The Bankruptcy Act's rules on disclaimer of onerous contracts
According to the Act, a bankruptcy estate may terminate a continuing contractual relationship with a usual or reasonable notice even though the parties have agreed on a longer notice. This possibility of changing the notice may also be applied in connection with employment relationships.
The case concerned an executive officer who was dismissed summarily. During the subsequent arbitration proceedings against the former employer, the executive officer was awarded compensation equivalent to six months' salary and severance pay equivalent to 12 months' employment.
A few weeks after the arbitration award, bankruptcy proceedings were commenced against the former employer. This resulted in the executive officer having to file his claim for compensation against the estate. However, LG recognised the status of the "executive officer" as a salaried employee, and LG also recognised a claim for compensation equivalent to three months' salary under the Salaried Employees Act. The claim against the estate therefore only concerned the difference. In this connection, the bankrupt employer stated that the claim had to be disclaimed as onerous under the Bankruptcy Act, with the result that the "executive officer" should not receive additional payment as he had already received salary and severance pay from LG. The "executive officer" claimed, however, that the claim was not to be disclaimed as the employment had ended prior to the bankruptcy.
Bankruptcy Court ruling
First of all, the Court found that, even if the job title was "executive officer", the Court recognised that the executive officer did in practice not act as executive officer. The "executive officer's" claim was therefore covered by section 95 of the Bankruptcy Act and was consequently not to override the consideration of the principle of equality of the Bankruptcy Act.
With reference to the purpose of the disclaimer of the claim as onerous the Court found that the claim was to be disclaimed, notwithstanding the fact that the "executive officer" had been dismissed summarily prior to the bankruptcy. On the above basis, the Court concluded that both the claim for compensation in relation to the notice of termination and the claim for severance pay were to be disclaimed. In relation to holiday pay, interest and legal costs, the Court found that these claims followed the principal claim.
At the time of the summary dismissal, the "executive officer" had been employed for approx. 1½ years, and he had in fact not acted as executive officer, which was recognised by LG and the estate, and he therefore received salary and compensation as an ordinary salaried employee. A recognition of compensation equivalent to 12 months' salary could in this situation have led to an unreasonable distribution of the assets of the estate. Horten represented the estate.
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