Can a Company in CIRP Still Enter Into Contracts?

Vikrant D. Shetty

Jun 12

8 min read

Updated: Aug 26

A company undergoing Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016 can still enter into contracts, but only the Resolution Professional, and not the board of directors, has authority to bind the company once the National Company Law Tribunal admits the insolvency application. Section 17 of the Code suspends the powers of the board on admission, and any contract signed thereafter by a director or officer without the Resolution Professional's authorisation is potentially invalid. A moratorium under Section 14 also prevents enforcement against the company for the duration of the process. This post sets out what counterparties should verify before contracting with a company in CIRP.

Can a Company in CIRP Still Enter Into Contracts?

Employees keep working, suppliers keep delivering, and customers keep placing orders. But one thing changes: who has the authority to manage the company and sign contracts on its behalf. This matters a great deal for counterparties. Getting it wrong can leave a contracting party holding an unenforceable agreement.

The moment the NCLT admits an insolvency application and appoints an Interim Resolution Professional, the powers of the board of directors are suspended under Section 17 of the IBC. Management vests in the IRP, and subsequently in the Resolution Professional appointed by the Committee of Creditors. Officers and managers of the company continue in their roles but must report to and act under the direction of the RP. Any contract signed by a director or officer after this point, without the RP's authorisation, is potentially invalid.

This creates a practical trap. Counterparties dealing with a company in CIRP often do not know that the RP is now the authorised signatory. They continue dealing with the CFO or the MD as they always did. Months later, when the resolution process has concluded or the company has been liquidated, they discover that the contract they thought they had is unenforceable. The time to ask these questions is before signing, not after.

Key Legal Issues for Counterparties

Who Has Authority to Contract During CIRP?

Under Section 17 of the IBC, the RP takes over management of the corporate debtor. The board is suspended. The RP has the power to do everything necessary to run the company and preserve its value, including entering into contracts in the ordinary course of business. Section 20 requires the RP to protect the corporate debtor's assets and keep the business running as a going concern. For routine procurement or service contracts, the RP can authorise transactions directly. For non-routine or major transactions, the RP typically needs Committee of Creditors approval.

What Does the Section 14 Moratorium Restrict?

Section 14 of the IBC imposes a moratorium on the corporate debtor from the date of admission of the insolvency application. The moratorium prevents: institution of suits or proceedings against the company; execution of judgments against the company; transfer, encumbrance, alienation or disposal of assets; and recovery of property in possession of the corporate debtor. The moratorium does not prevent new contracts from being entered. But it does mean that if the new contract is breached by the company during CIRP, the counterparty cannot sue or enforce against the company during the moratorium period.

Contracts entered before CIRP: the avoidance risk

Contracts signed before the CIRP commenced can be challenged and avoided under Sections 43 to 51 of the IBC if they are preferential transactions, undervalued transactions, extortionate credit transactions, or fraudulent transactions. A supplier who received payment from the company within 12 months before the CIRP start date (or two years for related parties), when the company was already technically insolvent, may find that payment clawed back by the RP. This is a risk that trade creditors and suppliers need to think about when dealing with financially distressed companies.

Resolution plans and existing contracts

Once a resolution plan is approved by the NCLT, the plan binds all creditors, members, guarantors, and other stakeholders. Approved resolution plans frequently restructure or terminate existing contracts. If you hold a long-term supply agreement with a company that goes through CIRP, the successful resolution applicant may not be bound to continue that contract. The plan may specifically terminate vendor or service agreements as part of the restructuring. Counterparties with valuable long-term contracts should consider registering as operational creditors to participate in the CIRP process and protect their interests.

Practical steps for counterparties

If you are dealing with a company that you know or suspect is in CIRP, get confirmation in writing that the person signing is either the RP or is specifically authorised by the RP. Ask for a copy of the NCLT order appointing the RP. Check the public notice on the IBC website or the NCLT cause lists. If the company is in CIRP, ensure your contract specifies that the RP has approved the transaction. Keep records of all communications with the RP directly. And understand that enforcement during the moratorium period will not be possible even if you have a valid signed contract.

Due Diligence Before Contracting With a Company in CIRP

Contracts during CIRP are not automatically invalid, but they come with risks that contracts in normal commercial relationships do not. The authority of the RP to commit the company, the restrictions imposed by the moratorium on enforcement, and the potential for earlier contracts to be avoided under the IBC's avoidance provisions all create complexity that counterparties need to navigate carefully.

The best protection is due diligence before signing: verify who you are dealing with, confirm their authority under the CIRP process, and factor the moratorium restrictions into your commercial planning. Discovering these issues after a dispute has arisen is far more expensive than addressing them at the contracting stage.

Frequently Asked Questions

Can a counterparty terminate an existing contract simply because the company has entered CIRP?

Not automatically, and doing so carries risk. Termination clauses triggered solely by insolvency, known as ipso facto clauses, are not expressly invalidated by the Insolvency and Bankruptcy Code, 2016, but Section 238 gives the Code overriding effect over conflicting contractual terms, and the Resolution Professional can approach the NCLT to resist a termination that would undermine the company's value. For goods or services the RP designates as critical, Section 14(2A) restricts termination during the moratorium.

What happens to contracts already signed if the company moves from CIRP into liquidation?

If the National Company Law Tribunal orders liquidation, the liquidator takes over the corporate debtor's affairs, and existing contracts are administered subject to the liquidation process and the priority waterfall under Section 53 of the Insolvency and Bankruptcy Code, 2016. Contracts that no longer serve the liquidation estate are typically wound down, and counterparties become creditors in the liquidation for any resulting claims.

Does the Section 14 moratorium prevent a counterparty from invoking an arbitration clause in its contract?

The moratorium under Section 14 of the IBC bars institution or continuation of suits and proceedings against the corporate debtor, and courts have generally treated arbitration against the corporate debtor as falling within this bar for the duration of CIRP. A counterparty wishing to pursue a claim during this period should instead file it before the Resolution Professional as part of the claims process.

How can a counterparty verify that someone claiming to be the Resolution Professional is validly appointed?

Ask for a copy of the National Company Law Tribunal's order appointing the Interim Resolution Professional or confirming the Resolution Professional, and cross-check the appointment against the public announcement the RP must make under the IBC and the information on the NCLT's cause list or the Insolvency and Bankruptcy Board of India's website. Verifying this before signing avoids dealing with an unauthorised signatory.

Is there a deadline for a counterparty to file a claim once a company enters CIRP?

Yes. Creditors and counterparties with a claim must submit it to the Resolution Professional within the time specified in the public announcement made after admission of the insolvency application, typically 14 days from commencement of CIRP, though claims can sometimes be accepted later at the Resolution Professional's discretion before the resolution plan is finalised. Missing the window risks exclusion from the resolution plan.

Do employees' contracts of employment continue unaffected during CIRP?

Employment generally continues during CIRP, since Section 20 of the IBC directs the Resolution Professional to run the company as a going concern, which includes keeping the workforce in place. Wages earned during the CIRP period rank as costs of the resolution process ahead of most other claims, while dues that accrued before CIRP commenced are claimed separately as workmen's dues in the resolution or liquidation process.

Can goods or services essential to keeping the company running be cut off during the moratorium?

No, not for the categories the law protects. Section 14(2) of the IBC bars suspension or interruption of essential goods or services, such as electricity, water, telecommunications, and IT services, during the moratorium, provided the corporate debtor pays for what it consumes. Section 14(2A) extends similar protection to other goods or services the Resolution Professional considers critical to preserving the company's value.

Can a contract signed by an unauthorised director during CIRP be validated later?

It can be, but only through the Resolution Professional's own ratification. If the RP reviews a contract signed without proper authorisation and considers it beneficial to the company, the RP can adopt it going forward. Absent such ratification, the counterparty cannot assume the contract is binding merely because it was signed by someone who held authority before the moratorium began.

Can a counterparty recover advance payments made to a company that later enters CIRP without delivering the goods or services?

Recovery is possible but constrained by the moratorium. The counterparty cannot sue to recover the advance during the moratorium under Section 14 of the IBC and must instead file a claim with the Resolution Professional as an operational or financial creditor, depending on the transaction, competing with other creditors through the resolution plan or, if the company is liquidated, through the Section 53 waterfall.

Who signs a contract on behalf of a company in CIRP?

The resolution professional signs, exercising the powers of the board under Section 17 of the Insolvency and Bankruptcy Code, 2016, which suspends the board on admission. A counterparty should take the contract as executed by the resolution professional and retain a copy of the appointment order on its file. A signature by a director, however senior, does not bind the corporate debtor during the process, and a counterparty who accepts one is left holding an agreement of doubtful enforceability.

Does a contract entered during CIRP rank as an insolvency resolution process cost?

Goods and services supplied to the corporate debtor during the process, on the resolution professional's authority and for the purpose of keeping the company a going concern, ordinarily form part of insolvency resolution process costs, which are paid in priority under Section 53 of the Insolvency and Bankruptcy Code, 2016. That priority is the principal commercial reason a counterparty may be willing to trade with a company in CIRP at all, and it depends on the supply being properly authorised.

Can a counterparty insist on advance payment before supplying during CIRP?

Yes, where no subsisting contract obliges it to extend credit. Nothing in the Code requires a counterparty to fund a company in CIRP, and asking for payment in advance, a shorter credit period or security is a commercially reasonable response to its own risk. Where an existing contract governs the supply, its terms continue to apply, and unilateral changes to payment terms may amount to a breach rather than a legitimate precaution.

What should a counterparty verify before signing with a company in CIRP?

Confirm the resolution professional's appointment from the tribunal's order and the Insolvency and Bankruptcy Board of India records, check whether committee of creditors approval is required for a transaction of that size under Section 28 of the Insolvency and Bankruptcy Code, 2016, and establish how the payment will be treated within the process. Contracts of unusual value or duration should not be signed on the resolution professional's authority alone without confirming the approval position first.