The commencement of the bankruptcy procedure must be advertised to enable all creditors to file their claims for payment against the bankrupt company. The court appoints the bankruptcy liquidator to investigate the business of the bankrupt company, verify creditor claims, sell the company’s assets, and distribute proceeds to the creditors. The distribution of the proceeds, if any, is made according to the hierarchy of creditors and is proportional to the amounts of their claims.

Since the bankruptcy proceeding can take several years to be completed, an insured seller will find it difficult to wait such a long time to be indemnified by the ECA or private insurer for the loss caused by non-payment of the credit. On the other side, the ECA or private insurer cannot determine whether the seller’s loss will be partial or total before the end of the bankruptcy proceeding. In other words, the exact amount of the seller’s loss will be known to the parties first when the bankruptcy proceeding has been completed.

The question frequently asked by small- and medium-sized companies is when do they become eligible to be indemnified by the ECA or private insurer if the foreign buyer goes into bankruptcy? Is it the date of non-payment of credit by the foreign buyer or the date when the bankruptcy proceeding has been completed?

The answer to the above question is that the insured seller does not need to wait until the end of the bankruptcy proceeding to receive indemnification from the ECA or private insurer. The reason for this is that the export credit insurance covers the loss caused by the non-payment of a credit at the due date. This means the insured seller becomes eligible to receive indemnification directly after the due date, which is long before the date when the foreign buyer’s bankruptcy proceeding will be completed.

What must the seller do to receive indemnification in such a situation?

The insured seller is obligated to notify the ECA or private insurer about the non-payment of the credit and claim indemnification for its loss. It is usually provided in the terms and conditions of export credit insurance policies that the insured seller must wait 30 to 90 days to see whether the foreign buyer will pay the credit after the due date. If the foreign buyer does not pay during this period, also called the ‘waiting period’, the seller will receive indemnification for its loss. Some export credit agencies do not apply the waiting period when the bankruptcy proceeding has been commenced against the foreign buyer, which means the seller will receive indemnification shortly after the due date for payment of the non-paid amount of credit. This is because it is obvious that the bankrupt foreign buyer will not pay the outstanding amount even after the expiration of the waiting period.

A seller that has been indemnified by the ECA or private insurer in the way explained above may sometimes receive an amount of money from the foreign buyer’s bankruptcy estate. Such amount is paid to the foreign buyer’s creditors through distribution of the proceeds after completion of the bankruptcy proceeding. Since the ECA or private insurer has already indemnified the seller, the question is what the seller is expected to do with the amount recovered from the bankruptcy estate.

If the indemnified seller recovers an amount from the bankruptcy estate, the recovered amount should be paid to the ECA or private insurer. In some countries, the seller has the right to assign its claim against the foreign buyer to the ECA or private insurer during the bankruptcy proceeding. In such a situation, the ECA or private insurer will receive recovery directly from the foreign buyer’s bankruptcy estate. However, in some countries, such assignment is not allowed, which is why the bankruptcy estate makes payment to the seller and not to the ECA or private insurer.

Depending on which party has recovered an amount from the bankruptcy estate, the seller or the ECA or private insurer, that amount will usually be shared pro-rata between them. For example, if the seller has been indemnified for its loss with 95 per cent, the ECA or private insurer will pay five per cent of the recovered amount to the seller and keep 95 per cent as its own recovery. Some ECAs and private insurers stipulate in their terms and conditions that the seller’s percentage will not be paid to the seller until the entire amount of indemnification paid by the ECA or private insurer to the seller has been recovered.

See our eLearning course Export Credit Insurance