I. SUPREME COURT JUDGEMENT OF 21st MARCH 2012

The Supreme Court judgement of 21st March 2012 sets the criteria for the qualification of credits arising from continuing performance contracts.

In this case, an energy supplier demanded the termination of the supply contract to a company that was in insolvency proceedings. At the time, the company owed amounts accrued prior to the date of declaration of insolvency. The supplier announced to the insolvent company that they were to cease the energy supply; however, the Commercial Court held that in the interest of the continuation of the insolvent business the contract should continue and asked the supplier not to cut off the energy supply. The energy suppliers requested the Commercial Court to terminate the contract or subsidiarily declare the persistence of the contract and order the insolvent company to clear its debts incurred prior to and after the insolvency declaration against the bankruptcy assets.

The judgement of the Commercial Court indicated the validity of the supply contract and that the credits generated prior to the declaration of insolvency should be understood as mass credits (créditos de la masa) and credits arising from then onwards should therefore be considered as credits against the bankruptcy assets.

The Provincial Court of Murcia reaffirmed the judgement.

The Supreme Court, nevertheless, quashed the judgment of the Provincial Court and held that:

A) The contract for energy supply must be understood as a continuing performance contract.

B) Credits arising prior to or after the declaration of insolvency derived from the energy supply contract should be considered as “credits against the bankruptcy assets”.

The basis for this decision is as follows:

  1. The energy supply company requests the termination of the contract but the plaintiff is required to maintain the supply, despite the existence of legal grounds for its termination.
  2. The power of resolution of continuing performance contracts may be exercised where the breach took place prior to the insolvency declaration, which was the case here. However, in this case the request should be rejected.
  3. Article 62.3 of the Insolvency Act allows for, in the interest of the insolvent company, even if there is a fair cause for termination, the judge to order performance of the contract, the insolvent company being obliged to pay the full amount of due and future invoices upon the maturity date. With the aim that the insolvent company may be able to continue its activity, the plaintiff is ordered to continue the contract.
  4. In accordance with Article 84.2 of the Insolvency Act, credits against the bankruptcy assets are understood to be those resulting from services payable by the insolvent company in contracts with reciprocal obligations pending compliance continuing in force after the insolvency declaration.
  5. The potentially insolvent credit (generated prior to the declaration of insolvency) becomes a credit against the bankruptcy assets, derived from forcing the maintenance of the contract in force and is a sacrifice that is required in order to continue operating the insolvent company, depriving the plaintiff of the right to terminate the contract.

II. CONCLUSION

Consequently, the final judgement decrees that both the energy bills due prior to the defending company’s declaration of insolvency as well as bills accrued after that declaration must be against the bankruptcy assets.

However, it should be noted that this victory could, in the moment of truth, be very insignificant to the extent that the mere fact that a credit qualified against the bankruptcy assets does in no way guarantee its recovery, although it is true that a credit against the bankruptcy assets has a better chance of recovery than an ordinary insolvency credit.

For more information, please contact:

Eduardo VILÁ: vila@vila.es/en