What Happens to Contracts, Income and Living Expenses During Bankruptcy?

A bankruptcy order does not automatically cancel every contract made by the bankrupt before bankruptcy began. It does, however, change the administration of contractual rights and liabilities. The bankruptcy trustee may have to decide whether a contract should be continued or disclaimed, while a counterparty may have rights under the agreement and the Insolvency Act. The answer depends on the contract, the estate, the timing, the trustee’s powers and any court order.

Parties should not assume that a notice of bankruptcy entitles them to stop performance, retain property, demand payment outside the estate or transfer a contract without checking the legal position. The practical starting point is to preserve the agreement, correspondence, invoices, performance records, security documents and notices, then identify what has happened since the bankruptcy order.

Identify the contract and the party’s legal position

Start with the executed agreement and its variations. Identify the parties, obligations, payment terms, termination clause, assignment restrictions, security, property or goods involved, outstanding performance and any dispute. Check whether the bankrupt signed personally, as a partner, as a guarantor or for a company. Those distinctions matter: a personal bankruptcy does not automatically make a company’s separate contract part of the bankrupt estate.

Then identify the stage of performance. A completed sale, a partly delivered supply arrangement, a lease, an employment-related agreement, a joint venture, a guarantee and a continuing services contract can raise different issues. Record what was due before the bankruptcy order, what falls due afterwards, what property is held by each party and whether another person has a proprietary or secured interest.

The trustee needs this information to decide how the contract affects the estate. The counterparty needs it to decide whether to continue performance, make a claim, seek directions or protect property that does not belong to the bankrupt. Informal assurances from the bankrupt after the order should be treated cautiously; the trustee’s authority and the statutory process govern estate decisions.

The trustee may continue or disclaim a pre-bankruptcy contract

Section 189 gives the bankruptcy trustee a statutory route to continue or disclaim contracts entered into by the bankrupt before bankruptcy commenced. A disclaimer is not simply a commercial preference. It is a formal insolvency step with consequences for the estate and the counterparty, and the applicable requirements, timing and notices should be checked in the Act and Regulations.

A trustee considering continuation should assess whether performance preserves or creates value for creditors, whether the estate can meet the relevant obligations, whether the contract is essential to realise property and whether the risk of continued performance is justified. A trustee considering disclaimer should identify the burdens, costs, property issues, termination consequences and the counterparty’s resulting claim. Accurate records of the decision and its authority are important.

A counterparty should not force a conclusion by refusing to provide the contract or by treating silence as a waiver. Send a focused written request to the trustee with the agreement, a summary of the obligations, deadlines and any urgent risk, while reserving rights appropriately. If the matter is time-sensitive, such as perishable goods, a property deadline or ongoing essential services, seek advice immediately about the correct court or statutory route.

Termination and post-order transactions need careful treatment

Section 190 addresses termination by the other contracting party. A bankruptcy order alone does not give every counterparty an unrestricted right to end an agreement. The contractual terms, the statutory provisions, the trustee’s election and the facts of performance must be considered together. A purported termination that ignores the agreement or insolvency law can create liability or disrupt estate value; continued performance without authority can create a different risk.

Section 191 deals with a transaction made with the bankrupt in ignorance of the bankruptcy. This recognises that a third party may act without notice of the order. The rule is not a reason to stop keeping records once notice is received. Retain the date, time, communications, payment evidence, delivery records and the basis on which the party believed it was dealing with the bankrupt. These facts may determine whether the transaction is protected and what should happen next.

Once a party knows of the bankruptcy, it should verify the trustee appointment before paying money, returning goods, transferring rights or taking a release. Ask for the relevant appointment and contact information, and keep a clear audit trail. A bank, customer, landlord, supplier or purchaser should not rely solely on an unverified email or a demand that does not identify the statutory authority.

Joint obligations and claims against co-contractors may continue

Bankruptcy can affect one party to a joint contractual liability without extinguishing the position of every co-contractor. Section 192 addresses the circumstances in which a co-contractor may sue and be sued where there is joint contractual liability. Partners, guarantors, co-borrowers and joint purchasers should therefore identify their own obligations and rights rather than assuming that the bankrupt’s estate has absorbed them all.

For example, a supplier may need to distinguish a claim against the bankrupt person from rights against a company, guarantor or remaining partner. A co-owner may need to distinguish rights in jointly owned property from a purely personal debt. A counterparty who settles with one person should document the scope of that settlement and obtain advice on whether it affects any claim against the estate or another liable person.

Where a contract creates a potential claim against the bankrupt estate, preserve the evidence and use the proof-of-debt process at the appropriate stage. Do not attempt to improve priority through a last-minute set-off, transfer or private payment without advice. The collective process requires a candid account of the agreement, security and all payments received.

Practical steps for counterparties, trustees and the bankrupt

The counterparty should preserve the agreement and performance evidence, identify urgent deadlines, notify the trustee in writing, and avoid unilateral enforcement after notice of bankruptcy. The trustee should investigate the contract, record the basis for continuation or disclaimer, communicate clearly and seek directions where the estate faces material risk or competing claims. The bankrupt should provide the agreement, records and information requested, and should not hold themselves out as able to bind the estate after the order.

If there is an urgent dispute, focus the question: is the contract still in force, who can perform, who holds the relevant property, what payment is claimed, and what relief is needed? The court has powers to deal with bankruptcy issues, and the Act also permits extension of certain periods in the relevant contract division. A prompt, evidence-led application is safer than allowing a commercial deadline to expire while the parties exchange informal assertions.

Keep a contract-specific chronology from the date of the bankruptcy order. Record notices received, the trustee’s appointment, every request for performance, deliveries, payments, access to premises or systems, and the date on which the party became aware of the bankruptcy. This record can be decisive where a counterparty says it acted in ignorance of the order, where a trustee disputes the status of goods, or where a deadline for termination, disclaimer or court relief is contested.

Where a contract affects essential services, occupied premises, customer deposits, intellectual property, employment obligations or a perishable asset, do not wait for a general answer to a broad enquiry. Identify the immediate legal and commercial risk, give the trustee the supporting documents, and seek focused advice about the next lawful step. Preserving value for the estate and respecting a counterparty’s rights often require prompt but carefully documented action.

Primary sources: Insolvency Act, 2015, especially sections 189 to 195, and the current Insolvency Regulations. This is general information, not advice on a particular contract, disclaimer or termination.