Contractual clause for the modification or termination of the legal relationship in the event of bankruptcy of the Counterparty

Contractual clause for the modification or termination of the legal relationship in the event of bankruptcy of the Counterparty

A declaration of bankruptcy has far-reaching consequences not only for the debtor himself, but also for his business partners. They are dragged into the debtor’s bankruptcy proceedings against their will, which, from their point of view, should be regarded as an unfavourable situation. In practice, there are attempts to prevent the need to participate in such proceedings by means of various contractual clauses.

POWERS OF THE TRUSTEE TO MODIFY THE DEBTOR’S CONTRACTUAL RELATIONS

After the debtor’s bankruptcy, the bankruptcy trustee acquires extensive competence to modify the contractual relations between him/her and the contracting parties. For example, it is possible to withdraw from a mutual agreement with the consent of the judge-commissioner (Article 98(1) of the Act on Bankruptcy Law.). According to Article 99 of the Act on Bankruptcy, if the bankruptcy trustee withdraws from the agreement, the other party has no right to return the performance made, even if the performance was in the bankruptcy estate (the Party may submit its receivables to the judge-commissioner). Other limitations also result, among others, from Article 107 of the Act on Bankruptcy (concerning lease and tenancy agreements of real estate), or Art. 114 of the Act on Bankruptcy (regarding the possibility of termination of the lease agreement by the bankruptcy trustee).

On the one hand, the regulations provided for lead to petrification of the existing legal relations between the debtor and its contractors, at the same time granting the bankruptcy trustee the right to interfere in contractual relations as a result of its unilateral initiative.

BANKRUPTCY CLAUSES FOR CONTRACTING PARTIES

The simplest solution for contractors, in order to improve their situation, would be the possibility of using clauses in the concluded contracts allowing for change or termination of the legal relationship in case of bankruptcy of a party to the contract. However, the use of such clauses is not possible due to the content of Article 83 of the Act on Bankruptcy. Pursuant to the aforementioned provision, the provisions of the agreement reserving, in the event of filing a petition for bankruptcy or declaration of bankruptcy, the change or termination of the legal relationship to which the bankrupt is a party, are invalid. It is absolutely invalid by operation of law.

The purpose of this regulation is to prevent the reservation of special treatment conditions in case of bankruptcy of the contracting party. The provision implements the principle of equal treatment of creditors, according to which the effects of bankruptcy should affect all creditors of the bankruptcy equally.

PRINCIPLE OF INVALIDITY OF CONTRACTUAL RESERVATIONS IN THE EVENT OF THE PARTIES’ BANKRUPTCY

The provision of Article 83 of the Act on Bankruptcy is ius cogens (the parties may not modify its content or exclude its application by way of an agreement). It should be stressed that the effect of invalidity does not affect the entire contract, but only provisions infringing Article 83 of the Act on Bankruptcy. Article 58 § 3 of the Civil Code, which allows for the invalidity of the entire legal act in the case of proving that without the provisions affected by invalidity the whole act would not have been performed, will not apply here.

It is also permissible to include a clause in the contract which reserves the right to terminate the contract in the event of a state of threatened insolvency, as well as the actual state of insolvency. In particular, it is possible to terminate the contract in the event of an event resulting in a deterioration of the contractor’s financial situation. However, the envisaged provisions cannot be connected with bankruptcy proceedings. Such clauses may, for example, indicate the values of financial ratios, the achievement of which may result in the termination of the contract.

REGULATIONS IN THE RESTRUCTURING LAW

It is worth mentioning that a similar regulation is provided for by the provisions of the Restructuring Law Act. Pursuant to Art. 225 of the Restructuring Law Act, the provisions of the agreement, which reserve the right to amend or terminate the legal relationship to which the debtor is a party in the event of filing an application for approval of the composition or approval of the composition, are invalid. On the other hand, pursuant to Art. 247 of the Restructuring Law Act, in the case of accelerated composition proceedings, the provisions of the agreement reserving the right to change or terminate the legal relationship to which the debtor is a party in the event of filing an application for the opening of accelerated composition proceedings or its opening are not valid. This provision is also applied in composition proceedings (Article 247 in conjunction with Article 273 of the Restructuring Law Act) and in cure proceedings (Article 247 in conjunction with Article 297 of the Restructuring Law Act).

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