The current crisis has led many entrepreneurs to decide to restructure their businesses. The initiation of restructuring proceedings impacts not only the company but also its contractors and creditors. In practice, creditors and contractors, upon learning of the opening of restructuring proceedings, sometimes seek to terminate their contracts with the debtor. It's worth emphasizing that the primary goal of restructuring proceedings is to avoid bankruptcy by enabling the debtor to reach an arrangement with creditors. However, sudden termination of contracts with the debtor by creditors or contractors, solely because of the opening of restructuring proceedings, would defeat the purpose of these proceedings and lead the debtor to file for bankruptcy.
Hence, the legislator introduced a ban (with certain exceptions) on terminating contracts during restructuring proceedings.
Pursuant to Article 256 Section 1 of the Restructuring Law, from the date of opening of accelerated arrangement proceedings until their conclusion or until the decision to discontinue accelerated arrangement proceedings becomes final, termination by the landlord or lessor of a lease or tenancy agreement for the premises or real estate in which the debtor's enterprise is operated, without the consent of the creditors' committee, is inadmissible . The prohibition referred to above applies accordingly to loan agreements regarding funds made available to the borrower before the date of opening of the proceedings, leasing agreements, property insurance agreements, bank account agreements, surety agreements, agreements covering licenses granted to the debtor, and guarantees or letters of credit issued before the date of opening of accelerated arrangement proceedings, as well as other agreements of fundamental importance to the operation of the debtor's enterprise .
Inadmissibility of terminating contracts after the opening of restructuring proceedings Despite the fact that Article 256 of the Bankruptcy Law refers to accelerated arrangement proceedings, the provision applies accordingly to arrangement proceedings, remedial proceedings and proceedings on approval of the arrangement, if the debtor has made an announcement about the setting of the arrangement date .
Taking into account the above provision, the other party to the contract should take into account that after the date of opening of the restructuring proceedings, termination of the contract between it and the debtor, without the consent of the creditors' committee (or, in the absence of a creditors' committee, the judge-commissioner), is, in principle, impossible.
So when can the other party effectively terminate the contract between it and the debtor against whom restructuring proceedings have been opened?
The answer should be found in Article 256 paragraph 3 of the Bankruptcy Law, which states that if the basis for terminating the agreement is the debtor's failure to perform obligations not covered by the arrangement after the date of opening of the accelerated arrangement proceedings or another circumstance provided for in the agreement, if it occurred after the date of opening of the proceedings, the provisions of paragraphs 1 and 2 shall not apply .
Therefore, there are two situations in which the other party to the contract has the right to terminate the contract between it and the debtor despite the opening of restructuring proceedings .
Firstly, after opening the restructuring proceedings, the debtor fails to fulfil its obligations that are not covered by the arrangement .
Example: Before initiating restructuring proceedings, the debtor entered into a lease agreement with a creditor. All liabilities that the debtor had not settled with the creditor before the opening of restructuring proceedings were covered by an arrangement after the opening of restructuring proceedings. After the opening of restructuring proceedings, the agreement remains binding on the parties, but the debtor fails to fulfill its current obligations under the agreement, namely, does not pay rent. Because these liabilities are not covered by the arrangement, the creditor acquires the right to terminate the lease agreement despite the opening of restructuring proceedings .
Secondly, there is another circumstance provided for in the agreement which occurred after the date of opening of the restructuring proceedings and which entitles the other party to terminate it .
Example: A debtor entered into a contract under which it agreed that entity X (the other party to the contract) would be its sole supplier. However, after the opening of restructuring proceedings, the debtor, contrary to the provisions of the contract, used the services of another supplier. Therefore, entity X will be entitled to terminate the contract based on the provisions set forth in the contract, despite the express prohibition under Article 256, paragraph 2 of the Bankruptcy Law.
Given the above premise, the other party to the contract should take into account that the circumstance provided for in the contract must materialize after the opening of restructuring proceedings . If this circumstance arises before, and the other party wishes to exercise this right after the opening of the proceedings, then termination of such contract will be ineffective.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of June 21, 2023
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