The right to halt operations in bankruptcy

The right to suspend performance represents an important protection for suppliers and other counterparties when a business goes bankrupt. This right means that a party can withhold their performance when the debtor cannot fulfill their part of a mutually burdensome agreement.

Legal basis and purpose

The right to suspend performance is regulated in the Norwegian Bankruptcy Act § 7-2 and gives a supplier the right to prevent their performance from being delivered to the debtor or their bankruptcy estate if the debtor lacks the means to fulfill their part of the agreement in due time. The purpose of the right to suspend performance is to protect the party who has not yet delivered their performance, so that they do not end up with only a dividend claim in the estate.

The right to suspend performance acts as a supplement to the principle of performance for performance. It applies even if the time for the debtor's performance has not yet arrived. This is particularly important in cases of bankruptcy because the creditor normally does not have the right to rescind the agreement after the performance has been delivered, see the Norwegian Bankruptcy Act § 7-7 second paragraph.

When is the performance "delivered"?

The crucial factor for whether the right to suspend is retained is whether the performance has been "transferred to the debtor or their estate" according to the Norwegian Bankruptcy Act § 7-2. To clarify, it is important to distinguish between different types of assets:

• Chattels: In the case of a pick-up purchase, the right to suspend is lost when the buyer has taken possession of the chattel. In the case of a send purchase, an independent carrier is considered the seller’s representative, and the right to suspend is retained until the chattel is delivered to the buyer.

• Real estate: The right to suspend is lost when the buyer has both received the deed and taken over the use of the property.

• Construction: The building is considered delivered as it is constructed, see Rt. 1992 p. 770. Materials that have been brought to the construction site and are supposed to be incorporated become the property of the client when they have been paid for.

• Money and securities: In cash payments, the right to suspend is lost when the money is delivered. In payment processing, the money is considered transferred when it is credited to the recipient's account.

Practical significance for the bankruptcy estate

For the bankruptcy estate, the right to suspend is of significant importance for which assets can be seized and how unfulfilled contracts can be handled. If the right to suspend is retained, the estate cannot seize the performance. If the estate needs the performance, it must enter into the contract and pay in full.

For business operators, it is important to be aware of the right to suspend in signs of financial difficulties with a contracting party. Quick actions can be crucial to securing their interests in a bankruptcy. This may include stopping the delivery of goods, demanding the return from a carrier, or ensuring that legal protection is established for performances already delivered.