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The principal may rescind the contract if a bankruptcy petition has been filed against the contractor – are you sure?

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​by Agnieszka Boncławek

23 January 2024


In everyday legal and business practice, you may come across different versions of the contractual provision mentioned in the title of this article. Although its wording may vary, the meaning and purpose are invariably the same – principals (ordering parties, buyers, customers) want to be protected if:

  • the other party is declared bankrupt,
  • the other party’s “financial standing has deteriorated significantly”,
  • the other party is “under threat of insolvency”. 

Incidentally, the last two provisions, taken from practice, are worded rather ambiguously and leave room for (over)interpretation. Regardless of their wording, each of them may be considered to hinder or prevent the achievement of the objectives of bankruptcy proceedings. In a lawsuit against the other party to the affected contract, the receiver may claim that such provisions are ineffective.

Reasons for ineffectiveness of a contractual provision in bankruptcy proceedings


The last two provisions are in many situations a disguised version of the first one. In each case, their purpose is (or may be) to ensure that a party to the contract may defend itself against its claim being included in bankruptcy proceedings. Remember that the overriding objective of business bankruptcy proceedings is to satisfy creditors to the maximum extent possible and, then, to enable the bankrupt to continue to operate in the market and fulfil its obligations.

The achievement of objectives of the proceedings is also hindered or prevented if the contractual provisions adversely affect the possibility of running the bankrupt's enterprise (e.g. upon declaring bankruptcy, the lessor terminates the lease for the bankrupt's key warehouse from which deliveries to customers are made) or liquidating the bankrupt's estate in the best way for the creditors.  

To sum up, a contractual provision – the real purpose of which is to favour one creditor over others in the event of declaring the contractor bankrupt, by making it more difficult to achieve the bankruptcy objective – is ineffective against the bankrupt's estate (Article 84(1) of the Bankruptcy Law). This means that such a clause in the contract will not have the expected effect, and in the event of bankruptcy declaration, the provision itself will be treated as if it did not exist. However, each legal relationship must be approached on a case-by-case basis.

Bankruptcy declaration does not rule out terminating contracts with the bankrupt


When we look at the bankruptcy law as a whole, a more optimistic picture emerges. We cannot conclude that the lawmakers’ intention was to render ineffective all the contractual rights of the bankrupt’s business partners. The purpose of the regulation is to render ineffective only such contractual rights which the bankrupt's partner has not exercised prior to the declaration of bankruptcy and which are contrary to the objectives of the bankruptcy proceedings. Therefore, the contract may be rescinded if the statutory or contractual grounds for such rescindment arose before the declaration of bankruptcy, which is the cut-off date in this case.

The contract may also be rescinded or terminated if, after declaring bankruptcy, the receiver does not perform the obligations under the contracts that remain in force. After that date, the other party may terminate the contract on general terms.

Contact

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Agnieszka Boncławek

Attorney at law (Poland)

+48 606 910 468

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