Meaning
Financial obligations that a debtor must satisfy to assume an executory contract during bankruptcy proceedings ensure that the non-debtor party is made whole. These section 365 cure costs represent the outstanding pre-petition balances that must be paid to a supplier before the contract can be continued. This mechanism applies to agreements for resin supply, custom moulding, and tooling maintenance.
Contract Assumption
Assuming a contract requires the debtor to cure any existing defaults and provide adequate assurance of future performance. For a polymer distributor, this means that the bankrupt debtor must pay all outstanding pre-petition invoices for resin deliveries before they can force the distributor to continue shipping material. This protects the distributor from being forced to supply materials under a contract that remains in default.
Payment Obligation
Determining the exact cure amount can be a source of dispute between the debtor and the supplier. The debtor must calculate all outstanding amounts, which may include unpaid invoices, interest, and any legal fees incurred as a result of the default. This calculation must be approved by the court, and the debtor must demonstrate the financial capacity to make these payments before the contract can be officially assumed.
Production Continuity
Paying these costs is essential for maintaining a stable supply chain during a corporate restructure. Moulders who receive their full cure payments can continue to run production lines without facing the risk of material shortages or tool disruptions. This continuity is particularly critical when dealing with long-term supply contracts for high-volume automotive or medical parts where qualification of a new supplier is not feasible.
If the debtor fails to assume the contract and pay the necessary cure costs, the contract is rejected, allowing the supplier to seek damages as a general unsecured creditor while freeing them from any further obligation to supply the debtor.
