Contracts during reconstruction – unfavourable agreements can be removed
The Reconstruction Act came into force on 11 May 2020. We have previously provided an overview of the most important changes in relation to the previous debt negotiation institute. The change in the law entails further limitations on the other contracting party’s right to terminate an agreement following a payment default. The termination of an agreement less than a month before a reconstruction will not be binding on the debtor.
The greatest practical contractual significance of the new reconstruction rules might be that an over 20-year-old provision for extraordinary termination of agreements has come to life. This will be a powerful tool in a reconstruction process.
Previous article about the new reconstruction rules
Ability to clear away unfavourable agreements – extraordinary termination right
Pursuant to Section 7-6, first paragraph, first sentence of the Recovery Act, the debtor may «regardless of the provisions of the agreement on termination, terminate the agreement with customary notice, or if such custom does not exist, with three months’ notice». This means that the debtor can get rid of unfavourable agreements through a reconstruction process.
The extraordinary right of termination has existed for over 20 years, but has barely been used. The fact that the provision has hardly been used in practice is not due to the lack of power in the provision, but as a result of the fact that the old debt negotiation rules were useless and have barely been used in the last 30 years. The provision is undoubtedly effective in a reconstruction and will be a valuable tool for clearing away unfavorable agreements etc.
There are no conditions for the termination right and there is, in principle, no requirements that the content of the contract is unfavourable to the debtor, etc. The right of termination is unconditional and does not need any justification. The provision can be used whether the agreement is unfavourable to its content or the debtor needs to clear the agreements in order to scale down the business etc.
After a termination, the other contracting party will have a claim for damages against the debtor. However, such a claim will, pursuant to the second paragraph of the provision, only have the status of dividend claim. This means that the other contracting party’s claim will be comprised by a composition in line with other unsecured creditors.
The other contracting party is not without negotiating arguments or legal instruments
Pursuant to the provision, the other contracting party has no right of objection and must in principle comply with a termination. However, the other contracting party is not completely without negotiating arguments or legal instruments. First, by virtue of being a creditor, the other contracting party will have the right to vote in the composition, and this way influence whether the debtor receives more than 50% support for the composition. The other contracting party may also object that the District Court affirms the composition.