Previous posts have explained some aspects of the ROT concept in Germany (Part 1Part 2Part 3). Now it is time to consider how ROT actually works in the insolvency of a German customer. The most important point in this respect is that the potential protection granted by ROT does not work automatically. Instead, action by the supplier is required, and the earlier this happens, the better.

Because the supplier has retained legal title to the inventory which he has supplied to the now insolvent German customer, the goods are not owned by the insolvent customer and therefore are not part of the insolvency estate of that entity. Instead, the supplier is entitled to request the return of these goods from the insolvent customer. However, as pointed out in an earlier post, the supplier will have authorized the customer to onward-sell the goods or to use them in a production process. If that authorization has not been explicitly revoked by the supplier, the insolvent company can act in accordance with the authorization, which usually will result in a deterioration of the legal position of the supplier. Consequently, the first important action step required from the supplier is to revoke any existing authorization of the customer to dispose of the goods, to inform the (interim) insolvency administrator of the existing ROT rights and to demand the return of the goods. If practically possible, taking physical possession of the goods (removing them from the premises of the insolvent customer) can further improve the position of the supplier. In case of extended ROT rights, it is also very important to revoke the authorization of the customer to collect the receivables which are assigned to the supplier under the extended ROT provisions.

Other relevant action steps will depend on the specific business relationship and the relevant insolvency case. Among others, the following scenarios are not uncommon in a German (preliminary) insolvency:

  • Despite the revocation of the rights of the insolvent customer to use the goods, it may be in the best interest of the supplier to allow the further use of the relevant goods as long as the insolvent company will continue its business (subject to payment). Ideally, this should be agreed very quickly after the opening of the (preliminary) insolvency proceedings.
  • Pooling its interest with that of other suppliers could become important in case the supplied goods have been mingled with goods from other suppliers so that the supplier is only co-owner of existing inventory (or where the supplier is not able to evidence exactly which inventory items are subject to the ROT).
  • The supplier should not give up any security position without obtaining payment or at least adequate alternative security over other assets.
  • Future deliveries should only be made against advance payment for these deliveries. However, it is important to know that after the opening of (preliminary) insolvency proceedings, the insolvent customer and its (preliminary) insolvency administrator will not be in the position to make payments in respect of invoices outstanding at that time for goods which are not subject to ROT rights of the supplier. If a supplier, despite its ROT rights, does not fully recover its outstanding claims, any shortfall will constitute a regular insolvency claim. After the opening of the insolvency proceedings, the supplier will have to register its claims with the insolvency administrator in accordance with the orders of the insolvency court. Default interest may also be charged until the date of the opening of insolvency proceedings as a regular insolvency claim, as well as additional damage claims, if any. However, in Germany the timeline for any distributions to insolvency creditors on such claims is usually very long (sometimes many years) and distribution amounts are often very low. Those factors are among the reasons why the protection granted by ROT agreements is such an important tool.

When negotiating any agreements during the preliminary insolvency period, the creditor should also keep in mind that German insolvency proceedings generally are a two-step process. In most cases, the preliminary insolvency stage lasts up to three months only, and then formal insolvency proceedings will be opened by the insolvency court. The date of the opening of formal insolvency proceedings is the relevant cut-off date for the determination of the legal position of the insolvency creditors, and therefore all agreements entered into during the preliminary insolvency period should address the question how the supplier’s position will be viewed in the subsequent insolvency proceedings. The supplier should not enter into any agreement which adversely affects its legal position in the opened insolvency proceedings. To the extent payments to the supplier will not be made before the opening of the insolvency proceedings, the supplier should request comfort that any outstanding claims newly created during the preliminary insolvency period will not qualify as (unsecured) insolvency claims only, but be treated as liabilities of the insolvency estate, as these have priority and will be satisfied out of the insolvency estate before any distributions to insolvency creditors.

If a supplier, despite its ROT rights, does not fully recover its outstanding claims, any shortfall will constitute a regular insolvency claim. After the opening of the insolvency proceedings, the supplier will have to register its claims with the insolvency administrator in accordance with the orders of the insolvency court. Default interest may also be charged until the date of the opening of insolvency proceedings as a regular insolvency claim, as well as additional damage claims, if any. However, in Germany the timeline for any distributions to insolvency creditors on such claims is usually very long (sometimes many years) and distribution amounts are often very low. Those factors are among the reasons why the protection granted by ROT agreements is such an important tool.