The consequences of bankruptcy for ongoing contracts
When a company is declared bankrupt, uncertainty quickly follows.
Often there are many ongoing contracts with customers, suppliers, landlords/(sub-)tenants, contractors, etc.
What happens to these ongoing contracts? Can you (or the trustee) terminate them? Do they have to continue to be performed? And by whom?
In this Wanted Fact, we summarise the key principles for you.
Bankruptcy does not automatically terminate the contract
As a general rule, a contract does not automatically end if one of the parties becomes bankrupt.
The contract therefore continues to produce its effects, even if your contracting party is bankrupt.
Your contracting party’s bankruptcy is also not, in itself, sufficient for you to unilaterally terminate an ongoing contract. However, you can provide contractually in advance that, in the event of bankruptcy, the contract will automatically end. In that case, the contract ends without intervention by the trustee.
In practice, performance of the contract is most often put “on hold” until there is clarity about the fate of the ongoing contracts and the trustee’s position.
The trustee takes over
From the date of bankruptcy, the trustee takes over the management of the company. The director or manager can no longer make decisions from that moment onwards. As a result, they no longer have any say regarding ongoing contracts.
The trustee must accept the bankrupt company’s contracts and contractual commitments in the state in which they are found.
Pursuant to Article XX.139 of the Belgian Code of Economic Law, the trustee must, after their appointment, decide without delay whether or not to continue performing the bankrupt company’s ongoing contracts.
The trustee may therefore decide to unilaterally terminate an ongoing contract if that termination is necessary for the administration of the estate.
Only if the contract can offer an economic benefit to the estate will continuation be justified. Conversely, if the contract increases the estate’s liabilities without any benefit, it will in principle be terminated.
If, for example, the trustee wants to sell a business as a going concern, the trustee will continue the necessary ongoing contracts in order to transfer them together with the business. Think, for instance, of a commercial lease for a shop, contracts with customers, a software licence, etc.
If the contract is continued, the remuneration due will be considered an expense of the estate and will therefore have priority over debts incurred before the bankruptcy.
The trustee is therefore obliged to decide what to do with ongoing contracts, but the trustee is certainly not above the law. If the trustee decides not to continue an ongoing contract, they will have to bear the consequences and accept the contractual termination compensation due. Whether you will actually recover that compensation will depend on whether there are assets in the bankruptcy and on the ranking of creditors.
The trustee will never have to pay these termination compensations “out of pocket”.
What can you do as a contracting party who discovers the bankruptcy?
If the trustee does not terminate the contract, the contract in principle continues. However, that is often not desirable for you as the contracting party.
If the trustee does not immediately communicate their decision regarding the contract, you can formally request the trustee to take a clear position.
After such formal notice, the trustee must explicitly communicate their decision to the contracting party within 15 days. If there is no response within that 15-day period, the contract must be considered terminated.
If the trustee unilaterally terminates the contract, the termination compensation due for unilateral (unjustified) termination of the contract will apply. The contracting party can include that compensation in their proof of claim. Whether you will actually recover that compensation will depend on whether there are assets in the bankruptcy and on the ranking of creditors.
The trustee will never have to pay these termination compensations “out of pocket”.
Exception to the rule: contracts that end in case of bankruptcy
There are three exceptions to this principle:
- Intuitu personae contracts:
Contracts that must be performed specifically by the person behind the company end in the event of bankruptcy. The underlying person (often the director) no longer performs tasks from the bankruptcy onwards. The trustee takes over the management and, as a result, an essential characteristic of the contract disappears.
The law also provides various exceptions to the rule. For example, it is legally provided that a commercial agency agreement or a mandate automatically ends in case of bankruptcy.
- Contracts with an express termination clause or bankruptcy condition:
You can expressly provide in your contracts that the contract ends immediately and without costs in case of bankruptcy of one of the parties.
Contacteer onze Wanted Lawyers voor meer informatie over dit onderwerp!