What happens to software licenses when a company becomes insolvent? § 103 InsO, cloud contracts, escrow agreements, and BGH case law — a practical guide for managing directors and restructuring professionals.
The Forgotten Risk in Restructuring Reports
Imagine the following scenario: a mid-sized company is in insolvency proceedings. The insolvency administrator has developed a viable insolvency plan, the creditors have agreed, and continuation seems secured. Then the most important software vendor terminates use of the ERP system — with immediate effect. Production stops, orders can no longer be processed, and the restructuring threatens to fail.
This scenario is not a theoretical exercise. In practice, we regularly see software licenses becoming an existential problem in insolvency. Companies that fail to secure their critical IT infrastructure early risk losing their most important operational foundations — at the very moment when they are most vulnerable.
The Basic Rule: § 103 InsO and the Insolvency Administrator's Right of Election
The central problem lies in § 103 of the German Insolvency Code (InsO). This provision gives the insolvency administrator a right of election for mutual contracts that have not been fully performed by either party at the time insolvency proceedings are opened:
- The insolvency administrator can choose to perform and continue the contract
- Or they can refuse performance, in which case the contracting party can only assert an insolvency claim
For software licenses, this means: if the debtor is the licensee and license fees have not been fully paid, the insolvency administrator generally has the right of election. If they refuse performance, the usage right expires — and the company is left without software.
Reverse Scenario: Insolvency of the Licensor
The situation becomes even more complicated when not the licensee but the licensor becomes insolvent. In this case, the licensor's insolvency administrator can also refuse performance under § 103 InsO. The IT-Recht-Kanzlei has comprehensively described the legal situation: the licensee loses their usage right and can only assert claims as an insolvency creditor — typically with a dividend of just a few percent.
License Types and Their Insolvency Resilience
Not all software licenses are equally vulnerable. Insolvency resilience depends largely on the licensing model:
Purchase Licenses (Perpetual Licenses)
For a classic purchase license with a one-time payment: if the purchase price has been fully paid and the software delivered, the contract is fully performed by both sides. In this case, § 103 InsO does not apply, and the usage right continues. The BGH confirmed this in its landmark decision of November 17, 2005 (case no. IX ZR 162/04).
Rental Licenses and Subscriptions
The situation is different for rental and subscription models. Since ongoing payments are exchanged for ongoing usage rights, this constitutes a mutual contract to which § 103 InsO applies. The insolvency administrator can refuse performance — with the consequence that the usage right expires.
SaaS and Cloud Contracts
The legal classification of SaaS contracts is particularly complex. These are typically continuing obligations for which § 108 InsO in principle orders the continuation of certain contractual relationships. However, SaaS contracts do not fall under the privileged contract types listed there (rental, lease, and employment contracts).
In practice, this means: SaaS providers can cease services upon payment default, and the insolvency administrator must decide whether to continue the contract at the expense of the estate. Additionally, SaaS contracts frequently contain change-of-control clauses that grant the provider a special termination right in case of insolvency.
The UsedSoft Decision and Its Consequences
An important milestone for understanding software licenses is the UsedSoft decision by the Court of Justice of the European Union (CJEU, judgment of July 3, 2012, C-128/11). The CJEU ruled that the copyright principle of exhaustion also applies to software acquired by download. This means: when a software manufacturer has sold a copy of its software for a fee corresponding to the economic value of the copy, its distribution right is exhausted.
For insolvency practice, this has significant implications: exhausted licenses can in principle be resold, which may be relevant for the disposal of the company or individual assets. However, the BGH clarified in its follow-up decision that the first acquirer must delete their own copy — a requirement that is difficult to monitor in insolvency.
Sublicenses: BGH Case Law on Continuation
A particularly practice-relevant question concerns the continuation of sublicenses. The BGH has addressed this in several decisions, clarifying that the termination of the main license generally does not lead to the expiry of derived sublicenses. The BGH emphasized that the interests of the sublicensee outweigh those of the main licensor, as the latter is adequately protected through the assignment of payment claims.
This case law, presented among others by RESMEDIA, has significant importance for corporate group structures where a parent company centrally procures licenses and sublicenses them to subsidiaries.
Software Escrow: The Lifeline
One of the most effective protective measures is the software escrow agreement. Here, the source code is deposited with an independent trustee — for example, TUeV SUED or a notary.
How It Works
Upon the occurrence of certain contractually defined events — particularly the insolvency of the software manufacturer — the source code is released to the licensee. The licensee can then maintain, develop, or have the software managed by a third party.
Legal Limitations
The insolvency resilience of escrow agreements is, however, not undisputed. The specialist attorneys at Barone & Vogt point out that effectiveness depends significantly on the specific contract design. The BGH clarified in its decision IX ZR 162/04 that a conditionally deferred transfer of usage rights can be insolvency-proof — but only if the triggering condition is not insolvency itself, but rather the exercise of an extraordinary termination right.
Design Recommendations
For an insolvency-proof escrow agreement, the following is recommended:
- Conditionally deferred grant of rights: Usage rights are transferred subject to a condition precedent at the time of contract conclusion
- Extraordinary termination right as trigger, not insolvency itself
- In rem grant of rights: Transfer of the usage right, not merely a contractual claim
- Regular updates: The deposited source code must always correspond to the current production version
Impact on Business Continuity
The loss of critical software licenses can immediately jeopardize business continuity. In restructuring practice, it is therefore essential to conduct a software audit early:
Checklist for the Software Audit in Crisis
- Inventory: Complete recording of all software used, license types, and contract terms
- Criticality assessment: Which software is indispensable for business operations?
- Contract analysis: Review of all license agreements for change-of-control clauses, special termination rights, and insolvency clauses
- Payment status: Are all license fees paid? Are there arrears?
- Escrow agreements: Do source code deposits exist for critical systems?
- Cloud dependencies: Which data is held by SaaS providers, and how can it be secured?
- Alternative solutions: Are there open-source alternatives or migration paths for critical systems?
Strategies for Practice
For Companies in Crisis
- Early communication with software vendors about the continuation of licenses
- Prioritization: Identification of business-critical licenses and ensuring their continuation
- Budgeting: Including license costs in liquidity planning
- Data export: Regular backup of all data from cloud systems
For the Restructuring Concept under IDW S6
- IT due diligence: The license portfolio as an independent audit item
- Risk analysis: Assessment of the financial and operational impact of license loss
- Measures planning: Concrete steps to secure critical licenses
- Cost-benefit analysis: Comparison between license continuation, migration, and in-house development
For Preventive Restructuring under StaRUG
The StaRUG provides the possibility to carry out restructurings before insolvency. Within this framework, license agreements can be renegotiated without the right of election under § 103 InsO being triggered. This can be a significant advantage in securing the company's IT infrastructure.
Conclusion: Software Licenses Deserve More Attention
Software licenses are a critical asset in the modern business world that frequently receives insufficient attention in restructuring reports and insolvency proceedings. The legal complexity — from the right of election under § 103 InsO to the question of insolvency resilience of escrow agreements to the particularities of SaaS contracts — requires early and careful analysis.
Companies that proactively secure their software licenses not only protect their operational foundations but also improve their negotiating position with creditors and investors. Because a viable insolvency plan requires a secured IT infrastructure.
At compleneo, we support you with the legal protection of software licenses in crisis and insolvency, as well as the integration of IT risks into restructuring concepts. Get in touch with us.
