How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?
Restructuring & Insolvency (2nd Edition)
The law empowers an administrator to unilaterally terminate any contract that has not been fully performed and the counterparty to the contract to urge the performance of the contract. If the administrator does not inform the counterparty within two months following the date when the competent court accepts the bankruptcy filing or not respond within 30 days following the date when the counterparty urges the performance of the contract, the contract will be deemed to have been terminated. If the administrator decides to continue the performance of the contract, the counterparty is entitled to demand the administrator to provide security, and the administrator’s failure to do so will result in the termination of the contract. If the contract is decided to be performed continuously, its existing provisions, including those on termination of the contract, retention of title, and debt offset, will remain valid, and should continue to be performed by the parties to the contract accordingly. No other person has the right to directly disclaim the contract, but if the administrator determines to continue the performance of the contract, it should promptly inform the creditor committee or the court of its decision.
As the law provides, bankrupt assets should be sold via auction, but the creditors’ meeting may resolve to dispose of the assets by other ways. In recent years, an increasing number of bankruptcy auctions are carried out online. Digital or physical, one thing remains unchanged is that open bidding is at the core of a fair auction. Buyers merely take away the debtors’ assets, which are free of liabilities and do not contain any equities in the debtors, either. In this way, buyers will not get embroiled in any dispute arising out of such liabilities or equities. Generally, the foregoing purchase will not incur any obligations that are not relating to the purchased assets, but under some circumstances, such as when the bankrupt assets are to be disposed of as a whole, the purchaser may be asked to shoulder extra obligations, for example, to employ the debtor’s employees. In bankruptcy procedures, existing security over bankrupt assets will not be released automatically, and the administrator may have the security released by repaying corresponding debts or provide other security to the satisfaction of the claiming creditor.
If the debtor reaches an asset disposal agreement with an intending investor before the bankruptcy filing is accepted by the court, such agreement should not be deemed different from any other agreement concluded before the acceptance, and it will not automatically become enforceable after the acceptance. If the administrator intends to continue the performance of the agreement, it may face various conditions precedent, for instance, the performance should be reviewed by the creditors’ meeting and be reported to the creditor committee or the court, and disposal of assets contemplated under the agreement may not be viable until the court announces the bankruptcy of the debtor.
There is no formal insolvency procedure that results in the automatic termination of contracts between the debtor and third parties.
Following appointment, administrators, receivers and liquidators can choose not to continue to perform a contract. Any damages flowing to the counterparty from the non-performance of a contract will rank unsecured against the company. However, any contract that an insolvency practitioner continues with may result in the practitioner being held personally liable under the Act.
Contractual and mandatory set-off will apply in formal insolvency processes, with certain exceptions. Section 533C of the Corporations Act provides for a statutory set-off in a liquidation where there have been mutual dealings between the distressed company and the relevant creditor. In such circumstances an automatic account is taken of the sum due from one party to the other in respect of those mutual dealings, and the sum due from one is set-off against the sum due from the other. Retention of title provisions will remain enforceable so long as the creditor has a perfected registered security interest in the property.
Under the current landscape, contracts may contain ipso facto clauses allowing a counterparty to terminate or renegotiate a contract on the occurrence of any insolvency event (which can be defined to include any form of restructure). However, the Australian landscape in respect of ipso facto clauses is in the process of reform. From 1 July 2018, a new ipso facto clause regime will operate in Australia following the introduction of the Insolvency Law Reform Act 2016 (Cth) (ILRA) and its associated instruments. That regime will impose an automatic stay on the enforcement of ipso facto termination rights that are triggered simply because a company enters a formal or informal insolvency or restructuring process. The stay will operate during a “stay period”, the length of which is determined by reference to the length of the relevant restructuring process. There are also circumstances in which the stay period will be indefinite. A court will have the power to lift the automatic stay where it considers it is in the interests of justice to do so.
The full effect of the regime will take some time to be properly understood as it does not operate retrospectively and only applies to contracts entered into after 1 July 2018. All existing contracts as at 1 July 2018 that contain ipso facto termination clauses will continue to confer rights on the counterparty to enforce those rights in accordance with the terms of the contract.
Existing agreements are not automatically terminated; any contractual provision to the contrary is deemed ineffective (exception: a close-out provision of a netting agreement). The debtor has the right to decide not to perform (except for employment contracts) during the stay if such non-performance is necessary for its reorganisation, or to enable a transfer of activities. The opening of judicial reorganisation proceedings does not have an impact on a retention of title clause.
Existing agreements are not automatically terminated, unless parties agreed otherwise, or if the agreement was concluded intuitu personae. The trustee may decide not to perform under the existing agreement (a party can force the trustee to decide within 15 days); in such case, the damages for non-performance will be treated as an unsecured claim. Under certain conditions, movable assets sold under a retention of title clause may be recovered.
Under the Financial Collateral Law of 15 December 2004, set-off provisions will be enforceable notwithstanding insolvency proceedings if certain conditions are met. Insolvency proceedings include bankruptcy, judicial reorganisation proceedings or other situations of concurrence of creditors known under Belgian law, and foreign administrative, judicial or voluntary collective or reorganisation proceedings. Certain limitations apply to the enforceability of set-off provisions in case of judicial reorganisation.
One of the principles of Dutch insolvency law is that contracts are in principle not affected by insolvency procedures. However, another important effect is that the bankrupt can no longer be forced to perform under a contract.
The trustee can (on behalf of the insolvent estate) demand performance from the debtor’s counterparty, if the debtor has performed his obligations prior to the commencement of bankruptcy proceedings.
Furthermore, the Bankruptcy Act deals with contracts that – at the time of declaration of bankruptcy – have not yet been (fully) performed by both the debtor and his counterparty. In that respect, the counterparty can request the trustee to notify him within a reasonable period of time whether the trustee shall perform the contract. If the trustee does not timely respond or in the event the trustee states that the liquidation estate is not bound by the contract, the trustee will lose his right to demand performance from the counterparty.
Under Dutch law, a retention of title, a right to terminate an agreement and a right of set-off are generally enforceable in bankruptcy.
Upon notice and a hearing, the debtor may reject most pre-petition executory contracts or leases, subject to a business judgment test, which is highly deferential to the decisions of the debtor. In most circumstances, a debtor has until confirmation of the plan to assume or reject executory contracts and until that time, both parties must continue to perform under the contract regardless of whether the debtor has paid outstanding prepetition amounts or not.
If the debtor chooses to assume the contract, it is responsible for all pre and post-petition defaults and is bound by the contract going forward. Should the debtor reject the contract, the debtor is no longer bound but the rejection is considered a pre-petition breach that results in an unsecured claim for damages. If the debtor chooses to continue to receive benefits from a counterparty pending the decision to assume or reject the contract, the debtor is required to continue paying for the reasonable value for such services. Further, claims from contract counterparties who supply such goods or services pursuant to a contract are afforded administrative priority to the extent that the goods or services were provided during the reorganization.
In safeguard or judicial reorganisation proceedings, the judicial administrator has the exclusive power to continue or terminate the debtor’s contracts. The judicial administrator may request the termination of a contract which is deemed necessary to the safeguard of the debtor and if the contract involved does not excessively prejudice the other party’s rights. If contracts are continued, all its provisions remain the same as prior to the opening of the proceeding. The creditor shall continue to honor its commitments despite the default of payment by the debtor prior to the proceedings. If the contract is rejected, the effect may also be favorable to the debtor since the burden will be reduced. The creditor will have to file its claim (stemming from the rejection of the contract). In liquidation proceedings opened with an observation period, the same provisions will apply.
Under controlled management proceedings, the debtor cannot dispose of its assets without the receiver’s prior approval.
The bankruptcy receiver, with the supervisory judge’s approval, may immediately sell perishable movable assets.
Assets may only be sold with the prior consent of the relevant practitioner/court. There is no credit bidding process provided under Luxembourg law and a receiver would not be entitled to sell assets that are owned by or secured in favour of a third party, without that party’s approval.
In general, if a contract contains an ipso facto clause which allows a party to terminate in the event of the other party entering receivership, voluntary administration or liquidation, there is generally no restriction on the operation of that clause (there are limited exceptions for contracts for the provisions of essential services). Even in cases where there is no ipso facto clause in a given contract, it is possible, albeit in very rare circumstances, for a Court to imply a term that the duration of the contract was intended by the parties to only last while the (now insolvent) company was trading, meaning that the contract becomes frustrated upon one of the parties entering receivership, voluntary administration or liquidation.
Pre-existing contracts – Receivership
Contracts that existed prior to appointment of a receiver are not automatically brought to an end by the occurrence of receivership, other than where the contract provides for that as an "ipso facto" termination event. Subject to available funding, a receiver may elect to allow the company to continue to perform contracts that the debtor company entered into pre-receivership, and those contracts would continue to subsist on the same contractual terms as agreed prior to the receiver's appointment. Otherwise, a receiver, acting as the debtor company's agent, may choose to cause the company to repudiate those contracts, which will typically leave the counterparties having to claim against the debtor company (in respect of any unpaid amounts, damages for breach or repudiation) as unsecured creditors. Claims by unsecured creditors in this context are often not worth pursuing, both because their claims are subordinate to that of the secured creditor that appointed the receiver, and because (subject to the exceptions described below) a receiver is not personally liable for pre-receivership contracts in his or her personal capacity, unless the receiver acts in bad faith or expressly adopts or assumes personal liability for those contracts (or holds itself out in a manner which prevents the receiver from denying personal liability). A receiver is, in general, personally liable for any contracts entered into by the receiver on behalf of the debtor during the receivership, but the receiver may expressly limit or exclude personal liability by contract.
There are two statutory exceptions to the rule that a receiver is not personally liable for contracts that the debtor entered into prior to the receiver's appointment, namely: employment contracts and those relating to property that was leased before, and continues to be leased after, the appointment of a receiver. The Receiverships Act 1993 provides that if a receiver does not give lawful notice terminating an existing contract of employment within 14 days of the receiver's appointment, he or she becomes personally liable for the payment of wages or salary which accrue to the employee from the date of receivership. In complex cases where a receiver is unable to determine within 14 days whether certain employees should be retained or dismissed, he or she is able to apply to the Court for an extension of the 14 day time period.
Similarly, the Receiverships Act 1993 also stipulates that a receiver is personally liable for rent and other payments accruing during the receivership that relate to property leased or rented by the debtor pursuant to a pre-receivership contract . The receiver's personal liability in relation to such payments begins 14 days after the receiver's appointment and continues until such time as the debtor company no longer uses or occupies the property, or until the receivership ends.
Pre-existing contracts – Voluntary Administration
Similarly unless there is a specific provision in the contact allowing for an "ipso facto" termination, contracts that existed prior to appointment of an administrator are not automatically brought to an end by the occurrence of voluntary administration. Subject to available funding, an administrator may elect to allow the company to continue to perform any of the contracts that the debtor company entered into pre-administration and those contracts would continue to subsist on the same contractual terms as agreed prior to the administrator's appointment. Otherwise, an administrator, may choose to cause the company to repudiate those contracts, leaving the counterparties having to claim against the debtor company as unsecured creditors.
An administrator is liable for debts of the company in administration that the administrator incurs in the performance of the functions and powers of an administrator, including for the purpose of funding the company in administration, for services rendered, for goods bought or for any property, hired, leased or occupied. Accordingly personal liability of an administrator can extend to pre-administration contracts in respect of debts incurred under such contracts during the period of administration without any requirement for "adoption" of such contracts by the administrator. This general rule as to personal liability is subject to particular rules for lease and employment obligations as discussed further below.
In addition to the moratorium that is imposed upon the appointment of an administrator (as discussed above in question 7), there is a further restriction in relation to transactions affecting the property of a company in administration. Any transaction entered into, or dealing made by a company in relation to its property is void unless personally authorised by the administrator or an order of the Court.
Unlike a liquidator or statutory manager, an administrator does not have the ability to disclaim contracts entered into by the company in administration prior to his or her appointment.
As to employment contracts, a regime similar to that of receivership exists in the case of voluntary administration. While the appointment of an administrator does not automatically terminate any employment contract(s), there exists a 14 day window in which an administrator may give lawful notice of termination to any given employee(s) so as to avoid being personally liable for wages or salary that accrue during the administration of the company under those contracts.
As to leases, a regime similar to that of receivership exists in the case of voluntary administration. While the appointment of an administrator does not automatically terminate any lease contract(s), there exists a 7 day window in which an administrator may give a "non-use notice" that states that the company does not propose to use the property or otherwise exercise any rights in relation to it, to any given lessor so as to avoid being personally liable for any obligation of the company under those contracts. After the expiry of the 7 day period, the administrator will be personally liable for rent in respect of all leased property during the administration for so long as the company continues to use, occupy or be in possession of the subject property.
Pre-existing contracts – Liquidation
The Companies Act 1993 does not specifically provide that pre-liquidation contracts come to an end solely by virtue of a company entering liquidation.
In general, unless there is a specific provision in the contract allowing for an "ipso facto" termination, contracts that existed prior to appointment of a liquidator are not automatically brought to an end by the occurrence of liquidation. Subject to available funding, a liquidator may elect to allow the company to continue to perform any of the contracts that the debtor company entered into pre-liquidation and those contracts would continue to subsist on the same contractual terms as agreed prior to the liquidator's appointment. Otherwise, a liquidator, may choose to cause the company to repudiate those contracts, leaving the counterparties having to claim against the debtor company as unsecured creditors.
A liquidator has the power to disclaim onerous property, which includes unprofitable contracts and property of the company that is unsaleable, or not readily saleable, or that may give rise to a liability to pay money or perform an onerous act. In order for a contract to be determined to be "unprofitable" so as to be capable of disclaimer, the liquidator would need to be able to establish that such contract is a burden on the company in terms of prospective liability, detrimental to creditors as a whole and not simply a "bad bargain".
In accordance with section 269(3) of the Companies Act, a disclaimer by a liquidator:
- brings to an end on and from the date of the disclaimer the rights, interests, and liabilities of the company in relation to the property disclaimed; and
- does not, except so far as necessary to release the company from a liability, affect the rights or liabilities of any other person.
Persons suffering loss as a result of a disclaimer can claim for that loss in the liquidation.
Contracts that grant a counterparty an interest in real property owned by the debtor in liquidation may not be able to be effectively disclaimed.
Pre-existing contracts – Statutory management
When a corporation enters statutory management, many of the rights that contracting counterparties would have otherwise been able to exercise are subject to a comprehensive moratorium (as discussed in question 7) which both restricts creditors from exercising rights against the corporation and allows the statutory manager to suspend obligations and terminate certain contracts that the corporation is party to. There are only very limited exceptions to the moratorium that is imposed following a corporation entering statutory management. Those exceptions include certain rights of set-off and the commencement or continuation of proceedings for the purpose of determining whether any right or liability exists (provided that leave of either the statutory manager or the Court is first obtained). Additionally, a statutory manager also has the ability to suspend the repayment of any deposit, payment of any debt, or the discharge of any obligation. Critically, the Corporations (Investigation and Management) Act 1989 ("CIMA") also provides that when this power is exercised by the statutory manager, it does not amount to either a breach or a repudiation of the contract on the part of the corporation being managed.
Whether many executory contracts survive statutory management depends largely on the actions of the statutory manager. The CIMA confers a discretion on a statutory manager that allows him or her to terminate, at any time, any contract of service or agency that the corporation being managed is party to. The discretion may be exercised even in circumstances where, but for the appointment of a statutory manager, the contract could not have been terminated until a later date or without cause. Termination of contracts by the statutory manager both discharges the corporation from future performance and all liability for subsequent non-performance. Like contract counterparties that have had their contracts disclaimed by a liquidator, those that have been terminated pursuant to a statutory manager's discretion to do so are entitled to apply to the Court for compensation within six months of receiving notice of their contract being terminated. In making a determination as to whether a contract counterparty is entitled to compensation, the Court is to have regard to the value of the consideration provided by the counterparty, all amounts and benefits that the counterparty has received under the contract, and the conduct of the parties.
Sale of Assets/Business
In general an enforcement sale can be conducted by a receiver, liquidator or administrator in respect of the assets of a company.
The terms and conditions of any sale in an insolvency process will be the subject of commercial negotiation in each case. However, generally assets are sold on an "as is where is" basis without any representation or warranties and without any assumption of personal liability by the relevant receiver, administrator or liquidator negotiating the sale on behalf of the insolvent vendor.
Where a receiver completes a sale of assets, section 30A of the Receiverships Act 1993 provides that all security interests in property which are subordinate in priority to the security interest pursuant to which the receiver was appointed will be extinguished on sale (without any requirement for the consent of the relevant secured creditor(s) whose interests are so extinguished). Accordingly a receiver is able to complete a sale of assets free and clear of all subordinate security interests provided that the security interest they were appointed pursuant to is first ranking. Specific releases will typically need to be obtained in respect of any prior ranking security interests in respect of assets a receiver wishes to sell.
Where an administrator or liquidator completes a sale of assets, specific releases will need to be obtained in respect of any security interests over assets an administrator or liquidator wishes to sell. There is no provision for any automatic extinguishment of any security interests in a sale by an administrator or liquidator.
Additionally for any sale of real property, owned by an insolvent debtor, a receiver, administrator or liquidator must obtain discharges from all registered mortgagees regardless of order of priority, in order to complete a sale free and clear of all such security, as there is no automatic extinguishment of prior or subordinate interests.
In some situations a first ranking secured creditor in respect of real property (first mortgagee) can carry out a mortgagee sale by way of direct enforcement (as an alternative to a sale by a receiver, administrator or liquidator) and this will have the effect of automatically extinguishing (without any requirement for the consent of the relevant parties whose interests are so extinguished) most types of subordinate interests on settlement so that the purchaser in a mortgagee sale can take title to the relevant real property free and clear.
Under New Zealand law a mortgagee exercising its power of sale in respect of real property may not sell the property to itself (other than by using a mortgagee sale conducted through a Court registrar process, which a rarely used process) or foreclose on real property in satisfaction of the secured debt. However, the scope of this rule is fairly narrow in practice, as it does not prevent a sale by the mortgagee to its subsidiary and does not apply to sales by receivers, administrators or liquidators, albeit that in respect of such sales the mortgagee or receiver or administrator (as the case may be) must still comply with their statutory duties in undertaking that sales process.
Section 120 of the PPSA, which applies to security over personal property, allows a first ranking secured creditor to retain the relevant collateral in satisfaction of the secured indebtedness (which is a form of voluntary foreclosure). The application of section 120 can be contracted out of. If that power is exercised it will satisfy the relevant debt in whole, irrespective of the value of the asset concerned, which may produce a windfall if the asset value is in excess of the debt concerned (or a shortfall as the case may be). For this reason, section 120 requires notice by the enforcing secured party to the debtor and other interested parties before the exercise of such power, and those parties are entitled to object if they would be adversely impacted by the retention of the asset. If a valid objection is received within the required time the secured party cannot retain the collateral and is bound to sell the collateral in accordance with the requirements of enforcement sale under the PPSA.
There is no formal recognition of 'credit bidding' (as an enforcement or restructuring procedure) under New Zealand law, although a credit bid can effectively be achieved through transaction structuring (in the right circumstances). It is generally possible for a secured creditor to bid for an asset (either directly or indirectly through a newly formed company) being sold through an insolvency process. If the secured creditor has first ranking security over the asset then the secured creditor could normally expect that most, if not all, of the sale proceeds would be paid to it from the sale process in satisfaction of the secured debt (for example costs, expenses, prior ranking preferred creditors and taxes may still need to be deducted). In some circumstances it can be possible to structure this money flow to occur without requiring actual cash payments (other than to meet amounts payable to third parties). In structuring any sale to a creditor particular consideration must also be given to the duty on receivers and mortgagees when exercising a power of sale to obtain the best price reasonably obtainable as at the time of sale.
Such 'credit bids' are not particularly common in New Zealand, although they have attracted more attention in recent years due to larger numbers of distressed investment funds pursuing the possibility of 'loan to own' strategies in the New Zealand market.
Pre-packaged insolvency sales (as practiced in United Kingdom and elsewhere) are possible but relatively uncommon in the New Zealand market for a number of reasons, including:
- that receivers (and mortgagees) are subject to a statutory duty to take all reasonable care to sell the property for ‘the best price reasonably obtainable as at the time of sale’. This has been interpreted by the Courts as requiring a focus on the process followed by the receiver (or mortgagee) to value and market the property (rather than on the price necessarily obtained); and
- that administrators and liquidators are subject to duties of independence, which prevent them from having a ‘substantial prior involvement’ with companies prior to their appointment.
It is possible in New Zealand for a majority of the relevant group of creditors and the company to pre-agree a restructuring to be effected by way of a scheme of arrangement or creditors' compromise. Typically this would be done by agreeing the substantive terms of a proposed scheme or compromise in advance, to put together a proposal that is likely to achieve the requisite majority approvals of creditors when formally proposed (75% (or more) in value and a majority in number of the relevant creditors). In practice it may be difficult to secure the majority in number of creditors if there is a large number of small creditors.
There can also be a degree of pre-planning involved in formulating a deed of company arrangement to be proposed by a director or creditor in a voluntary administration. Typically however this is less formal than the practice involved ahead of schemes of arrangement or compromises, in part because it is not possible to propose or approve a deed of company arrangement immediately at the outset of a voluntary administration, but instead this must wait for the second 'watershed' meeting of creditors (which is no sooner than between 20 to 25 days after the administrator is appointed).
When the insolvency procedure is opened, the ongoing agreements to which a debtor is a party are maintained, any contractual clauses of termination of the ongoing agreements, of forfeiture of the term or declaration of anticipated exigibility for the reason of opening of the procedure being null. For maximizing the debtor’s estate, the official receiver is the one entitled to appraise if an ongoing agreement should be maintained or terminated, which right may be exercised in a term of 3 months from the insolvency procedure opening date – nonetheless, an agreement executed essentially may not be terminated, there always being the risk of payment of indemnities. The same term applies also to the co-contracting party for the exercise of its right to notify the official receiver for pronouncing on the maintaining or termination of an agreement, in the absence of an answer in a term of 30 days the agreement being considered terminated. The insolvency law provides for a series of special rules applicable to certain categories of ongoing agreements: credit agreement, employment agreement, lease agreement, a series of variants of the sale-purchase agreement, a distinct situation being that of the leasing and utility supplier agreements and, at the same time, termination and set-off of receivables may be applied, and if an agreement is not terminated, the parties will execute their assumed obligations. The opening of an insolvency procedure does not affect the right of a creditor to invoke the set-off of its receivable with the one of the debtor on him, when the legal conditions are met. The reorganization plan may provide both for the sale of assets and the sale of business, the condition being that the sale is made in the conditions approved by the creditors. At the same time, under the law, the assets sold in the insolvency procedure are purchased by the buyer free of any encumbrances, such as privileges, mortgages, pledges or retention rights, seizures of any kind, except for the precautionary measures ordered in the criminal trial for special confiscation and/or extended confiscation. As an exception from the general provisions, mortgages shall be deregistered only under the sale deed signed by the official receiver/judicial liquidator, no express agreement on the secured creditor’s part being necessary to this end. There is the possibility to release a mortgage without the creditors’ consent only in the conditions in which the reorganization plan is approved by the vote on classes and is confirmed by the syndic judge subsequently or by the sale of the asset according to a sale regulation approved by the creditors. Adjudication on the account of the receivable and pre-package sale are possible, but they are not frequent in practice.
In case of bankruptcy proceedings, there are certain types of contracts that are terminated automatically under applicable substantive contract law (e.g. mandates governed by Swiss law). For other types of agreements, the applicable substantive contract law or the specific contract may provide for a termination right in case of bankruptcy. Automatic termination or termination rights are generally upheld in a Swiss bankruptcy. A contract which has not been terminated continues to exist as a matter of Swiss bankruptcy laws. If so, the receiver in bankruptcy may choose to perform the bankrupt's obligations under a so-called synallagmatic agreement (so called cherry-picking right). If the receiver in bankruptcy decides to perform the bankrupt party's obligations to secure performance by the other party, these obligations qualify as so-called estate obligations which are satisfied in advance and in full prior to all other creditors. Special rules apply to long-term contracts. In case no cherry-picking right has been exercised by the receiver in bankruptcy, even if they are not terminated upon the opening of bankruptcy procedures, future claims arising under such long-term contracts will only be admitted to the schedule of claims if they cover the period until the next possible termination date (calculated from the opening of bankruptcy) or until the end of the fixed duration of a contract. In addition, the cherry-picking right can be exercised for future obligations only. It is heavily debated under Swiss law whether an obligation of the non-affected party to perform agreements which have not been terminated and where no cherry-picking right has been exercised continues to exist.
In composition proceedings, contractual relationships between the debtor and its counterparties generally continue to be effective during the moratorium unless terminated ex lege or based on a contractual termination right (which, again, would generally be upheld). For contracts which have not been terminated, the administrator has the authority to order conversion of a performance owed by the debtor into a monetary claim of corresponding value which will then become subject to the terms of the composition agreement. Furthermore, the debtor may terminate long-term contracts without respecting the contractual notice periods during the moratorium against full indemnification of the counterparty (but only as an unsecured and non-privileged insolvency claim) if the continuing existence of these contracts would jeopardise the restructuring as a whole. The administrator's consent is required for such a termination.
Set-off rights generally continue to be available in insolvency proceedings, subject, however, to certain restrictions which may, in particular, prohibit set-off of pre-insolvency with post-insolvency claims. Retention of title arrangements are not typically effective in an insolvency scenario of a Swiss debtor unless the very strict rules, including registration requirements for retention of title arrangements under Swiss law have been properly followed (which is the exception rather than the rule).
An existing contract may be continued (notwithstanding the existence of a cause for termination) or dismissed by the appointed court officer, to the extent such act is required for the recovery of the company and with the approval of court. The company’s obligation under an existing contract adopted shall have the status of recovery expenses, and any damage to the other contract party shall be deemed as a debt recoverable in the Arrangement proceedings.
The other party may terminate an existing contract only with the approval of the court officer or the court. A termination cause relating to the occurrence of insolvency proceedings will not be enforced.
Set off provisions with respect to mutual business between the parties will usually be enforced. Set-off in framework agreements with respect to derivatives or repo transactions such as ISDA agreements, will be enforced by virtue of the Financial Assets Agreements Law, 2006.
Retention of title provisions will be enforced only if such retention of title is not considered under the Israeli law as collateral for securing obligation. However once a stay order is granted such enforcement will be subject to the court's approval. Such approval will be granted only if the retained asset does not guarantee proper protection to the creditor, or if granting of such approval shall not harm the chances of recovery.