Germany: German Insolvency Law – The Insolvency Administrator's Right To Choose Or Reject Performance

Last Updated: 21 June 2018
Article by Dr. Marco Wilhelm, Dr. Malte Richter, LLM and Tina Hoffmann

Within German contract law, the principle of being bound by a contract (pacta sunt servanda), i.e. the obligation to fulfill agreements, applies. In case of the insolvency of one of the contractual parties, however, exceptions are made. Upon the opening of the insolvency proceedings, the principle of being bound by a contract is modified.

The insolvency provisions concerning the fulfillment of mutual contracts (Sec. 103 et seq. German Insolvency Code (Insolvenzordnung, InsO)) grant the insolvency administrator an option right as to whether agreements which had been concluded prior to the opening of proceedings and which have not yet been fully performed by both parties shall be fulfilled. The opening of an insolvency proceeding does not lead to a substantive transformation of the agreements, however, any outstanding claims arising from the mutually unperformed agreement are no longer enforceable. The purpose of these rules is to allow the insolvency administrator to maintain or to increase the insolvency estate, enable restructuring attempts and to prevent the contractual partner of the debtor from terminating an agreement which was favorable for the insolvency estate due to the insolvency of the latter.

The most important stipulations are explained below.

The Insolvency Administrator's Option Right, Sec. 103 Inso

Prerequisites

The prerequisites for exercising the insolvency administrator's option right (Insolvenzverwalterwahlrecht) is the mutuality of the claims which have not or not fully been performed by both parties at the time of the opening of insolvency proceedings. Types of agreements which are often subject to the administrator's option right are purchase agreements, contracts for works and services, license agreements and loan agreements. However, the option right does not apply, for example, in the context of mutual agreements which have been fully performed by one party, agreements with a valid termination clause or shareholder agreements.

The administrator has to declare demand for performance to the contracting party. For this declaration, he is not bound to any time periods. However, the contracting party may ask the administrator to exercise his option right and to issue a corresponding declaration. In this case, the administrator has to issue his declaration "promptly" which means acting without undue delay. Thus, the insolvency administrator is allowed to assess the consequences of exercising his option right within a time period reasonable under the circumstances of the individual case in question, e.g., after obtaining the consent of the creditors' committee, after a final review of possible restructuring options or after the first report meeting to the creditors (Berichtstermin).

Consequences and Effects

Opting for Performance: In case the administrator decides to perform a not or not fully performed agreement, he assumes the rights and obligations of the debtor arising from the agreement. The declaration of the administrator has an effect only for the future (ex nunc), i.e. the performance owed by the debtor becomes a preferential obligation (Masseverbindlichkeit) and the performance owed by the counterparty becomes a preferential claim (Masseforderung). The initially agreed contractual conditions remain unchanged. Claims of the contractor which incurred prior to the opening of the insolvency proceeding are not affected by the administrator's election to choose performance. Such claims are to be filed as ordinary, unsecured insolvency claims (Insolvenzforderung).

Opting for Non-Performance: In cases where the insolvency administrator rejects the performance of a contract, this is only of declaratory nature, since as described above, upon opening of insolvency proceedings the reciprocal claims are no longer enforceable. The contractual claim of the contracting party is replaced by a compensation claim for non-performance. The contracting party may file such compensation claim as an ordinary, unsecured insolvency claim with the insolvency claims schedule. The amount of the damage claim is calculated based on the principles of the so-called theory of difference (Differenztheorie) pursuant to which the mutual claims arising from the non-performance of the agreement are netted against each other. If the result is a positive balance in favor of the contracting party, the latter can claim this balance as an insolvency claim. Satisfaction of such claim will be subject to the insolvency dividend quota.

Separable Performances, Sec. 105 InsO

For agreements containing separable performances, Sec. 105 InsO contains special provisions regarding the administrator's option right. In particular, this pertains to so-called agreements for continuing obligations, e.g. agreements for the continuous supply of goods or energy. In this context, and regardless of whether the insolvency administrator is opting for performance or not, all counterclaims for partial performances rendered prior to the opening of insolvency proceedings can only be filed as ordinary unsecured insolvency claims. If the administrator decides in favor of the continuance of the agreement, the contracting party becomes a preferential creditor for all future claims arising from the continued supplies or services. Partial performances already rendered prior to the opening of the insolvency proceeding cannot be reclaimed.

The fact that services rendered prior to the opening of insolvency proceedings may only be asserted as ordinary unsecured insolvency claims serves mainly the purpose of avoiding an exposure of the insolvency estate. Such exposure could in particular result from the fact that the administrator would otherwise need to first reject the further performance of the contract to avoid preferential claims against the insolvency estate and would then have to conclude the same agreement at potentially worse conditions.

Invalidity of Termination Clauses, Sec. 119 InsO

Contractual agreements excluding or limiting the applicability of the insolvency administrator's option right under Sec. 103 et seq. InsO are invalid. In its judgment dated 15 November 2012, the Federal Court of Justice (Bundesgerichtshof, BGH) has, with regard to agreements regarding continuing obligations, clarified that termination clauses linked to an insolvency event (insolvenzabhängige Lösungsklausel) jeopardize the administrator's right to choose between performance or non-performance and, thus, are invalid. This applies in particular to clauses which grant the parties the right to terminate an agreement for cause if the respective other party has filed for insolvency or if (preliminary) insolvency proceedings have been opened over the respective party's assets. On the other hand, termination clauses linked to non-insolvency events (insolvenzunabhängige Lösungsklausel), e.g. termination rights for default of obligations, initiation of enforcement measures in the assets of the other party, breach of essential contractual obligations or the occurrence of a significant deterioration of the financial situation of the other party, are usually deemed to be in line with legal regulations.

Exceptional provisions for different types of agreements

The insolvency laws provide for special provisions regarding certain types of agreements, which supersede or modify the administrator's option right:

Expiry of Agreements, Sec. 115 – 117 InsO

Save for very limited exceptions, assignments, agency agreements or powers of attorney relating to the insolvency estate terminate upon opening of insolvency proceedings by operation of law. Claims regarding an agreed remuneration or reimbursement of expenses can only be filed as non-preferential claims with the insolvency schedule.

Withdrawal of the Right of Choice, Sec. 106, 107 InsO

Subject to any avoidance rights, regarding priority notices (Vormerkung) registered prior to the opening of insolvency proceedings the administrator is deprived of his option right, Sec 106 InsO. Hence, such priority notices are insolvency-resistant (insolvenzfest). Any claims secured by a priority notice must be fully compensated from the insolvency estate. The insolvency-remoteness further applies to the purchaser's expectant right (Anwartschaftsrecht) in the event of the insolvency of the seller, if the parties have agreed on a retention of title (Eigentumsvorbehalt), Sec. 107 InsO.

Continuance of Certain Agreements – Special Termination and Rescission Rights, Sec. 108 InsO

By law, lease agreements on immovable property as well as employment and service agreements are continued despite the opening of insolvency proceedings, Sec. 108 InsO. Any claims which arose prior to the opening of insolvency proceedings from such agreement have to be filed as ordinary unsecured insolvency claims. Claims which arise after the opening of insolvency proceedings, however, are preferential claims. Instead of the option right, the insolvency administrator is granted special termination and rescission rights for these types of agreements.

The law on lease agreements grants the insolvency administrator a special termination right providing for a notice period of three months to the end of the month, irrespective of the contractual termination provisions. In case of the insolvency of the lessee, both the administrator and the lessor may withdraw from the agreement, if the rental property has not already been handed over at the time of the opening of the proceedings. If the administrator withdraws from the agreement, the lessor may request damage claims for the premature termination as an ordinary unsecured creditor. During the lessee's insolvency, the lessor cannot terminate the lease agreement based on pre-insolvency default of rental payments or because of a deterioration in the financial situation of the lessee, so called termination lock (Kündigungssperre), Sec. 112 InsO.

With regard to the laws on employment and service agreements, the administrator is also granted the right to terminate the underlying agreement at three months' notice to the end of the month, regardless of any agreed or applicable statutory notice period. Employees who would be subject to longer notice periods or are irredeemable under their employment or labor agreements may assert damage claims as ordinary unsecured creditors in the amount of the remuneration and fringe benefits they would have received if regular notice periods had been applicable. For employees whose employment agreements are irredeemable the amount of the damage claim is, however, limited to the amount calculated on the basis of the longest notice period applicable under statutory law.

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Mayer Brown
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Mayer Brown
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions