The foreign creditor in bankruptcy proceedings in Spain (3): Termination of contracts

As a general rule, the bankruptcy regulations in Spain establish that the declaration of bankruptcy does not automatically imply the early termination of a contract, meaning that the general principles of contract law still apply. In line with the non-interruption of the business or professional activity of the bankrupt, any clause providing the faculty to r terminate a contract by the mere declaration of bankruptcy will be dismissed.

Executory contracts with reciprocal obligations

Reciprocal obligations are obligations where each party is both a creditor and a debtor of one or more bilateral obligations. We can distinguish between:

Contracts with reciprocal obligations, pending fulfilment by one of the parties

The cases in which one of the parties has fully proceeded to the full performance of its reciprocal contractual obligations while the other party’s partial or total fulfilment of the performance of its reciprocal obligations is pending.

The regulations establish the inclusion of said credit or debt in the active or passive mass of the insolvency proceedings, as the case may be.

Contracts with reciprocal obligations, pending fulfilment by both parties

Generally, this situation occurs when:

  • Neither of the two parties has yet fulfilled their respective contractual obligations
  • There is partial performance of the contract
  • In continuing-performance contracts.

For these contracts, the bankruptcy regulations establish that the declaration of bankruptcy (by itself) will not affect their validity; each party must fulfil their contractual obligations. The obligations of the insolvent party will be considered charged to the insolvency mass.

Exceptions

According to bankruptcy regulations, there are several exceptions or specific circumstances where it is possible to withdraw from the contract or where it is possible to apply laws that establish or allow for its termination following the declaration of bankruptcy. For example, administrative, agency, insurance or mandate contracts.

However, the new regulations do not mention the power to terminate contracts with reciprocal obligations pending fulfilment by both parties, except for breaches after the declaration of bankruptcy.

In this sense, there is a distinction between:

  • Non-compliance before the declaration of bankruptcy (termination is possible for continuing-performance contracts and not possible for single-performance contracts)
  • Non-compliance after the declaration of bankruptcy (termination is possible), with retroactive effect except for continuing-performance contracts.

José María Mesa & Rosario Rodríguez

For additional information regarding the termination of contracts within the context of bankruptcy,

This article is not considered legal advice