Section 103 Inso (germany), Executory Contracts, Termination on Insolvency and Ipso Facto Clauses (2026 Update)

Section 103 InsO Germany is the single most consequential provision for any commercial counterparty wondering whether it can walk away from a contract the moment the other side files for insolvency. As restructuring and distressed M&A volumes climb across Germany in 2026, suppliers, landlords, lenders and private-equity-backed portfolio companies are confronting a question with real balance-sheet consequences: does a “termination on insolvency” clause actually work, or must the contract continue to be performed? The short answer is that German insolvency law gives the insolvency administrator, or the debtor in possession, the power to decide, and private contractual triggers rarely override that power.

This article explains what section 103 InsO Germany does, which contracts fall within its scope, how ipso facto clauses are treated, how leases are handled under §109 InsO, and what practical steps commercial counterparties should take immediately.

What is Section 103 InsO?, Statutory Text, Purpose and Immediate Effect

Section 103 InsO Germany governs the fate of contracts that remain unperformed, in whole or in part, by both sides at the moment insolvency proceedings are opened. Where a mutual contract has not been fully performed by either the debtor or its counterparty, the insolvency administrator is given an election: either perform the contract and demand performance in return, or decline performance. This right of election is the heart of the provision and shapes almost every commercial decision a counterparty must make once insolvency looms.

Statutory text (check against the official text of §103 InsO)

In plain terms, §103 InsO provides that if a contract has not been completely performed by the debtor and the other party at the time proceedings are opened, the administrator may perform it in place of the debtor and require the counterparty to perform. If the administrator refuses performance, the counterparty may only assert a claim for non-performance as an ordinary insolvency creditor, meaning it ranks alongside unsecured creditors and typically recovers only a fraction of its loss. The authoritative wording and paragraph numbering should always be checked against the official text published on Gesetze-im-Internet.

When Section 103 InsO takes effect (timing)

The election right under section 103 InsO Germany crystallises on the opening of formal insolvency proceedings, not on the mere filing of an application and not during the preliminary phase. This timing matters enormously. Between the filing of an insolvency application and the formal opening order, different rules and a preliminary administrator’s powers may apply, and the §103 election is not yet live. Counterparties should therefore track precisely where the debtor sits in the procedural timeline, because the leverage available to each side shifts materially at the point of opening.

Interaction with other insolvency rules

Section 103 does not operate in isolation. It interacts with the lease-specific regime in §109 InsO, with the set-off rules in §§94–96 InsO, and with the general framework of the Insolvenzordnung as a whole. The administrator’s election also interacts with security interests, retention-of-title arrangements and framework contracts. Understanding the interplay between §103 and these neighbouring provisions is essential, because a counterparty’s remedy will often depend less on the contract wording and more on how these statutory rules combine in the specific fact pattern.

Which Contracts Are “Executory” Under German Law?, Scope and Examples

The election right only applies to contracts that are “executory”, that is, mutual contracts under which both parties still owe performance that has not been fully rendered when proceedings open. If one side has already performed in full and only a money claim remains outstanding, the contract is not executory in the relevant sense; the outstanding claim is simply a debt to be lodged in the proceedings. Distinguishing a genuinely executory obligation from a bare monetary claim is therefore the first analytical step for any counterparty.

Supply and service contracts

Supply agreements and long-term service contracts are classic executory contracts. Where a supplier is obliged to continue delivering goods and the debtor is obliged to continue paying, and neither obligation has been fully discharged, the administrator can elect to require continued performance. For a supplier, this means it may be compelled to keep supplying an insolvent customer if the administrator chooses performance, while historic arrears are relegated to ordinary insolvency claims. Maintenance contracts, managed-service arrangements and recurring delivery frameworks typically fall into the same category.

Leases and licences

Leases are executory by nature, the landlord owes continued provision of the premises and the tenant owes rent, but they are governed by a specialised regime in §§108–112 InsO, including §109 InsO, rather than purely by §103, as discussed below. Licensing arrangements with continuing obligations, such as software or IP licences requiring ongoing support, updates or royalty payments, can also be executory. The treatment of IP licences in insolvency raises distinct transfer, termination and use questions that warrant careful analysis in each case.

Financial contracts (note special treatment)

Certain financial contracts are subject to special treatment under §104 InsO and related provisions that modify or displace the ordinary §103 election. Netting arrangements, close-out mechanics and regulated financial instruments may be handled under distinct rules designed to preserve market certainty. Counterparties to financial contracts should not assume the general §103 analysis applies without checking whether a specific rule governs the instrument in question.

Ipso Facto Clauses and Termination, Are Termination-on-Insolvency Clauses Enforceable?

An ipso facto clause, sometimes called a “termination on insolvency” clause, purports to give a party the right to terminate automatically, or to accelerate obligations, simply because the counterparty becomes insolvent or files for insolvency proceedings. These clauses are drafted into supply agreements, leases and framework contracts precisely to let the solvent party escape before it is dragged into the debtor’s insolvency. The central question under section 103 InsO Germany is whether such clauses actually achieve their intended effect.

Legal test for enforceability

The policy underlying §103 InsO is to protect the estate’s ability to continue value-generating contracts and to prevent counterparties from stripping the debtor of assets and relationships at the worst possible moment. Consistent with this policy, German case law, notably decisions of the Federal Court of Justice (Bundesgerichtshof) concerning solvency-dependent termination and set-off clauses in supply contracts, looks unfavourably on clauses whose sole trigger is the insolvency filing or the opening of proceedings. A clause that allows termination solely because of insolvency conflicts with the administrator’s statutory election right and may be treated as ineffective to the extent it would undermine that right.

The practical test turns on the trigger: a clause tied exclusively to the insolvency event is vulnerable, whereas a clause tied to an independent, objective breach may survive. This remains a developing and fact-sensitive area, and the specific wording and context matter.

Practical examples (supplier and customer)

Consider a supplier whose framework agreement says it may terminate “immediately upon the customer’s application for insolvency.” If the administrator elects to continue the contract, that insolvency-triggered termination right will typically not allow the supplier to walk away. By contrast, if the customer had separately fallen into material payment default or breached a quality obligation before the proceedings opened, the supplier may be able to rely on that independent ground of termination, provided the ground is genuinely distinct from the insolvency itself and not a disguised ipso facto trigger. The distinction is often fact-sensitive, and counterparties should document the objective breach carefully.

Remedies for the counterparty

Where a counterparty cannot terminate and the administrator rejects performance, the counterparty’s claim for non-performance becomes an ordinary insolvency claim. Where the administrator elects performance, the counterparty is entitled to performance in return, and post-opening obligations the administrator incurs are typically treated as costs of the estate (Masseverbindlichkeiten), improving the counterparty’s position for the ongoing relationship even though pre-opening arrears remain at risk. Preserving security, retention of title and set-off rights therefore becomes the counterparty’s most reliable protection, as discussed below.

Administrator and Debtor-in-Possession Powers: Assumption, Rejection and Continuing Obligations

The mechanics of the §103 election drive the commercial outcome. In a standard administration the insolvency administrator exercises the election; in self-administration (Eigenverwaltung) or debtor-in-possession proceedings the debtor, under the supervision of a trustee (Sachwalter), performs an equivalent function. Either way, the decision to assume (perform) or reject (decline) the contract is the pivotal event for the counterparty.

Assumption versus rejection, mechanics

If the administrator assumes the contract, both sides must continue to perform according to its terms. The counterparty cannot pick and choose: it must deliver the goods, provide the service or make the premises available, and in return it is entitled to the agreed counter-performance for the post-opening period. If the administrator rejects the contract, performance ceases and the counterparty is left with a damages claim for non-performance that it must lodge as an ordinary insolvency creditor. Under §103(2) InsO, if the counterparty calls on the administrator to exercise the election, the administrator must declare without undue delay whether it intends to demand performance; if it does not, it can no longer insist on performance.

Effect on arrears and post-petition performance

A critical distinction runs between pre-opening arrears and post-opening performance. Amounts the debtor owed before proceedings opened are, in principle, ordinary insolvency claims, the counterparty ranks with other unsecured creditors and typically recovers only a quota. Obligations arising from the administrator’s decision to continue the contract after opening, however, are typically satisfied as costs of the estate and are therefore far more likely to be paid in full. This asymmetry explains why continuation can be commercially attractive to a counterparty despite the insolvency: future dealings are substantially protected even though historic debt is impaired.

Interaction with set-off (§§94–96 InsO)

Set-off can transform a counterparty’s recovery. Where a counterparty both owes and is owed money by the debtor, the ability to net those claims may convert what would otherwise be a near-worthless insolvency quota into a full or substantial recovery. The set-off regime in §§94–96 InsO governs when netting is permitted, when a set-off position acquired shortly before proceedings may be challenged, and how existing set-off rights survive. Because set-off interacts directly with the §103 election, counterparties should map their mutual positions early and preserve any contractual or statutory netting rights.

Leases and §109 InsO: Rent, Termination and Use Compensation

Leases receive bespoke treatment under §§108–112 InsO, which modify the general §103 analysis for tenancy and lease relationships. Where the debtor is the tenant, §109 InsO allows the administrator to terminate the lease on the statutory notice period, irrespective of a longer contractual term, a power designed to let the estate shed unwanted premises efficiently. The underlying lease obligations themselves derive from general lease law in the Bürgerliches Gesetzbuch, so the insolvency rules sit on top of the ordinary BGB framework governing landlord and tenant.

Landlord remedies

A landlord facing a tenant’s insolvency cannot simply rely on a contractual termination-on-insolvency clause to eject the tenant; under §112 InsO a landlord is restricted from terminating a lease after the insolvency application on grounds of pre-application rent arrears or a deterioration in the tenant’s financial position. Instead, the landlord’s protections lie in the statutory treatment of rent and occupation. Rent falling due for the period before proceedings open is an ordinary insolvency claim. Where the estate continues to use the premises after opening, the resulting rent obligations are generally treated as costs of the estate, which materially improves recovery for the post-opening period compared with pre-opening arrears.

Tenant protections and occupancy

Where the debtor is the landlord and a solvent tenant occupies the premises, the tenant’s occupancy is generally protected and the lease continues on its terms (see §§108, 111 InsO), consistent with the policy of preserving stable tenancy relationships. This continuity protects businesses that depend on their premises from being displaced merely because their landlord has entered insolvency. The interaction between the lease provisions of §§108–112 InsO, the §103 election and the general lease provisions of the BGB should be checked carefully in each case, because outcomes differ depending on which party is the insolvent one.

Drafting points for new leases

When negotiating new leases, parties should assume that a bare insolvency-triggered termination right will be ineffective and build protection elsewhere: robust rent security such as deposits or guarantees, clearly defined objective default triggers, and mechanisms to secure payment for any continued occupation. Landlords in particular should prioritise credit support that survives insolvency rather than termination rights that may not.

Practical Checklist for Suppliers, Landlords and PE-Backed Portfolio Companies Under Section 103 InsO Germany

When a counterparty becomes insolvent, the quality of the first days of response often determines recovery. The following operational steps help commercial counterparties act decisively while preserving every available right under section 103 InsO Germany.

10-step operational checklist

1. Confirm the procedural stage. Establish whether an application has merely been filed, a preliminary administrator appointed, or proceedings formally opened, the §103 election only arises on opening.
2. Identify the decision-maker. Determine whether a full administrator or a debtor in possession (with a Sachwalter) will exercise the election, and open a direct line of communication.
3. Classify the contract. Decide whether the contract is genuinely executory or whether only a monetary claim remains to be lodged.
4. Audit your own performance position. Quantify pre-opening arrears separately from post-opening obligations, as their treatment differs sharply.
5. Review termination triggers. Separate any ipso facto trigger (likely ineffective) from independent, objective default grounds that may survive.
6. Press for an election decision. Request in writing that the administrator confirm whether it will assume or reject the contract, invoking §103(2) InsO to end uncertainty.
7. Preserve security and retention of title. Assert and document any security interest, retention-of-title claim or guarantee before engaging on continuation terms.
8. Map set-off positions. Identify mutual claims that may be netted under §§94–96 InsO to improve recovery.
9. Negotiate continuation terms. If continuation is likely, negotiate protections for the post-opening period, including payment timing and cost-of-estate treatment.
10. Lodge insolvency claims correctly and on time. File all pre-opening claims and any non-performance damages claim with the administrator within the deadline set in the opening order.

Comparison table: Terminate vs Continue under Section 103 InsO Germany

Drafting and Contracting Recommendations to Mitigate Risk

Because insolvency-triggered termination rights are frequently ineffective, the most reliable protection is built into the contract before any distress arises. The aim is to shift reliance away from fragile ipso facto wording and toward mechanisms that survive the opening of proceedings and preserve commercial value.

Contract clauses to add

• Objective default triggers. Draft clear, measurable default events, payment delay thresholds, quality failures, delivery deadlines, that stand independently of any insolvency event and can support termination on their own merits.
• Performance security. Require deposits, parent guarantees, standby letters of credit or escrow arrangements so that recovery does not depend on the debtor’s estate.
• Retention of title and set-off. Include robust retention-of-title and contractual set-off provisions that strengthen the counterparty’s position within the statutory framework.
• Notice and escalation. Build in staged notice and cure periods and an escalation pathway, creating a documented trail of objective breach well before any insolvency filing.
• Step-in and supply continuity protections. For critical supply relationships, negotiate step-in rights or continuity undertakings that protect the supply chain regardless of the counterparty’s status.
• Liquidated damages and choice of law and venue. Agree reasonable liquidated-damages mechanics and clear governing law and jurisdiction to reduce dispute cost and uncertainty.

Clauses to avoid

• Bare insolvency triggers. Avoid relying on wording that permits termination “solely upon insolvency or the filing of an application,” as such clauses are likely to be ineffective against the administrator’s election.
• Automatic acceleration on insolvency. Clauses that accelerate all obligations purely because of insolvency are equally vulnerable and should be paired with independent, objective grounds.
• Over-reliance on contractual escape alone. Do not treat any single clause as a substitute for credit support and security; the durable protections are structural, not merely drafted.

Conclusion and Next Steps

Section 103 InsO Germany reshapes the commercial calculus of every executory contract once a counterparty enters insolvency: the administrator’s election to assume or reject, not the parties’ private termination triggers, usually determines what happens next. Ipso facto clauses that rely on insolvency alone may well be ineffective, leases follow the specialised regime in §§108–112 InsO, and a counterparty’s best protection comes from security, set-off and well-drafted objective default grounds rather than from an insolvency-triggered escape. For suppliers, landlords and PE-backed portfolio companies, the practical priorities are clear: confirm the procedural stage, press for an election decision, preserve every security and set-off right, and lodge claims correctly and on time.

Companies facing a distressed counterparty, or reviewing their contract templates ahead of the 2026 restructuring wave, should take advice early, the window to protect value under section 103 InsO Germany is often narrow. To discuss a specific contract or portfolio, contact our Germany insolvency team.

This article provides general guidance and does not constitute legal advice. It addresses German law under the Insolvenzordnung and should not be relied on for any specific matter without professional advice tailored to the facts.

Sources

1. Insolvenzordnung (InsO), §103 (Gesetze im Internet)
2. Insolvenzordnung (InsO), §109 (Gesetze im Internet)
3. Insolvenzordnung (InsO), §112 (Gesetze im Internet)
4. Insolvenzordnung, main page (Gesetze im Internet)
5. Bürgerliches Gesetzbuch (BGB) (Gesetze im Internet)
6. Bundesgesetzblatt (BGBl.), official gazette
7. Deutscher Anwaltverein (German Bar Association)
8. Max Planck Institute for Comparative and International Private Law
9. European Commission, Insolvency and restructuring policy