Bankruptcy’s Impact on Contractual Obligations
D) Effects on Contracts
a) A company may be declared bankrupt if it cannot fulfill its contractual obligations. The resolution of contracts concluded by a common debtor before the bankruptcy date is a principle with special force. This principle aims to maintain the validity of contracts.
b) The principle of maintaining contracts is not absolute. Bankruptcy can be a legal cause for contract termination. Parties may also agree to contract termination in the event of bankruptcy. Furthermore, the principle of maintaining contracts can give a party the right to unilaterally withdraw from a contract. This can occur both before and after the declaration of bankruptcy.
c) Generally, contracts with outstanding reciprocal obligations remain valid after a bankruptcy declaration. If one party has fulfilled their obligations and the other has not, the creditor’s claim against the bankrupt is recorded in the passive mass. If the bankrupt debtor breached their obligation, the creditor’s claim is included in the active mass. If neither party has fulfilled their obligations, the benefits payable by the bankrupt will be fulfilled by the estate. The bankruptcy administration may authorize the debtor to claim compliance or suspend the contract.
d) The continued existence of contracts with outstanding reciprocal obligations does not preclude subsequent breaches. The declaration of bankruptcy does not affect the right of parties to resolve contracts in the event of default after the declaration of bankruptcy. This applies to contracts with reciprocal obligations pending compliance by both parties.
e) Certain contracts made by the debtor may be resolved before the declaration of bankruptcy due to breaches caused by financial difficulties. These include:
- Contracts for the acquisition of movable or immovable property with deferred payment, resolved within three months before bankruptcy.
- Loan and credit agreements that expired early in the three months before bankruptcy due to unpaid principal or interest.
- Urban leases, where the bankruptcy administration may invalidate eviction actions.