A very common clause in ongoing commercial agreements (e.g., distribution agreements or international marketing agreements) is that the agreement shall be terminated in the event that one of the parties becomes insolvent - a very logical clause, because why should I, a party to the transaction, be bound to an insolvent company or a bankrupt person? Moreover, without such a clause - as soon as a company shows the slightest difficulty, all its suppliers would immediately terminate the agreements (and the company will immediately collapse) so as not to be in a place where they are bound to it. However, is this clause enforceable in Israel?
In enacting the new Israeli Insolvency and Economic Recovery Law in 2018, the legislator had two main goals in mind: The economic recovery of debtors and the value to creditors, when it is clear that the interest of the creditors is recovery, so that the debtor will be able to pay off its debts. One of the innovations of the new law is a seemingly puzzling limitation on the right to terminated an agreement upon a party entering insolvency, with the law clarifying that this limitation applies even if the contract expressly states that it will be terminated in circumstances in which a party enters into insolvency. Under to the law, the counterparty may notify the liquidator that it seeks to terminate the contract and the liquidator has 45 days to move the Court to order enforcement of the agreement, except in contracts of employment, for the provision of personal services or a for provision of credit.
In a case discussed at the Haifa District Court in January, 2020, in which a motion was made to enforce a contract with an insolvent company, the Court accepted the motion, holding that the counterparty may not rush to terminate the contract just because it learned that the company was about to file for insolvency, inter alia because this could create a chain reaction and subsequently cause great damage to both the company's operations and reputation, in a manner that would affect the negotiations with potential investors and thwart the company's recovery process. In contrast, in a case discussed at the Haifa District Court in December, 2024, the Court rejected a motion to enforce a distribution contract after the distributor, who had entered insolvency, assign the contract to another because the counterparty cannot be forced to enter into an agreement with a third party. In a matter discussed at the Tel Aviv-Yafo District Court in April, 2020, the Court distinguished between the continuation of a contract and its extension and held that forced engagement does not apply to the extension of a contract that is due to end on a predetermined date. In a holding from March, 2023, the Supreme Court also clarified that binding a party to a contract will not apply where a liquidation order has been issued for a company, but only in cases where an order for its recovery has been issued, because the violation of the freedom of contract is not required where no benefit shall arise to the company.
Therefore, the balance between the freedom of contract and its restraint in all matters concerning insolvent companies is a delicate issue that may be interpreted in in different manners by the Court, depending on the circumstances. Hence, before entering into long-term contract, certainly international distribution contracts, it is recommended to consult an attorney who is knowledgeable in the field of commercial and corporate law, who can assist to create a structure, either in advance or in retrospect, in order to prevent, or at least minimize as much as possible, the damage to the contracting party in the event that the counterparty becomes insolvent.