A very common clause in ongoing commercial agreements (for example, distribution agreements or international marketing agreements) is that the agreement will be canceled in the event that one of the parties becomes insolvent – a very logical clause, because why should I, as a party to the transaction, be tied to an insolvent company or a bankrupt person? Moreover, without such a clause – as soon as a company shows the slightest difficulties, all its suppliers will immediately cancel the agreements (and the company will immediately collapse) so as not to be in a place where they are tied to it. However, is this clause enforceable in Israel?
When enacting the new Insolvency and Economic Rehabilitation Law in 2018, the legislator had two main goals in mind: the economic rehabilitation of the debtor and the transfer of value to creditors, when it is clear that the interest of the creditors is rehabilitation, so that the debtor can pay his debts. One of the innovations in the law is a seemingly puzzling limitation on the right to cancel a party who entered into a contract with a corporation that has entered into insolvency, with the law clarifying that this limitation applies even if the contract expressly states that it will be canceled in circumstances in which a party enters into insolvency. According to the law, the other party to the contract can notify the insolvency trustee that it wishes to cancel the contract and the trustee has 45 days to apply to the court to order the enforcement of the agreement, except if it is an employment contract, a contract for the provision of personal services or a contract for the provision of credit.
In a case heard in the Haifa District Court in January 2020, in which a request was made to enforce a contract with a corporation that had entered insolvency, the court accepted the request, and ruled that the other party could not rush to cancel the contract just because it learned that the company was about to file for insolvency, among other reasons because this could create a chain reaction and could cause great damage to both the company’s operations and reputation, in a way that would affect the negotiations with potential investors and thwart the company’s rehabilitation process. In contrast, in a case heard in the Haifa District Court in December 2024, the court rejected a request to enforce a distribution contract after the distributor, who had entered insolvency, canceled the contract, because the other party could not be forced to enter into an agreement with a third party. In a matter heard in the Tel Aviv-Yafo District Court in April 2020 , the court distinguished between the continuation of a contract and the extension of a contract and ruled that forced engagement does not apply to the extension of a contract that is due to end on a predetermined date. In a ruling 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 corporation, but only in cases where an order for its rehabilitation has been issued, since the infringement of freedom of contract is not required in cases where no benefit will accrue to the corporation in any case.
Thus, the balance between freedom of contract and its restraint in all matters concerning insolvent corporations is a delicate balance that may be interpreted this way and that way by the court, depending on the circumstances. Therefore, before entering into long-term agreements, certainly international distribution agreements, it is recommended to consult a lawyer knowledgeable in the field of commercial law and corporate law, who can help create an outline, either in advance or retrospectively, in order to prevent, or at least minimize as much as possible, the harm to the contracting party in the event that the other party becomes insolvent.
