Effects of the Bankruptcy Procedure Declaration on Contracts

Validity of contracts with reciprocal obligations

Article 61 of Spanish Bankruptcy Law contains the effects of the declaration of bankruptcy procedure on synallagmatic contracts. In general, the mere declaration of bankruptcy procedure will have no effect on pre-existing contracts. If, after the declaration of bankruptcy, one of the parties has not fulfilled its obligations, these obligations will be maintained. If the debtor is responsible for the outstanding obligation, its debt will be included in the liabilities. In this way, the services which the debtor is obliged to provide will be charged to the insolvency estate. If it is the debtor to whom it is owed, his claim will be included in the assets.

However, there is a possibility that outstanding contracts will be terminated after the declaration of bankruptcy procedure. This must be requested by the insolvent party, in the case of intervention. By the Receivership, in the case of suspension. The termination must be in the interests of the bankruptcy procedure. This request will be presented to the bankruptcy judge. The bankruptcy judge will issue an order declaring the termination of the contract if there is an agreement between parties. Otherwise, the differences will be substantiated by the insolvency procedural plea, on which the bankruptcy judge will decide. The judge will decide on the restitutions and compensation to be charged to the estate.

A special feature exists if the contract on which there is no agreement is a financial lease. This consists in the fact that the incidental claim must be accompanied by an independent expert appraisal of the assets. Thus, the judge may take it into account when deciding on possible compensation.

The clauses allowing the contract to be terminated in the event of a declaration of bankruptcy procedure will be invalid. They will not be valid in any case, whether they empower the debtor or the other party to terminate it.

Termination for non-compliance

Contracts that have been breached by one of the parties after the declaration of the bankruptcy procedure can be terminated. Successive contracts can also be terminated if the breach occurred before the declaration of bankruptcy procedure.

The termination action will be exercised through the insolvency procedural plea and before the bankruptcy judge. However, even if there is cause for resolution, the judge may order the fulfilment of the contract. The judge will take this decision if it is in the interests of the bankruptcy procedure. In that case, the debtor’s due services will be charged to the bankruptcy procedure estate.

With respect to the obligations that have not yet expired, they will be extinguished with the termination of the contract. There are two cases of overdue debts:

• If the default of the insolvent party precedes the declaration of insolvency. The credit of the other party will be included in the bankruptcy procedure
• If the default is subsequent. The creditor’s claim shall be satisfied from the estate

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Jurisdictional and administrative procedures in the Bankruptcy Procedure.

Special cases

What has been established so far will not be affected to:

• The power to unilaterally terminate the contract in accordance with the law.
• Cases in which laws allows the termination of the contract in the event of a declaration of bankruptcy procedure.

Employment contracts

The declaration of bankruptcy procedure affects employment contracts. The procedures that have the bankrupt as an employer will be processed before the bankruptcy judge in matters of:

• Substantial modification of the working conditions of a collective nature;
• Collective transfer;
• Collective dismissal; and
• Suspension of contracts and reduction of working hours.

Where such proceedings are pending, they shall also be referred to the bankruptcy judge.

To this end, the Spanish Bankruptcy Law establishes three requirements that must be met by the application for collective measures:

2. Those entitled to do so must apply to the bankruptcy judge. They are entitled to make this request:
   1. The Receivership;
   2. the debtor; or
   3. the employees of the bankrupt party through their legal representatives.
3. The report of the Receivership regulated in Article 74 Spanish Bankruptcy Law and following, must have been issued. The application may be submitted before the report is issued if the wait is detrimental to the company or workers.
4. The application must include and justify the reasons why the collective amendments are requested. In addition, it must include the objective to be achieved by these measures.

The consultation period

Once the application is admitted for processing, the judge of the competition calls the consultation period. For this period, the representatives of the workers and Receivership will be called. The debtor will only be convened in case of intervention of their powers and prior judicial authorization. Therefore, it cannot be called in cases of suspension of its powers. The duration of the consultation period will be a maximum of 30 calendar days. The maximum will be 15 calendar days for companies with less than 50 employees.

The judge may replace the consultation period by the mediation or arbitration procedure applicable within the company. This must be requested by the Receivership or the workers’ representatives.

The agreement between the workers’ representatives and the Receivership

The consultation period shall result in an agreement between the workers’ representatives and the Receivership. For this agreement to be valid, it must have the agreement of the majority of the workers’ representatives. If such an agreement is reached earlier and accompanied by the application, the consultation period is not necessary.

The agreement shall contain the identification of the workers affected by the modification and the corresponding compensation.

Once the agreement has been reached, it will be communicated to the judicial secretary. Once communicated, he will ask the labour authority to issue a report on the agreement. This report must be issued within 15 days. For this report, the labour authority may hear both the workers’ representatives and the Receivership.

Once the judge receives the report or the term for its issuance ends, the proceedings will continue.

After the above, the bankruptcy judge will have 5 days to decide, by order, on the proposed measures. He must accept, if it exists, the agreement reached between the workers’ representatives and the bankruptcy receiver.

what happens if there is no agreement?

If no agreement, the judge will summon the person who had intervened in the consultation period to make allegations. They can also provide evidence. This appearance may be substituted by a written procedure of allegations for a period of 3 days. To make this modification the judge must consider it appropriate

Order suspending or terminating employment contracts

If the order declares the collective suspension or termination contracts, it shall be effective from the date of issue. It has the same effects as the employer’s extinctive or suspensive decision (Articles 51 and 47 of the Workers’ Statute). Or, where appropriate, it will have the effects of an administrative decision on a redundancy programme.

Several appeals may be lodged against the order. The main one is an appeal against a decision to replace a worker. But also, the rest of the appeals included in the Law 36/2011 regulating the Social Jurisdiction. These appeals may be filed by:

• The Receivership;
• Debtor;
• The workers’ representatives; and
• The Spanish Wage Guarantee Fund (FOGASA)

Appeals will be processed and resolved before the social order. They will not have a suspensive effect on the processing of the bankruptcy procedure or on the insolvency procedural pleas.

The workers’ representatives and FOGASA will process their actions against the order through the insolvency procedural plea in labour matters. But they may only use this route if the actions are strictly related to the individual legal relationship. Deadline for these actions is 1 month from the date on which the worker became aware of the order. The sentence on these actions can be appealed through the appeal of substitution.

The individual resolutions covered by article 50 of the Spanish Workers’ Statute (Hereafter, ET) will be considered as collective extinctions. They must be motivated by the economic situation or insolvency of the bankrupt party. They will be considered as such from the initiation of the procedure for the modification of collective conditions. This procedure is set out in article 64 of the Spanish Bankruptcy Law. Once this procedure has been initiated, all individual actions against the debtor will be suspended. The suspension will be maintained until the order terminating the collective termination is final.

The resolution agreeing to the suspension will be communicated to the Receivership. This will be done so that the credit that may arise from the suspension can be recognized as contingent. The order that determines the collective extinction will have the effect of res iudicata in the individual processes suspended.

Peculiarity in the event of substantial collective amendments contained in Article 41 of the Workers’ Statute (ET)

There is a peculiarity if a substantial modification of a collective nature. This amendment must be in accordance with Article 41 ET. In that case, the right to terminate the contract with compensation recognized in this article will be suspended. The suspension will be maintained during the processing of the bankruptcy procedure. And it may be extended for a maximum of one year.

Senior management contracts

During the course of the bankruptcy procedure, the debtor’s contracts with senior management may be terminated or suspended. The decision corresponds to the Receivership, ex officio or at the request of the debtor. This decision can be challenged by raising an insolvency procedure plea in labour matters before the bankruptcy judge.

If it is decided to suspend the contract, the senior manager may terminate it with one month’s notice. Th senior manager will retain his right to compensation.

In the event of the termination of the contract, the bankruptcy judge may moderate the compensation agreed in the contract. This indemnity must not exceed the limit established in the labor legislation for collective dismissal.

The Receivership may request the judge to delay the payment of the compensation until the qualification sentence is final.

Collective agreements

Changes to the conditions laid down in collective agreements may only affect matters permitted by labour law. In addition, the agreement of the workers’ representatives shall be required.

Contracts with Public Administrations

The effects of the bankruptcy procedure declaration on contracts signed between the debtor and the Public Administrations are different:

• Administrative contracts. These will be governed by the provisions of their special law
• Private contracts. These will be governed by the provisions of the Bankruptcy Law for contracts, and which have been discussed above.

If this article has been of interest to you, you can find more information in the following article:

Who is eligible to apply for a Bankruptcy Procedure?