Business bankruptcy cases are not uncommon in the courts of the Republic of Kazakhstan. The basis for the bankruptcy of an enterprise, as specified in the law, is the insolvency of the debtor. However, when initiating bankruptcy proceedings, the question may arise of how to deal with concluded, but not yet executed, contracts and obligations?
IS THE BANKRUPTCY OF THE ORGANIZATION GROUNDS FOR REFUSAL TO PERFORM THE CONTRACT?
According to the general provisions enshrined in Article 377 of the Civil Code of the Republic of Kazakhstan , an obligation is terminated by the liquidation of a legal entity (debtor or creditor).
From the meaning of the cited norm, it can be concluded that the very initiation of bankruptcy proceedings by the court of the debtor is not a basis for the refusal of the other party (counterparty) of the contract from its execution. The same is expressly stated in paragraph 1 of Article 8 of the Law of the Republic of Kazakhstan “On Rehabilitation and Bankruptcy” . According to this provision of the law, the initiation of bankruptcy proceedings against the debtor is not a basis for a unilateral refusal to perform the contract at the initiative of the counterparty and does not entail the termination of this contract.
Thus, the counterparty of the debtor, regardless of the initiation of bankruptcy proceedings by the court, is not entitled to refuse the concluded agreement and is obliged to execute it properly. In this case, the agreement concluded between the parties on the refusal to execute the contract and on the termination of its validity, due to the initiation of bankruptcy proceedings, is invalid.
IN WHAT CASES IS A BANKRUPTCY MANAGER OBLIGED TO REFUSE TRANSACTIONS CONCLUDED BY THE DEBTOR?
In accordance with paragraph 3 of Article 8 of the Law “On Rehabilitation and Bankruptcy”, the bankruptcy manager, based on the decision of the committee of creditors, is obliged:
- modify, terminate, withdraw from the contract or
- challenge the validity of the contract concluded by the debtor before the initiation of bankruptcy proceedings and demand the return of the property transferred by the debtor.
Thus, in addition to the grounds specified in Article 7 of the Law “On Rehabilitation and Bankruptcy”, the bankruptcy manager is obliged to refuse to perform the contract (to change, terminate or challenge it) if there is an appropriate decision of the creditors’ committee.
IS IT POSSIBLE TO SET OFF CLAIMS DURING THE BANKRUPTCY PROCEEDINGS?
Set-off of claims, in accordance with paragraph 1 of Article 370 of the Civil Code, is one of the ways to fulfill the debtor’s obligation under any transaction.
Paragraph 4 of Article 8 of the Law “On Rehabilitation and Bankruptcy” states that from the moment a bankruptcy case is initiated and until the court ruling on the termination of the bankruptcy case or the court decision on declaring the debtor bankrupt comes into force, the set-off of mutual claims between the debtor and its creditors is not allowed.
In this regard, the Law “On Rehabilitation and Bankruptcy” expressly prohibits both the debtor and the creditor from taking actions aimed at fulfilling obligations by way of set-off. In case of violation of this prohibition, the bankruptcy manager has the right to file a lawsuit in court and challenge the actions on such a set-off.