Debts between limited liability companies: legal mechanisms for resolution

In business, situations where debts arise between limited liability companies (LLCs) are quite common. Overdue payments under supply, contract, lease, service or financial assistance agreements can significantly affect the financial stability of a business and lead to protracted conflicts between counterparties. In such circumstances, it is important to understand legal ways to settle debts between LLCsand the risks and consequences of each of them.

Causes of debt between LLCs

The most common grounds for debts between legal entities are:

• failure to fulfill or improper fulfillment of contractual obligations;

• financial difficulties of the debtor;

• a dispute over the volume or quality of goods or services provided;

• lack of clear payment terms in the contract;

• abuse by the counterparty;

• force majeure, including martial law.

Regardless of the reasons, debts between LLCs are commercial disputewhich is subject to settlement in pre-trial or court proceedings.

Pre-trial settlement of debts between LLCs

The first and most cost-effective step is to pre-trial settlement of a dispute. It allows you to maintain business relationships and avoid additional costs.

Pre-trial instruments include:

• sending a written claim to the debtor;

• negotiations on debt restructuring;

• entering into an additional agreement to change the payment terms;

• signing a debt repayment schedule;

• offsetting of counterclaims of the same type;

• assignment of the right of claim (cession).

A legally competently drafted claim with reference to the contract, legal provisions and debt calculation often encourages the debtor to voluntarily repay the debt.

Debt restructuring as a way to resolve a dispute

Debt restructuring is a compromise option when the debtor recognizes the debt but is unable to repay it in a lump sum. It is formalized by entering into an additional agreement, which may include

• phased debt repayment;

• deferral or installment of payments;

• change in the currency of the liability;

• reduction of penalties;

• providing security for the fulfillment of obligations.

Such an approach allows the creditor to minimize the risks of complete insolvency of the debtor, and the debtor to avoid litigation.

Judicial debt collection between LLCs

If the pre-trial measures fail, the next step is to applying to the commercial court. Judicial debt collection is the most formalized but also the most effective way to protect the creditor's rights.

It can be recovered in court:

• the principal amount of the debt;

• penalties, fines and forfeitures;

• inflationary losses;

• three percent per annum;

• court costs and legal aid expenses.

For a successful case, it is important to have proper evidence: a contract, certificates of completion, invoices, bills, payment documents, correspondence with the debtor.

Writ proceedings as a quick way to recover

In cases where the debt is undisputed and supported by documents, the following may be applied writ proceedings. It allows you to obtain a court order without summoning the parties and significantly reduces the time for debt collection.

However, the debtor has the right to file an application to set aside the court order, after which the dispute will be considered in the lawsuit.

Enforcement proceedings and actual debt collection

Obtaining a court decision does not always mean an automatic refund. The next step is to enforcement proceedingsThe enforcement is carried out by public or private executors.

The following measures are possible within the framework of enforcement proceedings:

• seizure of the debtor's accounts and property;

• foreclosure on funds;

• prohibition of asset alienation;

• sale of property through electronic bidding;

• foreclosure on corporate rights.

Professional legal support at this stage greatly increases the chances of actually receiving the debt.

Alternative dispute resolution: mediation and arbitration

In addition to court proceedings, the following options are possible alternative dispute resolution methodsIn particular:

• mediation with the participation of a neutral mediator;

• commercial arbitration (if there is an arbitration clause);

• negotiations with the participation of the parties' lawyers.

Such tools allow you to reach a compromise faster and reduce reputational risks for your business.

Responsibility of the director and members of the LLC

The general rule is that an LLC is liable for its obligations only to the extent of its own property. However, in certain cases it is possible to bringing the manager or participants to justiceIn particular, at:

• bankruptcy;

• abuse of corporate rights;

• fictitious or sham transactions;

• violation of the duties of officials.

Such cases are complex and require a thorough legal analysis.

Preventing the emergence of debts in the future

It is advisable to minimize the risks of debt between LLCs:

• carefully check counterparties;

• clearly define payment terms in contracts;

• use security for fulfillment of obligations;

• provide for penalties;

• regularly monitor accounts receivable;

• involve lawyers at the stage of concluding contracts.

Prevention is always cheaper and more effective than legal action.

Conclusion.

Debts between limited liability companies are a common occurrence in business activities, but they are not a hopeless situation. Ukrainian legislation provides a wide range of tools for pre-trial and judicial debt resolutionas well as for the actual collection of funds.

Timely legal support, the right strategy and a professional approach allow us to effectively protect business interests and minimize financial losses.