Understanding the Impact of Bankruptcy on Contractual Relationships
min readWhen a contracting party declares bankruptcy, it is crucial to grasp the implications for existing contracts. This article highlights the most important legal ramifications for the non-bankrupt parties involved.
Continuation or Termination
Bankruptcy proceedings do not automatically terminate ongoing contracts. Termination can only occur if dictated by statutory law or mutual agreement. However, the non-bankrupt party has the right to suspend its obligations until it receives sufficient guarantees for counter-performance. If such guarantees are not provided within a reasonable timeframe, the non-bankrupt party may terminate the agreement.
Proof of Debt
The solvent party has the right to file its performance claim as part of the bankruptcy process. All claims are converted to monetary demands, including those initially seeking specific performance. This is true for continuing obligations (Dauerschuldverhältnisse) where claims may be filed as bankruptcy claims from the opening of bankruptcy proceedings until the next possible termination date, or the end of the fixed contract term. The solvent party's recovery is limited to the bankruptcy dividend, which could be zero if the bankrupt party's assets are insufficient.
The Bankruptcy Administration's Right to Fulfill Contracts
The bankruptcy administration may decide to fulfill partially executed bilateral contracts to enhance the value of the bankruptcy estate, benefiting the creditors collectively. This decision prioritises creditors' interests without regard for the other contractual party's position. Upon the bankruptcy administration's intervention, the counterparty's claims become so-called "estate debts" which take precedence over other creditors' claims.
Non-Exercise of the Right to Fulfill Contracts
If the bankruptcy administration decides not to intervene, it does not mean the contract is terminated. Instead, the contract must be settled within the framework of the bankruptcy proceedings. The exact process for this resolution remains to be fully determined. However, the Swiss Federal Supreme Court appears to support the approach that allows the non-bankrupt party to claim damages for either the negative or positive interest in the bankruptcy proceedings.
Preparation and Planning - Get in touch
Foresighted contract drafting and systematic planning are essential to minimise the negative impacts of a contracting party's bankruptcy. For further guidance on bankruptcy matters, please get in touch. We can assist and answer any questions.
Debt Enforcement and Bankruptcy Act : SR 281.1 - Bundesgesetz vom 11. April 1889 über ... | Fedlex (admin.ch) (available in German only)
