Drafting Ipso Facto Clauses That Survive Indian Courts
An ipso facto clause lets one party walk away from a contract because the other has become insolvent, without proving anything else. Indian law does not treat that bargain as void, but under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016, the National Company Law Tribunal can disable it where the contract is what keeps the counterparty alive. What follows sets out the boundaries drawn in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta [(2021) 7 SCC 209] and converts them into drafting instructions for contracts signed long before any distress appears.
What the Gujarat Urja Doctrine Decided, and What It Did Not
The facts drive the ratio. Astonfield Solar (Gujarat) Private Limited generated solar power under a single long-term power purchase agreement (PPA) with Gujarat Urja Vikas Nigam Limited, which bought its entire output. Floods in 2015 and 2017 damaged the plant, the company slid into default and filed under section 10 of the Insolvency and Bankruptcy Code, 2016 (the Code). The purchaser then issued a termination notice under a clause triggered by the commencement of insolvency proceedings. The resolution professional moved the NCLT under section 60(5)(c), the termination was stayed, the National Company Law Appellate Tribunal (NCLAT) affirmed, and on 8 March 2021 the appeal was dismissed.
Residuary Jurisdiction Where Insolvency Is the Sole Trigger
Three propositions emerge. The residuary jurisdiction in section 60(5)(c) over questions arising out of or in relation to the insolvency is wide enough to take in a contractual dispute, and section 238 gives the Code overriding effect over the PPA as an instrument. Next, and this is the part most commentary skips, the Court refused to strike down ipso facto clauses as a class. It surveyed their treatment in the United States, the European Union, Singapore and the United Kingdom, noted that the Code carries no equivalent bar, and held that one could not be read in from the statute's object. Where the line sits between contractual freedom and corporate rescue was for Parliament. Relief followed on the facts alone: the PPA was the debtor's sole contract, it was terminated for no reason other than the insolvency, and termination would have brought about the corporate death of the debtor. The intervention rested on section 60(5)(c) read with section 238, not on any prohibition inside section 14(1).
The Outer Limit Drawn in the Tata Consultancy Services Case
Eight months later the same court fixed the boundary. In Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain [(2022) 2 SCC 583] the appellant terminated a facilities agreement with SK Wheels Private Limited for repeated deficiency in service, having already served breach notices. The NCLT stayed the termination, the NCLAT upheld the stay, and the Supreme Court set both aside. There is no residuary jurisdiction over a contractual dispute arising dehors the insolvency. Even where the dispute does relate to the insolvency, a party may be restrained only if the contract is central to the success of the corporate insolvency resolution process (CIRP) and termination would cause the debtor's corporate death.
The two judgments hand the drafter a usable test. A termination right is fragile to the extent it depends on the fact of insolvency, and durable to the extent it depends on something the counterparty did or failed to do, evidenced before anybody filed anything.
Termination Triggers, Their Treatment During CIRP, and How to Strengthen Them
The table maps triggers found in most Indian commercial templates against their likely fate once a CIRP is admitted.
Termination trigger as drafted | Likely treatment during CIRP | How to strengthen it |
Commencement of CIRP, admission of a section 7 or 9 application, or appointment of an interim resolution professional | Weakest position. Insolvency is the sole trigger, so section 60(5)(c) is engaged and termination may be stayed where the contract is central to the CIRP. | Keep the clause but never rely on it alone. Add independent triggers and terminate on those first. |
Filing of a winding up petition, appointment of a receiver, or an arrangement with creditors | Treated the same way. The trigger is a proxy for insolvency and will be read as one. | Convert it into a financial covenant measuring the counterparty's condition, such as minimum tangible net worth or interest cover. |
Payment default continuing beyond a stated cure period | Ordinarily enforceable where the default and the notice predate admission and are documented. | Short, certain cure period. Send reminders to the contractual notice address. Do not waive by accepting late payment without reservation. |
Failure to meet a defined service level or delivery schedule | Enforceable where measured against an objective standard and recorded contemporaneously. This is the Tata Consultancy Services position. | Define the metric, the measurement method and the reporting cadence, and require a periodic signed report. |
Breach of a specific covenant, such as loss of a licence, lapsed insurance, or breach of a security covenant | Enforceable. The breach is independent of insolvency and provable from documents. | List the covenants exhaustively and make each measurable. Require evidence of compliance at fixed intervals, not on request. |
Change of control or transfer of a material part of the business | Enforceable in principle, but a transfer under an approved resolution plan invites scrutiny where the clause is used to defeat the plan. | Decide the plan scenario in advance: carve out transfers under a section 31 plan, or take a consent right with stated grounds of refusal. |
Termination for convenience on notice | Generally the most robust, since there is no trigger to characterise as insolvency-related, though a notice served the day after admission attracts scrutiny. | Keep the notice period realistic. Record the commercial reason internally before serving. |
What Is the Drafting Error Behind Most Failed Ipso Facto Terminations?
The recurring mistake is not the presence of an insolvency trigger. It is the absence of anything else. A supply agreement whose termination article recites insolvency, winding up and the commencement of any proceeding under the Code, but says nothing measurable about performance, leaves its holder with one ground, and that ground is the one the NCLT can neutralise. Delete nothing; add.
Why the Performance Record Decides More Than the Clause Text
The question a tribunal asks is short. Would this contract have been terminated had the CIRP never started? It is answered from documents, not from the recitals in the notice. A file holding dated breach notices, service credit deductions, rejected consignment notes and quality audit reports produces one answer. A file whose earliest complaint is dated four days after the public announcement produces another, and no amount of drafting rescues it.
Building a Default File That Predates the Petition
Three habits do most of the work. Complaints go in writing to the contractual notice address, not by message to a project manager who has since left. Every acceptance of late or defective performance is expressly without prejudice and without waiver, since a history of silent tolerance is the strongest material a resolution professional can be handed. Performance is measured against a stated metric on a fixed cadence, so the record exists whether or not anyone was annoyed that month.
Section 14 and the Overlays No Clause Can Displace
Section 14(1) is narrower than it is usually assumed to be. It stops the institution or continuation of suits against the corporate debtor, the transfer or disposal of its assets, action to enforce a security interest, and recovery of property occupied by the debtor. Terminating a contract does not appear on that list. Advising a client that a notice is void under the moratorium is usually wrong; the notice is instead liable to be stayed on an application by the resolution professional, which is a different problem with a different answer.
What Counts as an Essential Supply Under Section 14(2) of the Code?
Section 14(2) protects essential goods or services, which regulation 32 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 confines to electricity, water, telecommunication services and information technology services, and only to the extent these are not a direct input to the output the debtor produces. Power drawn to run a debtor's printing presses is a direct input and falls outside; the same supply lighting its offices falls inside. Section 14(2A), inserted in 2020, is wider: the resolution professional may designate goods or services as critical to preserving value and running the debtor as a going concern, and that supply cannot then be terminated, suspended or interrupted during the moratorium unless the debtor fails to pay for supplies made during it. No contract can pre-empt the designation. What a contract can do is fix payment terms and a suspension right for non-payment tightly enough that the unpaid-dues exception is easy to invoke.
Can a Licence or Permit Be Suspended During the Section 14 Moratorium?
The Explanation to section 14(1) provides that a licence, permit, registration, quota, concession or clearance granted by a government, local authority or sectoral regulator is not to be suspended or terminated on the ground of insolvency, provided current dues for its use during the moratorium are paid. The Insolvency and Bankruptcy Code (Amendment) Act, 2026 carried that logic past plan approval. Section 31(5), in force since 26 May 2026, provides that once a plan is approved under section 31(1) such grants are not to be suspended or terminated except for breach of an obligation during the remaining period of the grant.
Step-In, Novation and Assignment as Drafted Alternatives
Termination is a blunt remedy and, in the scenario where it matters most, an unreliable one. The better response builds remedies that leave the contract standing while moving the risk.
A step-in right should be written as a consequence of performance failure, never of insolvency, and must state who may step in, on what notice, what access to premises, systems and data follows, who bears the cost, how long it lasts and how step-out works. Vague step-in language is unenforceable in practice because nobody can operate it in a crisis.
Assignment and novation clauses deserve more attention than they get. Most templates bar assignment without prior written consent and stop there. State whether consent may be withheld and on what grounds, then decide in advance how the clause behaves when control of the counterparty changes under an approved resolution plan. A party wanting continuity should carve out transfers under a plan approved under section 31; a party that does not should say so plainly.
Credit support does the rest. A parent guarantee, a standby letter of credit, retention of title, escrowed source code or a shorter payment cycle each survives a counterparty's CIRP in a way a termination clause may not. Section 14 now also covers a surety seeking to proceed against the corporate debtor under a contract of guarantee, which constrains the surety's recourse rather than the beneficiary's claim.
The First Fortnight After Admission
Most of the damage is done inside a fortnight. The public announcement carries the insolvency commencement date and the last date for claims, which regulation 6(2)(c) of the CIRP Regulations sets at fourteen days from the appointment of the interim resolution professional; claims go in on Form B for operational creditors and Form C for financial creditors. Pause before serving any notice. Where independent grounds exist, particularise them with dates and documents and leave the insolvency out. Where they do not, a notice served now will be stayed and will hand the resolution professional a written record of bad faith. Then settle with the resolution professional, in writing, whether performance continues, since supplies made during the CIRP with that authorisation rank as insolvency resolution process costs.
Liquidation, Where the Rescue Rationale Runs Out
The Gujarat Urja protection is built on rescue. Once a liquidation order is passed under section 33 the objective becomes realisation and the premise weakens. The section 14 moratorium ends. Since 26 May 2026 clauses (a) and (c) of section 14(1), covering suits against the debtor and enforcement of security interests, apply mutatis mutandis on a liquidation order, subject to proceedings the Central Government may notify, and neither shields a contract from termination. A liquidator pursuing a going concern sale under regulation 32(e) or 32(f) of the IBBI (Liquidation Process) Regulations, 2016 will resist termination on value-maximisation grounds, but it is a weaker argument than the one available during a CIRP.
Frequently Asked Questions
Does the Insolvency and Bankruptcy Code, 2016 make ipso facto clauses void?
No. In Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta the Supreme Court declined to invalidate them as a class and left the question to Parliament. The clause stays valid. What the Code supplies is a power in the NCLT to stay its operation, plus protection for essential and critical supplies during the moratorium.
Can a contract be terminated during the section 14 moratorium?
Often, yes. Section 14(1) does not list contract termination among the prohibited acts. The risk lies elsewhere: if termination is triggered solely by the insolvency and the contract is central to the CIRP, the resolution professional can apply under section 60(5)(c) and the notice can be stayed.
A vendor has been in breach for months. Does a CIRP wipe out the termination right?
Not if the record shows it. Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain confirms there is no jurisdiction over a termination arising independently of the insolvency. What decides the point is the dated correspondence, the performance data and the notices served before the petition.
Are you obliged to keep supplying a customer that has entered CIRP?
You must continue if the supply is essential under section 14(2) read with regulation 32, or if the resolution professional designates it critical under section 14(2A). In the second case the obligation falls away if the debtor does not pay for supplies made during the moratorium, so agree payment terms in writing and enforce them.
Should the insolvency termination clause be deleted from the template?
No. Keep it and add independently verifiable triggers beside it: payment default with a defined cure period, measurable service levels, and named covenants provable from documents. Then terminate on the independent ground.
Does the analysis change once the company moves into liquidation?
Yes. The rescue rationale does not carry across to liquidation, where the objective is realisation. The moratorium under section 14 ends on the liquidation order, and although clauses (a) and (c) of section 14(1) now apply at that stage, neither stops a contract being terminated.
Does the Gujarat Urja doctrine apply to contracts other than power purchase agreements?
Yes. The Supreme Court's reasoning in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta is not limited to power purchase agreements; it applies to any contract terminated solely on the ground of the counterparty's insolvency where the contract is essential to keeping the corporate debtor alive. The subsequent Tata Consultancy Services decision confirmed the same residuary jurisdiction under Section 60(5)(c) in the context of an information technology facilities agreement, so the doctrine operates across contract types, not just regulated utility supply arrangements.
Can a resolution applicant use Gujarat Urja to force continued supply after a resolution plan is approved?
The Gujarat Urja protection is tied to the corporate insolvency resolution process and the National Company Law Tribunal's residuary jurisdiction under Section 60(5)(c) over questions relating to that process. Once a resolution plan is approved and the CIRP concludes, that specific statutory basis for restraining termination falls away, and the resolved company's relationship with its counterparties reverts to ordinary contract law, though Section 31(5) of the Code separately protects statutory licences and permits from suspension after approval.
What happens to a termination notice served before insolvency proceedings began but not yet acted upon?
A notice served before the corporate insolvency resolution process commenced, on grounds independent of insolvency such as a documented payment default, is generally unaffected by the later admission of the corporate debtor, since the ground for termination predates and is unconnected to the insolvency. The resolution professional may still contest the notice's validity on its own contractual merits, but cannot invoke Gujarat Urja to restrain it purely because a CIRP has since begun.
Can parties avoid the NCLT's Section 60(5)(c) jurisdiction by inserting an arbitration clause?
An arbitration clause does not oust the National Company Law Tribunal's jurisdiction over questions arising out of or in relation to the insolvency of a corporate debtor, since Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 is treated by courts as a matter the tribunal alone can decide once a corporate insolvency resolution process is underway. Purely commercial disputes unconnected to the insolvency can still proceed to arbitration under the contract's dispute resolution clause, but a dispute about termination triggered by the insolvency itself is likely to stay with the tribunal.
Does the Gujarat Urja doctrine apply in ordinary civil courts, outside the NCLT?
No. The doctrine operates through the National Company Law Tribunal's residuary jurisdiction under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016, which applies specifically to questions arising out of or in relation to the insolvency of a corporate debtor undergoing a CIRP. A civil court has no equivalent power to stay a termination on the ground that it would jeopardise an insolvent party's survival, so the protection is only available once a formal insolvency process has been admitted.
What documentary evidence best shows a termination was unrelated to the counterparty's insolvency?
Contemporaneous breach notices, service credit deductions, rejected consignment or delivery records, quality audit reports and any correspondence recording the default, all dated before the insolvency commencement date, are the strongest evidence. A termination file whose earliest documented complaint appears only after the public announcement of the corporate insolvency resolution process is far weaker, since it suggests the termination ground was constructed around the insolvency rather than existing independently of it.
Can Gujarat Urja protect a low-value or non-essential contract from termination?
Unlikely. The Supreme Court's relief in Gujarat Urja rested on the specific finding that the terminated power purchase agreement was the corporate debtor's sole revenue-generating contract, so termination would have caused its corporate death. A contract that is peripheral to the debtor's business, or one of several similar contracts, is far less likely to meet that threshold, and NCLAT and NCLT benches have generally confined the protection to contracts central to the debtor's survival.
Vikrant D. Shetty | Vikrant D. Shetty leads the Insolvency and Arbitration Practice and the Corporate and Commercial Law Practice at the Mumbai-based law firm Vikrant D. Shetty & Associates, Advocates & Solicitors, which advises Indian and international clients on commercial contracts, termination and enforcement strategy, and appears for financial creditors, operational creditors and corporate debtors before the National Company Law Tribunal (NCLT), Mumbai Bench, and before the Bombay High Court in matters involving companies, insolvency and contractual enforcement.
This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please seek direct consultation with an advocate.
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