German court extends termination options in the event of insolvency

The German Federal Court of Justice (BGH) has ruled on the question of whether an agreement that grants release from a contract on grounds of insolvency or the opening of insolvency proceedings is effective.

Background

The German Insolvency Code (InsO) grants insolvency administrators certain powers to terminate contracts on behalf of the insolvent party. InsO prohibits the parties from entering into agreements that prevent this. The BGH had not previously considered whether this also means that a party contracting with the insolvent debtor is prohibited from relying on a clause that allows it to terminate the contract based on the debtor's insolvency. 

Decision

The BGH held that no basic rule can be derived from InsO that so called “insolvency-dependent dissolution clauses” are always invalid. InsO provides that agreements are invalid if they impair the administrator's specific power to terminate contracts granted under InsO. German law provides specific termination options for certain contracts. The BGH held that it is permissible for parties to contracts that may be terminated "for cause", to include in such cause the opening of insolvency proceedings or the petition to open insolvency proceedings. 

Key takeaways

Provided that the contract is not subject to a specific prohibition on termination for insolvency and the purpose of the termination right is not to undermine the insolvency administrator's subsequent powers, the ability to argue for the validity of an "insolvency-dependent dissolution clause" has been strengthened by this decision.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.

IX ZR 213/21 [27 October 2022]