A claim filed by insolvency practitioners requesting the termination of contract of payment in kind, which was entered into between a party under insolvency proceedings and a third party, centred on the giving of a slicer machine in consideration of debt; whether the credit of the defendant was qualified as subordinated as a result of damages resulting from the company’s inability to operation, and for violating the principle of equality among creditors.

The defendant, answering the claim and considering that the contract is not subject to be terminated in the event that this is agreed, requested that – pursuant to Section 73.3 of the Bankruptcy Act – the credit should be considered against the estate, which would be satisfied simultaneously by reintegration of the machine.

The defendant also issued a counterclaim seeking a declaration of their right to keep the machine, stating the validity of the contract and, additionally, their credit as against the estate. This was objected by the plaintiff, particularly in relation the qualification of the credit that shall be considered as subordinated and subsidiary ordinary.

The Court of first Instance admitted the claim and agreed to the termination of contract, but qualified the credit as ordinary. The counterclaim was dismissed. However, the right to payment for the amount agreed by both parties was recognized.

The credit was considered as included in the insolvency proceedings. If this was declared as credit against the estate, one creditor would acquire favour over the others by reaching a detrimental agreement on the insolvency estate.

The defendant appealed the decision, which was upheld in part. Even though the defendant agreed to the termination of contract, it was noted that the credit should be considered as credit against the estate, and satisfied simultaneously to the refund of the asset object of the termination pursuant to Section 73.3.

Against the decision, the bankruptcy administration board appealed to the Supreme Court, citing the existence of contradictory case law of Regional Courts on the application of Section 73.3 to contracts of payments in kind. They stated that the right to the benefit in favour of any of the defendants as a result of the termination should be considered as credit against the estate.

The Supreme Court, following the arguments of a previous judgment, considered the provision inapplicable to a unilateral payment by the debtor before the insolvency proceedings. They further stated that the termination involved only the payment, and that the obligation to make restitution with interests without losing their right to credit shall not be applicable. They also stated that bad faith cannot be considered for the purpose of credit subordination as under Article 73.3.

Refunds resulting from termination require the goods to be returned to the estate of the insolvent party, with the creditor entitled to credit for the amount held before the contract of payment in kind. The Supreme Court admitted the appeal and declared that, in those cases that the payment in kind is terminated, the credit shall be considered as ordinary.