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 ability for either party to disclaim the contract?
Restructuring & Insolvency (3rd edition)
Termination of Agreement by Debtor
After filing an NOI or a Proposal under the BIA, or after obtaining an Initial Order under the CCAA, a debtor (except a debtor who is a natural person and who does not operate a business) may, with the approval of the Trustee or Monitor and with notice to the other party or parties to an agreement, disclaim most agreements.
If the Trustee or Monitor does not approve the termination of the agreement, the debtor may apply to the Court for a determination in respect of same. The counterparty to the agreement to be disclaimed may also oppose the termination and apply to the Court for a determination in respect of same. The Court, in deciding whether to allow the contract to be terminated or not, will consider, among other things, (i) the approval or opposition of the Trustee or Monitor; (ii) whether the termination would enhance the prospect of a viable Proposal or Plan; and (iii) whether the disclaimer would likely cause significant financial hardship to a party to the agreement. If a counterparty to an agreement that is disclaimed by the debtor suffers a loss as a result of the termination the counterparty will have a claim in the restructuring for damages. The claim may then be addressed within the terms of the Proposal or Plan.
Certain types of agreements may not be terminated, such as “eligible financial contracts” (i.e. derivatives), financing agreements where the debtor is the borrower, and most leases where the debtor is the lessor. Specific rules also apply to intellectual property-related agreements, where a counterparty’s contractual rights, including the right to use the IP and extend the agreement, may not be altered for as long as the counterparty respects its obligations as per the agreement. With respect to collective agreements, the Court may order a renegotiation, but neither the Court nor the debtor may terminate or alter the collective agreement outright.
Termination of Agreement by the Counterparty
After a debtor has filed an NOI, a the Proposal under the BIA, or after the debtor has obtained an Initial Order under the CCAA, no party to an agreement with the debtor, including a security agreement but excluding “eligible financial contracts” (i.e. derivatives), may terminate or amend the agreement, or claim an accelerated payment or a forfeiture of the term (even if provided for in the agreement) by reason only that the debtor is insolvent, has filed an NOI, a Proposal, or has obtained an Initial Order. The words “by reason only” are important: any right of a counterparty to terminate an agreement with the debtor for another valid reason, repetitive failure to pay for example, remains enforceable.
In the case of a lease where the debtor is the lessee or with respect to a public utility contract (e.g. Internet, telephone, electricity, etc.), the lessor or the public utility company may not terminate their agreement with the debtor by reason only that the debtor has not paid rent or royalties or made any other payments of a similar nature, as applicable, in respect of a period preceding the filing of the NOI or the Proposal, or preceding granting of the Initial Order. However, no counterparty to any agreement with the debtor, including lessors and public utility companies, is obliged to advance money or credit to the debtor, or do anything with delayed payment, after the NOI or the Proposal has been filed, or after the Initial Order has been obtained. This means that, in practice, as soon as the NOI or the Proposal is filed, or as soon as the Initial Order is obtained, all commercial partners of the debtor who choose to continue to do business with the debtor may do so on a “cash on delivery” basis, demanding immediate payment for goods, services, use of leased or licensed property or other valuable consideration, as the case may be, in the post-filing or post-Initial Order period.
The foregoing trumps any agreement to the contrary and cannot be contracted out of. Nevertheless, it remains within the discretion of the Court to order the termination of most agreements upon the counterparty demonstrating that it will suffer significant financial hardship if the agreement is not terminated.
Assignment of Agreement
On motion in a BIA, or CCAA restructuring, or in a bankruptcy, and on notice to every party to the agreement, the Court may order an assignment of the rights and obligations of the debtor (except if the debtor is a natural person who does not operate a business) under the agreement to another person, or entity who has agreed to the assignment. Certain contracts are excluded from such an assignment by their nature, including “eligible financial contracts” (i.e. derivatives) and collective agreements. In deciding whether to order the assignment, the Court will consider, among other things, whether the person to whom the assignment is to be made is able to perform the debtor’s obligations, and whether the assignment would be appropriate in general.
The CCAA has generally been regarded as specifically preserving the law of set-off (or, in Québec, compensation), such that pre-filing debts may be set off against post-filing debts as there is no change of mutuality (i.e. the legal nature of the debtor remains unchanged) as there would in a bankruptcy. The Courts have adopted this provision in the context of BIA Proposal proceedings. However, there has been some uncertainty in recent years as to whether this is always the case. In the 2017 decision, Arrangement relatif à Métaux Kitco inc., the Quebec Court of Appeal determined that only mutual debts existing as of the date of the initial order may be set-off in a CCAA restructuring. Accordingly, pre-filing debts may not always be set-off against post-filing debts in Quebec.
In the context of either a bankruptcy or a receivership, set-off rights may be exercised by or against the debtor, as per provincial law, provided that the obligations that are being set-off, or compensated, both arise either before or after the date of the bankruptcy, or the Receivership Order.
British Virgin Islands
The commencement of liquidation does not prima facie affect existing contracts, though the liquidator has a power to disclaim an unprofitable contract into which the company has entered by filing a notice of disclaimer with the court under section 217 of the IA. In many cases, however, the contract will include express provisions in contemplation of either party’s insolvency. The liquidator also has a power to carry on the business of the company so far as this is best interests of the company.
Nothing in the BVI’s insolvency legislation invalidates termination, retention-of-title, or set-off provisions in commercial contracts, though the general common-law rules concerning these principles apply, such as the need in retention-of-title cases for the assets in question to remain identifiable and not to have been worked into new property or transferred to an innocent third party. As stated above, the IA expressly provides for a right of set-off in relation to mutual credits.
A contractual counterparty may apply to the court for an order rescinding the contract on such terms as to payment between the company and the counterparty of damages for non-performance as the court may think fit. If a counterparty is awarded damages, these may be claimed as a debt in the liquidation. No contractual counterparty may commence or proceed with any proceedings against the company without permission of the court having jurisdiction in the insolvency.
Again, the legislative provisions relating to restructuring procedures do not make express provision in relation to existing contracts.
An official liquidation of a company (but not a voluntary or provisional liquidation) will automatically terminate the employment contracts of all of its employees. For all other types of contract, voluntary, official or provisional liquidation will not release either party from their obligations under the contract unless there is an express provision to that effect. The company in liquidation will therefore continue to be bound by the contract, as will the counterparty unless the liquidation provides it with termination rights. However, unless there is a reason to cause the company to perform its obligations under the contract, the liquidator may choose to allow the company to default, in which case the counterparty may have no option other than to prove in the liquidation for any damages caused by the breach of contract.
Termination, retention of title and set-off provisions remain enforceable in the liquidation. Where the company had not entered into any set-off, non set-off or netting agreement prior to the commencement of the liquidation, the statutory set-off provisions will apply. Under statutory set-off, an account is taken of what is due between the insolvency company and the counterparty in respect of mutual dealings and the two amounts are set off against each other.
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.
- Contracts in restructuring processes
With the consent of the restructuring administrator the debtor may as a starting point continue contracts/bilateral contracts entered into. The debtor may also terminate the contracts with the consent of the restructuring administrator which is usually also the case for non-terminable contracts unless the non-terminability is secured by registration.
In restructuring proceedings, contracts are treated under the same rules as contracts in insolvency proceedings so please see the section on such contracts.
It is noted that the debtor cannot continue the contract without the consent of the other contracting party if except from the restructuring proceedings the other contracting party was entitled to terminate the contract without notice for other reasons that debtor’s delay in the contractual payment.
In restructuring proceedings, the debtor may in certain circumstances continue agreement than the other contracting party had terminated without notice no later than 4 weeks prior to the restructuring.
If the creditors approve a restructuring proposal that includes a transfer of business, the contracts may in certain cases be transferred to the buyer without the consent of the other contracting party.
- Contracts in insolvency proceedings
The insolvent estate may decide to let the insolvent estate adopt the contract or not. Consequently, it cannot be effectively agreed in advance that insolvency or restructuring proceedings means that the agreement be terminated without notice. The other contracting party may require that the insolvent estate decides on the adoption of a contract without undue delay.
If the insolvent estate does not adopt the contract, the other contracting party may as a starting point terminate the agreement without notice and claim damages for its loss suffered by the non-performance of the contract.
If the insolvent estate adopts the contract, the insolvent estate assumes the rights and obligations under the terms of the contract.
The maintenance of retention of title in restructuring and insolvency proceedings requires that the retention of title is valid prior to the commencement of the restructuring proceedings or the issue of the insolvency order. Right of set-off may as a starting point be maintained but it is governed by the Danish Insolvency Act.
If the insolvent estate adopts the contract, the other contracting party may only terminate the contract without notice if the insolvent estate is in breach of its contractual obligations unless the other contracting party could terminate without notice based on the general rules of Danish law of obligations.
However, even though the insolvent estate has adopted the contract, the insolvent estate is always entitled to terminate the contract by giving a month’s notice if the contract concerns the delivery of an on-going service.
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.
If the debtor and another party did not perform, or perform completely, a mutual contract at the date the insolvency proceedings were opened, the insolvency administrator may perform such contract, replacing the debtor and claiming the other party’s consideration. If the administrator refuses to perform such contract, the other party shall be entitled to its claims for non-performance only as an insolvency creditor. Contractual clauses excluding or limiting this election right of the debtor shall be void. If the other party requires the administrator to opt for performance or non-performance, the administrator shall state his or her intention to claim performance without undue delay. If the administrator does not give a statement, he or she may no longer demand performance.
The election right of the debtor set forth above is excluded or restricted by more specific rules for (i) certain fixed-date financial market transactions (ii) real estate transactions protected by priority notices (Vormerkung), (iii) real estate leases and (iv) service and employment agreements.
Retention of title rights
If before the insolvency proceedings were opened, the debtor sold a movable asset while retaining title and transferring its possession to the purchaser, the purchaser may claim performance of the sales contract.
If before the insolvency proceedings were opened, the debtor, purchased a movable asset in which the seller retained title, and the seller transferred possession of such asset to the debtor, the seller has a right to withdraw such asset from the estate without paying fees, if the insolvency administrator opts for the non-performance of the underlying purchase agreement. However, the insolvency administrator is entitled to execute its election right only after the first creditors’ assembly (Berichtstermin), unless a considerable reduction in the value of the movable asset is to be expected and the creditor has notified the administrator of this circumstance.
If a creditor had a right to set off a claim on the date the insolvency proceedings were opened, such right shall remain unaffected by the proceedings unless, among other things,(i) an insolvency creditor has become an obligor to the insolvency estate only after the opening of the insolvency proceedings; (ii) an insolvency creditor acquired its claim from another creditor only after the opening of the insolvency proceedings; (iii) an insolvency creditor acquired the opportunity to set off its claim by a transaction that is subject to contestation; and/or (iv) a creditor with a claim to be satisfied from the debtor’s free property is an obligor to the credit of the insolvency estate.
In general, contracts which do not by their terms conclude upon the happening of an event of insolvency will continue in force following a winding up order and may be performed and enforced by the company in provisional or permanent liquidation. The rules with regard to termination, retention of title and set-off are not codified in statute and the enforceability of any particular arrangement will turn upon the terms of the arrangement and circumstances of the insolvency. In addition, there are special provisions which apply to insurance contracts and segregated accounts companies which may affect the operation of these principles. The liquidator of a company may with the leave of the Court disclaim any onerous property belonging to the company. This includes real property and contracts. Any person who is caused loss by the operation of the disclaimer is deemed to be a creditor of the company to the amount of the loss and may prove the amount as a debt in the winding up.
The commencement of a winding up or administration (whether compulsory or voluntary) does not automatically trigger a termination of existing contracts although they may be frustrated by the procedure.
The previous contractual arrangements of the company are likely to remain in force including retention of title clauses and set-off provisions.
There is no disclaimer process in Guernsey at present but a proposal to introduce it has been approved by the States of Guernsey. Legislation is also being drafted to ensure the continuity of key supplies to a company in administration.
A contract will not be automatically terminated by the examinership of a company. However, in general a counterparty is not prevented from exercising a right to terminate in accordance with the terms of the contract. Notwithstanding that, a landlord will generally not be entitled to terminate the lease of a premises occupied by the company in examinership provided that the company is able to discharge the rental obligation for the period of the moratorium.
Parties with rights of set off continue to be able to exercise those rights during the period of the examinership. Parties that have retained title to goods supplied to a company in examinership are not permitted to repossess those goods whilst the moratorium is in place. However, the company is not able to dispose of goods without the approval of the Court and where such approval is given the Court will generally direct that the proceeds of the sale of the ROT assets is applied against the monies owing to the ROT creditor.
A company in examinership can, with Court sanction, repudiate any contract where some element of performance (other than payment) remains to be rendered by both the company and the contracting party and where proposals for a scheme of arrangement are being put forward. Where a contract is repudiated, the damage caused to the counterparty will be assessed and constitute an unsecured claim under any scheme of arrangement.
Unless otherwise expressly provided, existing contracts will not automatically terminate upon the appointment of a liquidator to a company. Termination, retention of title and set-off provisions will remain enforceable notwithstanding the liquidation of the company.
A liquidator may, within two months of the winding-up of the company, apply to the High Court to disclaim certain onerous or unprofitable contracts of the company. Unconditional contracts for the sale of property cannot be disclaimed, and where a liquidator refuses to complete such a contract, an order for specific performance can be sought.
Unless otherwise expressly provided, existing contracts will not automatically terminate upon the appointment of a receiver to a company. Termination, retention of title and set-off provisions will remain enforceable notwithstanding the appointment of a receiver to the company. It has been held in case law that a receiver may disregard the contractual obligations of the company where he can prove that there would be no benefit to the company or the secured creditor in fulfilling the contractual obligations.
A receiver cannot repudiate contracts however, as agent of the company, a receiver may refuse to perform contracts whereby the only recourse available to the contracting party is to sue an insolvent company for breach of contract whereupon he would rank as an unsecured creditor only in respect of any award made in its favour.
- The existence of insolvency proceedings does not have any effect on any contracts by operation of law outside the moratorium. The Viscount or a liquidator have a power to disclaim any onerous contracts subject to a right of any person adversely effected by disclaimer being entitled to claim in the bankruptcy or winding up for any loss or damage suffered thereby. . (Désastre Law 15 and Companies Law Art.171)
As a general principle, the insolvency declaration does not affect the provisions of an executory contract, unless the conciliator rejects it on grounds that such rejection is in the best interest of the estate.
Any provision of an agreement that sets modifications that worsen the contractual terms for a debtor derived from the filing of a petition or demand for, or the declaration of, concurso (ipso facto clauses), shall be void. That is, the courts would not recognize the validity of a clause in an agreement that would give a party the right to terminate it in the event of a demand or petition for, or declaration of, concurso of the other party.
Any party to an executory contract with the debtor shall be entitled to require the conciliator to declare whether he will assume or reject the contract. If the conciliator decides for the assumption of the contract, the debtor must perform or guarantee performance thereunder. If the conciliator rejects the contract, or does not provide an answer within 20 days, the debtor’s counterpart may thereafter declare the termination of the contract. An unresolved issue is whether the conciliator has the authority to decide on a partial assumption of a contract. Prevailing opinion is that no such authority exists: the contract would be assumed or rejected in its entirety.
In principle, from the insolvency declaration, no debts of the debtor can be netted out, except for rights in favor of, and obligations payable by, the debtor deriving from the same transaction, and those maturing prior to the insolvency declaration whose netting is foreseen by law; rights and obligations arising from repurchase, securities loan and derivative transactions, and their framework agreements; and tax refunds and claims.
Contracts are governed by the provisions of the Peruvian Civil Code and are based on private autonomy; that is, the parties may freely determine the content of the contract, provided that it does not breach the law. In Insolvency Proceedings, the provisions in the Civil Code apply insofar as the Insolvency Act does not govern them nor does it have a major effect on them.
The parties must continue meeting their obligations under a contract, whose terms and conditions will remain effective. However, there may be a default exception in contracts with reciprocal considerations which should be performed simultaneously, as either party is entitled to suspend its obligation to perform his consideration until the other party satisfies or secures satisfaction of its valuable consideration.
Finally, if a contract allows either of the parties to terminate it on the occurrence of an insolvency proceeding, the termination will take effect; however, this termination clause will have to be expressly provided in the contract pursuant to Article 1430 of the Civil Code.
Existing contracts within restructuring proceedings may be managed in various ways depending on nature and subject of the given contract. Under Article 98 of the Bankruptcy Law appointed trustee may, with the prior consent of the Judge – Commissioner, perform the debtor’s obligation resulting from contract and demand the other party to render reciprocal performance, or withdraw from the contract with effect as of the date of declaration of bankruptcy. It is also possible to withdraw from a reciprocal contract by appointed Receiver under the Restructuring Law – in remedial proceedings.
Certain contracts’ clauses may be questioned under the Bankruptcy Law, e.g. clause stipulating that a legal relation to which the bankrupt is a party, may be modified or terminated if a bankruptcy petition is filed or if bankruptcy is declared. Such a clause under the Article 83 of the Bankruptcy Law is invalid. Clauses preventing or hindering the achievement of the purpose of bankruptcy proceedings have no effect to the bankruptcy estate.
Moreover, as to the: contract of agency, contract of lending for use, contract of loan, contract of lease or tenancy, credit contract, contracts of bank account, contracts of securities account, contracts of derivatives account or settlement account, or contracts of operating an omnibus account, as well as contracts for making safe-boxes available and contracts for safekeeping, leasing contracts or mandatory property insurance contracts, the Bankruptcy Law provides individual and specific regulations reflecting nature of said contracts. In particular the Bankruptcy Law regulates possibility of expiration of the contract by operation of law, possibility to withdraw from contract or to terminate contract.
Under the Restructuring Law there are some restrictions as to the possibility of termination of the tenancy contract and lease contract of the unit or immovable property, in which the debtor’s undertaking is run.
The Companies Act empowers the liquidator to disclaim property or contractual obligations of the company if they impose onerous burdens, are unprofitable or not readily realisable. The liquidator can exercise the power of disclaimer only with the leave of the Court or the committee of inspection.
The making of a judicial management order does not affect existing contracts, unless expressly provided for by the terms of a contract. There is also no equivalent power granted to Judicial Managers to disclaim contracts. However, a judicial manager may choose not to adopt certain contracts, leaving the counterparty with a claim for damages against the company. In this regard, the Companies Act grants the judicial manager a “grace period” of 28 days from the making of the judicial management order to review the company’s existing contracts, during which time the judicial manager is not taken to have adopted any contract by reason of anything done or omitted.
Upon liquidation, contractual rights of set-off are replaced by the insolvency set-off provisions governed by the Companies Act. As for judicial management, case law has held that the contractual right of set off is not affected by the moratorium imposed by judicial management.
In company reorganization, the debtor’s contracts remain in force and both parties are obliged to perform their obligations. There is even statutory protection for contracts, which prohibits a creditor to terminate an agreement due to the debtor’s non-performance prior to the commencement of the reorganization proceedings. The creditor will, however, have the right to request security or cash payment for future deliveries or performance.
Retention of title and set-off provisions will normally survive and remain enforceable as such in restructuring proceedings. Premature termination will be regulated in the agreement, however, provisions automatically terminating contracts or allowing parties to terminate upon a counterparty’s insolvency, will be superseded by the statutory protection for contracts described above. It may be noted that, in order to effectively disclaim a contract at a cost, a debtor may always terminate the contract wrongfully, giving the other party a claim corresponding to the full contract and any contractual damages etc, all of which will later get crammed down in the following public composition (assuming the reorganization is successful and the composition is accepted by a majority of the creditors).
In bankruptcy, the general rule is that contracts remain in force. However, the debtor’s agreements will not be binding on the insolvent estate, and the agreements therefore are not enforceable against the estate. Contractual provisions automatically terminating a contract or allowing a party to terminate it upon the other party’s insolvency, will be upheld in principle, but the insolvent estate will have a superseding statutory right in most cases to assume the contract, including all rights and all obligations of that contract (partial assumption is not allowed).
Retention of title clauses will survive insolvency proceedings if they are properly drafted, and the creditor will have the right to request the insolvent estate to separate and release any such property. Setting off claims is normally allowed in bankruptcy proceedings, but statutory set-off regulations will apply.
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).
The DIP cannot be a cause to terminate a contract (art. 61.3 SIA).
The contract with pending obligations for both parties shall be in force after the DIP. Likewise, the contracts where at the moment of the DIP, one of the parties had entirely fulfilled his obligations while the obligations of the others party is pending, the debtor’s credit shall be included in the aggregate assets or liabilities of the insolvency proceeding (art. 61.1 SIA).
Even if there are causes to terminate the contract, the court could decide not to terminate the contract in interest of the insolvency proceeding (art. 62.1 and 61.3 SIA).
On the other hand, the labor contracts and contracts with public administration are regulated by others specific rules (art. 64, 65, 66 and 67 SIA).
The SIA only allows the set off if previously to the DIP, the credit fulfills the requirements that establish the article 1196 of SCC (art. 58 SIA):
- Both subject has to accomplish with the obligation and the parts mutually are debtor-creditor.
- Both debts consist of an amount of money, or if it consist of a consumable asset, it has to be of the same sort and quality.
- Both debts has to be matured, liquid and enforceable.
- Both debts are not retained.
Regarding the retention right, once the insolvency proceeding is initiated, the exercise of retention on assets and the right of integration in the debtor’s estate shall be suspended. If at the conclusion of the proceeding, such assets or rights have not been disposed of, they shall be immediately be returned to the holder of the retention right whose claim has not been fully settled (art. 59 SIA).
The assets that integrate the debtor’s estate shall be liquidated according to the rules established by the liquidation plan. Notwithstanding, the assets that are considered as merchandise could be sold during all the development of the proceeding in the course of the regular business activity of the company (art. 148 and sequence SIA). If the IA wants to sale any other assets than merchandise assets outside the liquidate phase, it will be necessary to apply to court for an authorization (art. 43 SIA).
Regarding the sale of the entire business, it could be done in any phase of the insolvency proceeding. However, in the liquidate plan shall contain the requirements that have to accomplished the offer to propose to sale the entire business. In any case, the proposal has to be in written and shall include viability plan (art. 100 and 146 bis SIA).
All hoisting of the foreclosure has to be authorized by the creditors. However, in a Spanish insolvency proceedings the unique seizure that could be lifted are the tax foreclosure in case when the maintenance severely hinders continuity of the business activity (art. 55.3 SIA).
According to the SCC (art. 1525 and subsequent), it is allowed to credit bidding. Once the credit has been sold, the new creditor shall subrogate in the position that occupied the previous creditor. As for the pre-packaged sales, the Spanish legal system does not regulate pre-packaged sales.
Pursuant to section 365 of the Code, contracts that are executory as of the petition date must continue to be performed by the debtor and non-debtor party even where pre-petition defaults exist pending approval of the bankruptcy court of the debtor’s request to either “assume” or “reject” the contract. As a general rule, contracts are “executory” when there are material obligations remaining to be performed by both parties. Section 365 permits the debtor to reject a contract that is burdensome or not beneficial to the estate. Rejection is deemed a breach of the contract as of the petition date, entitling the counter-party to the contract to assert a pre-petition claim against the estate. Subject to certain limitations in the Code, a debtor may also assume a contract or unexpired lease. If the debtor assumes a contract, it is must cure, or provide adequate assurance that it will cure, all defaults and that it can perform under the contract after assumption.
Absent approval by the bankruptcy court, the general rule is that a debtor is forbidden from paying any prepetition amounts accrued but unpaid on an executory contract as of the petition date.
The general rule is that a company’s contracts remain enforceable upon insolvency.
Properly drafted, a retention of title clause will survive an insolvency filing.
Contractual provisions allowing parties to terminate upon a counterparty’s insolvency will be upheld save in limited circumstances relating to certain essential supplies (e.g. gas, electricity, water and communication and IT services). (This is subject to proposed reforms to prevent reliance on ipso facto clauses - where the clause allows a contract to be terminated on the grounds of the counterparty’s insolvency - in supplier contracts.) There is also an ‘anti-deprivation’ principle which prohibits any contract from providing that property will transfer to another on the occurrence of an insolvency event.
In a liquidation or a distributing administration, statutory set-off applies where a creditor of the insolvent company is also a debtor of the company. Set-off is mandatory and automatic, and the relevant rules supersede all other contractual rights of set-off that are inconsistent with them.
A liquidator (but not an administrator) has the power to unilaterally disclaim onerous executory contracts to avoid incurring future liabilities.
As about bankruptcy proceedings, there is no particular provision under the Hungarian law. Some of the provisions only forbid the enforcement of creditors' rights arising from such arrangements during bankruptcy proceedings. Liens and security arrangements may be released during the negotiations of agreements if the parties wish to do such settlements. There are no specific provisions on releasing non-debtor parties from liabilities.
Under the duration of the stay of payment, set-off may not be applied against the debtor. However, a set-off claim may be heard in judicial proceedings initiated by the debtor and still in progress, if submitted before the time of the opening of bankruptcy proceedings.
The executive officers and senior management of the debtor economic operator, their close relatives and their domestic partners may not set off their claims against the debtor, nor may any member (shareholder) of the economic operator with majority control over the debtor or the economic operator in which the debtor has majority control (or the member in the case of single-member companies, the owner in the case of sole proprietorships, or the foreign-registered company in the case of Hungarian branches).
The liquidator shall be allowed to lease or authorise the use of any of the debtor’s assets only upon the consent of the creditors’ committee or the representative of creditors to a person or organisation who was the debtor’s executive officer at the time the liquidation was ordered, or within one year previously, or who controlled the debtor exclusively or by way of majority. The permission of the court is not required under the applicable law.
Notwithstanding contractual provisions to the contrary, the application for a judicial reorganization procedure does not terminate current contracts or the modalities thereof. However, the debtor may unilaterally decide to suspend the performance of its contractual obligations for the duration of the suspension period with a notice to the co-contracting party, if so required for the reorganization of the enterprise. The right of the debtor to unilaterally suspend the performance of his contractual obligations does not apply to employment contracts. The judicial organization does not have an impact on retention of title. Limitations may apply to set-off provisions.
The bankruptcy does not automatically terminate existing agreements. After his appointment, the bankruptcy trustee will have to decide whether or not to further perform the agreements concluded before the date of the bankruptcy decision. The bankruptcy trustee may unilaterally terminate agreements when the management of the bankrupt estate requires this. Set-off after opening of the bankruptcy procedure is in principle prohibited and only allowed in very limited circumstances (i.e. where both debts are closely connected).
Current legislation stipulates that in recovery proceedings, an existing contract shall not be terminated (nor be terminated by the other party) for cause of insolvency. An Officer may decide to continue or terminate an existing contract, as required for recovery of the company. Termination of an existing contract, or adoption of an existing contract, which the other party is entitled to terminate are subject to Court approval. In cases where the other party is entitled to terminate an existing contract due to breach thereof by the company, the Court shall not approve the adoption of such contract, unless it is proven that the company would fulfill its obligations pursuant to the contract as from the adoption date. The Court may also instruct a vital supplier of the corporation to continue supplying the vital goods and/or services to the company under a stay of proceedings, if such goods or services are required for continued operation of the company.
In liquidation proceedings, a termination provision that was agreed upon two solvent parties will generally be recognized. However, if the contract stipulates that the mere issue of a liquidation order constitutes material breach of the contract, which confers on the other party the right to receive consolidated damages, it may be determined that such provision bypasses the cogent creditor ranking and constitutes prohibited creditor preference, and hence must be canceled.
In addition, the Officers in corporate insolvency proceedings have the authority to relinquish an onerous asset. The statutory definition of "onerous asset" includes non-profitable contracts. Relinquish an onerous asset is subject to Court approval, which may contingent such relinquishing on ensuring proper compensation for the damaged party.
Pursuant to the provisions of the Insolvency Law, the Officer may also continue existing contracts during operation of the corporation (even if the other party to such contract has a contractual right to terminate the engagement), and the Officer may, subject to Court approval, terminate an existing contract – even if there is no cause for doing so. Note that the Officer may not file a motion for continuing a contract that is a labor contract, contract for provision of personal service or contract for extending credit – and the Court shall not instruct such contract to be continued. Moreover, the Insolvency Law confers on the Officer the right to assign the rights and obligations of the corporation to an assignee, subject to Court approval, where such assignment is required for overall rehabilitation of the corporation, or for maximizing debt repayment to creditors, and provided that this would not harm the other party to the contract.
The contracts in progress are considered to be maintained at the date of the opening of the procedure. Any contractual clauses to terminate the contracts in progress, to cancel the benefit of the time limit or to declare the anticipated exigibility due to the opening of the procedure are null and void.
The provisions relating to the maintenance of ongoing contracts and the nullity of termination or acceleration clauses are not applicable to qualifying financial contracts and bilateral clearing operations under a qualified financial contract or bilateral clearing agreement.
In order to maximize the value of the debtor's assets within a 3-month limitation period from the date of the opening of proceedings, the court administrator/ liquidator may terminate any contract, unexploded leases, other long-term contracts, as long as these contracts have not been executed wholly or substantially by all parties involved.