Every contract practically stipulates that if any of the parties binding a contract with each other goes bankrupt or insolvent, this may lead to any of the parties terminating or ending the contract. Negotiation is rare in these kinds of terminations of contracts unless there is a clause which states that the ownership of property is reversible often intellectual property. This essay attempts to take a peek at the same requirements and investigates whether they can be enforced or not.
When a business is facing its ups and downs, it is not in the position to cover its debts or pay back its creditors; it is allowed to file in surveillance of federal courts, for bankruptcy defense accordingly either for liquidation under Chapter 7 or Chapter 11.
“Chapter 7 filing means that the business intends to sell all its assets, distribute the proceeds to its creditors, and then cease operations” (TradesReview.com).
“A Chapter 11 is the part of the U.S. Bankruptcy Code describing how a company or debtor can file for court protection. In the case of a corporation, reorganization occurs under the existing management” (TradesReview.com).
Legally, either the debt burden will be relieved to a great extent by terminating the contracts in motion or sell most of its assets. All this will give the business an opportunity to take a new start from the scratch. Mostly when the debts are more than the assets, the business owners are not left with anything because all the assets are confiscated to cover the debts and expenses.
Stocks are reversed, stakeholders are terminated, and in turn the creditors become the owners of the company who try to earn profits from the business in order to cover their losses. How this business is reformed and revamped is all a part of the Chapter 11 of the Code of Bankruptcy in America.
The Typical Ipso Facto Clause
Under this clause, commonly the provision that lies factual is that without notice, this Agreement shall be ceased without any prior notice, either by any of the party facing bankruptcy or settlement of debts due to insolvency.
This is applicable mostly in seizure of contracts and miscellaneous agreements. What activates this need for termination includes factors such as:
· An intentional bankruptcy;
· Insolvency of any of the parties in contract
· Liquidation (George and Chattopadhyay)
The main catalysts for terminating a contract are either of the parties facing insolvency or liquidation. However, when the monetary situation of only one of the parties involved in the contract gets weak, the more economically secure party may be adamant that the other party walks out of the contract.
These termination requirements may be regular, but can they be enforced?
In short, NO; the two main requirements of the bankruptcy code trigger this outcome.
“Section 541(c) of the Bankruptcy Code provides that an interest of the debtor (the bankrupt company or person) in property becomes "property of the estate," meaning that the debtor does not lose the property or contract right, despite a provision in an agreement
A second Bankruptcy Code provision, Section 365(e)(1), governs ipso facto clauses in executory contracts, which are agreements under which both sides still have important performance remaining” (Kannel and K.) .
One cause is that below the older Bankruptcy Act of 1898, reinstated in 1979, these clauses based on facts were implementable. Over the passing time, legal bodies and small businesses are used to counting them in their agreement forms and they have sustained to inscribe them into many agreements. Since it's for all time probable that the Bankruptcy Code might be altered to re-establish the previous code, lawyers frequently observe slight motive to exclude them.
One more important reason for which this termination cannot be enforced is that it can only be enforceable if the bankruptcy is filed for in actual. If the contract already mentions that the contract will be terminated in case of insolvency then this termination is possible. However, if the bankruptcy is headed for and the factual clause is not made an element of the unique conformity, then the contract cannot be finished even in the case of bankruptcy.
“Parties include termination on bankruptcy provisions in contracts all the time, despite the general rule making them unenforceable in bankruptcy” (George and Chattopadhyay). Unluckily, most of them do so without understanding that the proviso may be unsuccessful, and that can lead to problem. If implementing an ipso facto clause is significant to any of the party’s agreements, particularly if you also look forward to the most difficult deterioration of intellectual assets or other privileges ahead of this execution of the contract.
Some of the very common contracts which are eligibly terminated in Chapter 11 insolvency comprise of “unsecured loans, union contracts, supply or operating contracts and real estate leases” (George and Chattopadhyay). The latter is eligible only if abandoning these agreements will be monetarily constructive to the business. After the filing of Chapter 11, it may take about a few months or maybe more than a year, for the company to get out of its insolvency.
George, E and P. Chattopadhyay. "One foot in each camp: The dual identification of contract workers." Administrative Science Quarterly 50. (1) (2005): 68-99.
Investorwords.com. Chapter 11. 2009. 3 May 2010 <http://www.investorwords.com/825/Chapter_11.html>.
Kannel, William W and Walker Adrienne K. Sales of Not for Profit Assets after The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. 2005. 3 May 2010 <http://www.mintz.com/newsletter/Bankruptcy-Law-Article-0705/index.htm>.
TradesReview.com. Chapter 7 vs. Chapter 13 Bankruptcy. 2009. 3 May 2010 <http://tradesreview.com/category/history-of-international-trade/chapter-37-international-trade-end-of-chapter-solutions.html>.