terminable contract

Termination of contracts in the Bankruptcy Procedure

When is a contract terminable if one of the parties is in Bankruptcy Procedure?

1. When there is damage to the assets of the company in Bankruptcy Procedure. But, when is it understood that there is damage to the asset?

When there is damage to the assets of the Bankruptcy Procedure. As it was already indicated in the Sentence 622/2010, of October 27th SIC (RJ 2010, 7608), it can be understood as an unjustified patrimonial sacrifice.

What is the concept of “Unjustified Patrimonial Sacrifice”?

The Unjustified Asset Sacrifice implies a reduction in the value of the asset on which later, once the Bankruptcy Procedure has been declared, the assets will be constituted ( art. 76 LC ), and, furthermore, it must be unjustified.

The lack of justification must always underlie. And it does so in cases where Article 71.2 LC presumes, without admitting evidence to the contrary, the damage. Apart from these cases, the circumstances that arise when the act of disposition entails a pecuniary detriment must be examined. In order to appreciate its justification, it is necessary that the damage goes beyond the subjective reasons that form the economic interest. In principle, the accreditation of the damage corresponds to the person who requests the termination (Article 71.4 LC). Unless the impugned act is affected by any of the presumptions of damage provided for in Article 71.3 LC. And that by admitting evidence to the contrary the burden of proving that the contested act does not harm the assets is transferred to the demanded.

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For the purposes of termination of contracts, not all payments are detrimental to the assets.

In the case of payments, not all are detrimental to the assets. Their justification is determined by the nature of the debt satisfied, as well as by its enforceability. There is no justification for paying a credit that is not due or that is not required.

Therefore, in principle, a payment due within the two years prior to the declaration of Bankruptcy Procedure, provided that it is due and payable, is generally justified. And therefore it does not constitute a damage to the assets. However, this does not exclude that exceptional circumstances may exist on some occasions. These circumstances (such as the situation of insolvency at the time of payment and the proximity to the application and ruling of the Bankruptcy Procedure, as well as the nature of the credit and the status of its creditor) may deprive some payments of their justification to the extent that they constitute a breach of the par condicio creditorum.

2. When is there bad faith for the purpose of terminating contracts?

The LC has required more than simple knowledge of the insolvency situation or proximity to the mentioned debtor’s insolvency. And even more than just the detrimental effects that the transfer could cause to the creditors.

Bad faith is composed of two aspects. A subjective aspect and an objective aspect. The subjective one “does not require the intention to harm”. Only “the awareness that other creditors are negatively affected -aggrieved-. In this way, by aggravating or hardening the economic situation of the debtor, the effectiveness against him of the rights of others is notoriously weakened”. And it is complemented by the objective, evaluative aspect of the creditor’s conduct. This conduct consists in it being worthy of the ethical repulse in legal traffic”. In this sense, Sentences 548/2010, of September 16th, (RJ 2010, 5597), and 662/2010, of October 27th (RJ 2010, 7608)

Is “partial” termination of contracts possible in the case of complicated legal transactions?

The Sentence 210/2012, of April 12th RJ 2012\590 (Speaker: Gimeno Bayon Cobos) introduced the termination of complicated legal transactions where the termination of a specific clause was intended to attribute merely liquidation effects and not ineffectiveness to the reintegration action.

The law does not specify what needs to be understood as “damage to assets”. Despite this, there is no discrepancy at the doctrinal level, nor do in the decisions of the Tribunals, which state that in any case those which cause an unjustified detriment or reduction of the bankrupt’s assets are prejudicial.

There is no obstacle to the termination of a particular contract. Even if it is economically related to another and, consequently, there is nothing to prevent terminating the exclusive concession contract, or part of it, while maintaining the sale and purchase agreement of the branch of activity.

1) There is no law that expressly prohibits partial termination in cases where it is materially possible (in this sense with reference to termination by fraud, Sentence 1182/2006, of November 21st.

2) The reparation of the damage allows the effects of the termination to be modulated.

Can the (reciprocal and simultaneous) restitution of provisions be compensated?

Not if it is a Bankruptcy Procedure credit (Article 58 LECO). But yes, if it is a credit against the estate (SAP of Alicante, of April 2008, ratified by the Sentences after the one of March 19th 2013.

What happens if there is no cash flow to return the provisions?

It will be paid on its due date (84.3 LECO) because it is a credit against the estate. The reference to the requirement of simultaneity must be considered as “at maturity”. In this sense (although not explicitly) the SAP of Madrid, of December 19th 2008 has pronounced.

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