Bankruptcy and Pending Contracts in Switzerland
Bankruptcy constitutes a complex legal situation that significantly impacts pending contractual relationships. In Swiss law, this process is governed by the Federal Act on Debt Enforcement and Bankruptcy (DEBA), which establishes precise rules concerning the fate of contracts when an entity faces insolvency proceedings. The question of whether pending contracts are maintained or terminated represents a major issue both for the bankrupt debtor and for their contracting parties. The legal mechanisms put in place aim to preserve a balance between creditor protection and the possibility of economic recovery. Our law firm accompanies businesses and individuals daily when confronted with these delicate situations, offering precise expertise in the application of legal provisions relating to pending contracts during bankruptcy proceedings.
General Principles Applicable to Pending Contracts
In matters of bankruptcy, Swiss law does not provide a general rule applicable uniformly to all pending contracts. Certain guiding principles may nonetheless be identified:
- The opening of bankruptcy does not automatically extinguish pending contracts
- The bankruptcy administration generally has an option right to decide the fate of contracts
- The bankruptcy estate substitutes for the bankrupt party in its contractual relationships
- Claims arising after the opening of bankruptcy constitute debts of the estate
The Option Right of the Bankruptcy Administration
One of the fundamental mechanisms in the treatment of pending contracts is the option right conferred on the bankruptcy administration. This right allows it to choose between executing the contract for the benefit of the estate or not executing it. This prerogative aims to maximise the value of available assets to pay creditors.
The exercise of this option right is, however, subject to several limitations:
- It may only be exercised on bilateral contracts not yet fully executed by both parties
- The decision to continue executing a contract must serve the interests of the body of creditors
- Certain special provisions of Swiss law may restrict or modulate this option right for certain specific types of contracts
Specific Regimes According to Contract Type
Swiss law applies distinct rules depending on the nature of contracts confronted with a bankruptcy situation.
Employment Contracts
Employment contracts are subject to particular treatment in the event of bankruptcy. Article 333 CO provides that employment relationships pass to the acquirer with all associated rights and obligations if the business continues its activity. However, in the event of outright bankruptcy, the notice periods provided by art. 335c CO apply. Employees' claims benefit from first-rank privilege under article 219 DEBA.
Commercial and Private Leases
For lease contracts, article 266h CO provides that the tenant's bankruptcy allows the landlord to demand security for future rents. If such guarantees are not obtained within a reasonable period, the landlord may terminate the contract. Moreover, the bankruptcy administration may decide to take over the lease for its own account, transforming rents accruing after the bankruptcy into debts of the estate.
Work Contracts
In the context of work contracts, the bankruptcy administration may exercise its option right to continue the works if this proves profitable for the estate. In the event of non-execution, the client may assert a damages claim in the bankruptcy, while the bankrupt contractor may claim payment for work already performed.
Sale Contracts
For sale contracts, the fate differs depending on the state of execution of the contract. If the goods have been delivered but not paid for, the seller may exercise their right of revendication under strict conditions defined by article 242 DEBA. If the goods have not yet been delivered, the administration may choose to execute the contract if this presents an advantage for the estate.
Company Contracts
The bankruptcy of a partner generally leads to the dissolution of the simple partnership under article 545 CO. For commercial companies, the consequences vary depending on the legal form: automatic dissolution for general partnerships, possible continuation for limited companies or limited liability companies with exclusion of the bankrupt partner.
Protection of the Bankrupt Party's Contracting Parties
Rights of Retention and Revendication
The right of retention, governed by articles 895 et seq. of the Swiss Civil Code, allows a creditor to retain property belonging to the bankrupt debtor until payment of their claim, provided there is a connection between the property and the claim. In the context of bankruptcy, this right confers on the creditor a privileged position.
The right of revendication is provided for by article 242 DEBA and allows the seller to recover goods dispatched to the bankrupt party if certain conditions are met, particularly if the goods have not yet been paid for and have not yet reached the bankrupt party or their representative.
Set-off and Exception of Non-performance
Set-off constitutes an effective means of protection for the contracting party of the bankrupt who is simultaneously creditor and debtor. Article 213 DEBA authorises set-off in bankruptcy under certain conditions, offering the contracting party the possibility of extinguishing their debt to the extent of their claim.
The exception of non-performance (exceptio non adimpleti contractus) allows a party to suspend the performance of their own obligations as long as their contracting party does not perform theirs. This mechanism remains applicable in the event of bankruptcy and may constitute a lever of negotiation with the administration.
Specific Contractual Clauses
Parties may anticipate the risk of bankruptcy by inserting specific clauses in their contracts. However, the effectiveness of these clauses is limited by mandatory law. Thus, automatic termination clauses in the event of bankruptcy are generally considered unenforceable against the estate, as they contravene the discretionary power of the bankruptcy administration. By contrast, real guarantees (pledges, mortgages) and personal guarantees (suretyships) retain their effectiveness and allow the creditor's position to be secured against the risk of insolvency.
Frequently Asked Questions on the Fate of Contracts in Bankruptcy
Does bankruptcy automatically terminate pending contracts?
No. Bankruptcy does not automatically terminate contracts. The bankruptcy administration decides which contracts it maintains (if profitable for the estate) and which it terminates. Termination must comply with legal or contractual deadlines. Contracting parties have specific rights depending on the type of contract (lease, employment, sale, etc.).
What happens to employment contracts in a company bankruptcy?
Employment contracts are not automatically terminated. The bankruptcy administration may maintain them if it continues the activity. If it decides to cease operations, the statutory notice periods apply (art. 333 CO). Wages during the notice period are debts of the estate (priority). Arrears from the last 6 months benefit from first-class privilege.
Can a commercial tenant terminate their lease if the landlord goes bankrupt?
Yes. In the event of the landlord's bankruptcy, the bankruptcy administration takes over the landlord's obligations. If it wishes to sell the property, the tenant benefits from the legal protection of leases (the lease may only be terminated according to ordinary rules). Conversely, in the event of the tenant's bankruptcy, the administration may terminate the lease with the statutory notice period (art. 266h CO).
What happens to pending sale contracts in a bankruptcy?
For sales not yet executed, the bankruptcy administration may choose: 1) to execute the contract if this is profitable for the estate, 2) to terminate it (the contracting party then becomes a creditor of the estate for their damages). Termination of a purchase option or a forward contract gives rise to a third-class damages claim.
Are the rights of a pledgee over leased assets affected by bankruptcy?
No. Pledgees (mortgages, movable pledges) retain their rights over the pledged assets irrespective of the bankruptcy. They are paid in priority on the proceeds from realisation of the pledged asset, even before first-class creditors. If the proceeds are insufficient, the balance becomes a third-class claim in the bankruptcy.