Negotiating with a customer in financial distress requires a structured, legally informed approach that balances the recovery of outstanding amounts against the risk of triggering formal insolvency proceedings. Across the European Union, creditors have access to well-established pre-litigation tools – including payment plans, standstill agreements, and mediation – that can preserve the commercial relationship while protecting the creditor's position. Acting early, with the right documentation in place, significantly improves the prospects of reaching a binding settlement agreement before the situation deteriorates further.
Why the Pre-Litigation Phase Matters in the EU
When a customer begins showing signs of financial difficulty – delayed payments, requests for extended terms, or incomplete deliveries – the instinct for many foreign creditors is to move immediately to legal proceedings. That instinct is often counterproductive. EU insolvency frameworks, anchored in Regulation (EU) 2015/848 on insolvency proceedings, establish a clear preference for restructuring and rescue over liquidation. Courts in member states are increasingly attuned to pre-litigation efforts, and a creditor who has made a genuine attempt to negotiate is generally better positioned procedurally and reputationally.
The pre-litigation phase also allows a creditor to gather information, assess the debtor's actual financial position, and determine whether a negotiated outcome – even at a discount – delivers more value than a protracted court process. This is particularly relevant in cross-border situations, where enforcing a judgment across EU member states, while facilitated by Regulation (EU) 1215/2012 (the Brussels I Recast), still involves time and cost.
Step 1 – Assess the Debtor's Position Before Making Contact
Before reaching out formally, gather available information about your customer's financial standing. This includes reviewing public filings, credit reports, and any communications already exchanged. In many EU jurisdictions, companies are required to file annual accounts with a commercial registry; these are often publicly accessible. Look for indicators such as negative equity, declining revenue, or prior restructuring activity.
At this stage, consider whether the customer is likely to be subject to formal insolvency proceedings in the near term. If formal proceedings are imminent or already open, the legal framework shifts substantially – creditors may be subject to a moratorium, and direct negotiation with the debtor's management may no longer be appropriate without coordination with an insolvency practitioner. A review of the relevant national insolvency register is advisable.
- Check the national insolvency register for any filed proceedings.
- Review publicly filed accounts where available.
- Examine your contract for governing law, jurisdiction, and any escalation clauses.
- Identify whether any security, guarantee, or retention-of-title clause is already in place.
Step 2 – Send a Formal Letter Before Action
A well-drafted letter before action is not merely a procedural formality – it is a strategic document. It places the debtor on formal notice, sets out the amount claimed and its legal basis, proposes a reasonable timeframe for response, and signals that the creditor is prepared to proceed to litigation if necessary. In several EU jurisdictions, sending a letter before action is a prerequisite before commencing certain court proceedings, and courts may take account of whether one was sent when awarding costs.
The letter should be precise, professional, and free of emotional language. It should clearly identify the invoices or contract obligations in question, the total amount outstanding, any applicable interest (whether contractual or statutory under Directive 2011/7/EU on late payments in commercial transactions), and a firm but reasonable deadline for a substantive response. Avoid ultimatums that leave no room for dialogue – the purpose at this stage is to open, not close, negotiation.
Step 3 – Establish a Standstill Agreement if Needed
Where the debtor requires time to prepare a credible repayment proposal, a standstill agreement is a practical instrument. Under a standstill, the creditor agrees not to enforce its claim or take legal steps for a defined period, in exchange for the debtor providing certain undertakings – for example, not to incur further obligations, not to dispose of assets above a specified threshold, and to provide regular financial updates.
Standstill agreements must be carefully drafted. Key provisions to address include the duration of the standstill, the specific obligations frozen, the conditions under which the creditor may terminate the standstill early (for example, if a winding-up petition is filed), and whether the standstill tolls any limitation period under the applicable governing law. The latter point is critical: limitation periods across EU member states vary, and an informal moratorium that is not properly documented could inadvertently allow a time-bar to run.
Step 4 – Explore Mediation
EU Directive 2008/52/EC on mediation in civil and commercial matters provides a framework that applies in cross-border disputes. Many EU member states have also extended their national mediation legislation to purely domestic disputes. Mediation offers a confidential, structured environment in which a neutral third party assists the parties in reaching a voluntary resolution. It does not bind the parties unless they agree, and it does not prevent either side from pursuing litigation if the mediation fails.
For creditors dealing with distressed customers, mediation has several practical advantages: it is faster than litigation, it allows creative solutions (such as partial debt forgiveness in exchange for accelerated payment), and it preserves the commercial relationship where continued business is desirable. Mediation can also assist in multi-party situations, where a customer has several creditors and a coordinated approach is more likely to produce a viable outcome than unilateral enforcement action by any single creditor.
If you are handling negotiations across multiple EU jurisdictions, our team can advise on the interaction between national mediation frameworks and cross-border enforcement. For matters with a Spanish dimension, further details on our approach are available on our commercial negotiations in Spain page.
Step 5 – Negotiate a Payment Plan or Partial Settlement
Once dialogue is open, the negotiation itself requires a clear structure. Begin by understanding what the debtor can realistically pay and over what period. Request disclosure of cash flow projections and current liability schedules – a debtor who refuses to share basic financial information is a red flag. Establish whether there are other creditors in the picture and, if so, what their priority position is relative to yours.
A payment plan can take several forms: deferred payment of the full amount over an agreed schedule, a reduced lump-sum settlement in full and final satisfaction of the debt, or a hybrid structure combining an immediate payment with future instalments. Whichever form is chosen, the agreement must be documented in writing and must contain:
- The total amount of the original debt and any agreed reduction.
- The payment schedule, with specific dates and amounts.
- Consequences of default – for example, the full original debt becoming immediately payable if any instalment is missed.
- Governing law and jurisdiction provisions.
- Whether the agreement is in full and final settlement or whether the creditor reserves the right to pursue any balance.
- Signatures of authorised representatives of both parties.
A settlement agreement that is ambiguous on any of these points can generate further disputes. In particular, the phrase "full and final settlement" must be included deliberately and explicitly – courts in various EU jurisdictions have interpreted ambiguous settlement language narrowly, leaving creditors unexpectedly exposed to additional claims or defences.
Step 6 – Formalise and Enforce
Where a settlement agreement involves a substantial sum or a multi-year repayment schedule, consider whether it should be notarised or approved by a court for enforceability. Several EU member states allow parties to submit a settlement to a court or notary for endorsement as an enforceable title, which significantly simplifies enforcement if the debtor subsequently defaults without requiring a new judgment.
In a cross-border context, an agreement reached through mediation can, subject to certain conditions, be enforced under the Singapore Convention on Mediation (for signatories) or, within the EU, through the provisions of member state procedural law implementing Directive 2008/52/EC. If subsequent enforcement across EU borders becomes necessary, Regulation (EU) 1215/2012 provides the primary framework for recognition and enforcement of court judgments, while Regulation (EC) 805/2004 may apply where the debt is uncontested.
Common Errors by Foreign Creditors
International businesses dealing with EU-based distressed customers frequently encounter the same set of avoidable mistakes. Being aware of them in advance can preserve both the debt recovery prospects and the broader commercial relationship.
- Acting too slowly: Waiting for a customer's financial position to stabilise before initiating contact often means the creditor's position deteriorates as assets are dissipated or other creditors take priority.
- Relying on informal agreements: Email exchanges or verbal commitments to pay are rarely sufficient. A properly executed written agreement is essential for enforceability.
- Ignoring local insolvency law: A negotiated payment plan concluded after the debtor is technically insolvent may, in some jurisdictions, be voidable as a preference if formal proceedings subsequently open. Local legal advice on this point is indispensable.
- Overlooking limitation periods: Each EU member state has its own limitation rules. A standstill or informal moratorium that does not explicitly address the running of time can inadvertently extinguish a claim.
- Failing to assess the debtor's authority: Ensure that the individuals signing any agreement on behalf of the distressed company have the necessary corporate authority to bind it – particularly where the company is already subject to supervision by a court-appointed officer.
- Conflating pre-litigation negotiation with insolvency procedure: If the debtor is already in formal restructuring or insolvency proceedings, different rules apply and unilateral negotiation outside those proceedings may be ineffective or void.
Key Documents and Their Purposes
A well-organised creditor will typically prepare or request the following documents during the negotiation process:
- Letter before action – formal notice of the claim and an invitation to negotiate.
- Non-disclosure agreement – where financial information will be exchanged, to protect both parties.
- Standstill agreement – temporary freeze on enforcement while negotiations proceed.
- Term sheet or heads of terms – a non-binding outline of the proposed settlement, used to align positions before drafting the final agreement.
- Settlement agreement or payment plan – the binding resolution of the claim.
- Enforcement title (if applicable) – a notarised deed or court-endorsed settlement enabling direct enforcement without a new judgment.
Realistic Timelines and Cost Drivers
The duration of a pre-litigation negotiation process varies considerably depending on the complexity of the debt, the number of creditors involved, and the debtor's cooperation. A straightforward negotiation between two parties, where the debtor is cooperative and financially transparent, can conclude within a few weeks. More complex situations – involving disputed amounts, multiple creditors, or distressed companies that are simultaneously engaged with their banks and other stakeholders – may take several months.
Cost drivers in this phase include legal advisory fees for drafting and reviewing the key documents, potential mediation costs (which vary by institution and case size), translation costs in multi-lingual transactions, and notarisation or court endorsement fees where sought. In cross-border situations, having legal support coordinated across the relevant jurisdictions reduces the risk of inconsistent advice and duplicated effort.
If the negotiation is likely to shade into formal insolvency territory, early engagement with restructuring specialists is advisable. Our bankruptcy and restructuring practice provides integrated advice across EU jurisdictions for creditors navigating this transition.
Decision Checklist Before Entering Negotiations
Before opening formal discussions with a distressed customer, work through the following questions:
- Is the debtor subject to any open insolvency or restructuring proceedings?
- What is the governing law and jurisdiction of the underlying contract?
- What limitation period applies, and when does it expire?
- Does the creditor hold any security, guarantee, or retention-of-title right that could be enforced unilaterally?
- Is there a dispute about the amount or liability, or is the debt undisputed?
- What is the debtor's likely asset position and ability to pay?
- Are there other creditors whose actions could affect the available pool of assets?
- Is continued commercial relationship with this customer a priority, or is the relationship effectively at an end?
- Has internal approval been obtained for the minimum acceptable settlement terms?
Multi-Jurisdiction Considerations
Cross-border debt situations within the EU involve an additional layer of complexity. The debtor may be incorporated in one member state, have assets in another, and be subject to insolvency proceedings in a third (pursuant to the rules on the centre of main interests under Regulation (EU) 2015/848). Any settlement agreement needs to be enforceable in the jurisdictions where the debtor holds assets, and the governing law clause must be chosen with care under Regulation (EC) 593/2008 (Rome I).
Creditors should also be aware that some EU member states have introduced specific pre-insolvency restructuring frameworks pursuant to Directive (EU) 2019/1023 on restructuring and insolvency. Where such a framework is active, it may affect the creditor's ability to enforce claims outside the formal procedure and may impose a stay on individual enforcement actions. The precise implementation of this Directive varies by member state, and the position in any given country should be verified with local counsel.
For an in-depth view of how multi-jurisdiction debt negotiations have been structured in practice, see our analysis on settling multi-jurisdiction debt before litigation in the EU.
Working with Legal Counsel
Engaging legal counsel early in the process – ideally before the first formal communication with the distressed customer – allows the negotiation strategy to be shaped by an accurate understanding of the creditor's legal position. Counsel can advise on the strength of the underlying claim, the available enforcement options, the implications of any proposed settlement for tax and accounting purposes, and the interaction between negotiation and any parallel insolvency process affecting the debtor.
It is also worth noting that the quality of legal drafting in the settlement agreement is not a secondary concern. Vague, ambiguous, or inconsistent drafting has been the source of significant subsequent disputes, particularly when the debtor later attempts to resile from agreed terms or argues that the settlement did not cover a particular head of claim.
If your business is managing a receivable from an EU-based customer in financial difficulty, our team is available to discuss the specific circumstances and assist in developing a negotiation strategy suited to the situation. Please contact us at info@ferrazwhitmore.com or visit our contacts page to arrange an initial conversation.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.