Can Force Majeure Be Invoked When a Supplier Enters CIRP
A supplier's insolvency is rarely a force majeure event, because force majeure in India is a creature of contract, not a free-standing doctrine, and standard clauses list external events such as war, flood or embargo rather than a counterparty's financial failure. The more significant constraint is section 14 of the Insolvency and Bankruptcy Code, 2016, whose moratorium bars suits and enforcement against the insolvent supplier without stopping the buyer's own commercial decisions, such as sourcing elsewhere or accruing a damages claim. This article addresses whether a buyer can invoke force majeure, what section 14 actually restricts, and what protections still work once a supplier is admitted into insolvency.
Why a Supplier's Insolvency Rarely Fits Inside a Force Majeure Clause
Why Doesn't a Standard Force Majeure Clause Cover Supplier Insolvency?
Force majeure in India is a creature of contract. There is no free-standing doctrine of it; the clause is the source of the right, and its wording decides the outcome. A standard Indian supply contract lists war, civil commotion, fire, flood, earthquake, epidemic, strike, embargo and act of government. Insolvency of a party is almost never on that list, and a residuary limb covering any other event beyond the reasonable control of the affected party takes its colour from the enumerated events, all of which are external and extraordinary. A counterparty's balance sheet failing is neither. Credit deterioration is a risk procurement is expected to diligence, price and monitor.
The Clause Excuses the Party That Is Prevented
The clause suspends the obligations of the affected party. In a supplier CIRP that party, if anyone, is the supplier: it gains relief from delivery obligations, and the buyer's benefit is derivative, usually a right to suspend reciprocal obligations and, after a defined period of continuing force majeure, to terminate without liability. A buyer invoking the clause on its own behalf has to explain what prevented it from performing, and nothing has. There is a further cost that gets overlooked. Characterising the disruption as force majeure concedes that nobody is in breach, which is the concession that destroys the damages claim the buyer wants to preserve.
Section 32 Governs Where the Contract Has Spoken
In Energy Watchdog v. Central Electricity Regulatory Commission [(2017) 14 SCC 80] the Supreme Court considered generators seeking relief under long term power purchase agreements after a change in Indonesian coal pricing regulation raised their input costs. The Court held that where a contract contains an express force majeure clause, the field is occupied by section 32 of the Indian Contract Act, 1872, which governs contingent contracts, and section 56 has no application; section 56 operates only where the event occurs dehors the contract. The claim failed on the facts as well: the clause expressly excluded a rise in fuel cost, and alternative modes of performance remained available at higher cost. Commercial onerousness is not frustration. For a buyer, the practical message is that the analysis is a construction exercise on the words actually signed, with no general doctrine held in reserve behind them.
Can Frustration Under Section 56 Excuse a Buyer From a Defaulting Supplier?
Even where no force majeure clause exists, section 56 seldom assists. Frustration needs impossibility or destruction of the fundamental basis of the bargain, not added difficulty or expense. A supplier in CIRP has not ceased to exist: its management vests in the interim resolution professional under section 17 of the Code, and the statutory scheme assumes the business keeps trading. If equivalent goods can be bought elsewhere at a higher price, the buyer holds a quantifiable damages claim, which is the opposite of a frustrated contract. A party also cannot found frustration on the other side's own default, which is what a failure to deliver is.
What the Section 14 Moratorium Stops, and What It Leaves Untouched
On admission the Adjudicating Authority declares a moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 (the Code). Section 14(1) prohibits four things: institution or continuation of suits or proceedings against the corporate debtor, including execution of any judgment, decree or order in any court, tribunal, arbitration panel or other authority; transferring, encumbering, alienating or disposing of its assets or any legal right or beneficial interest in them; any action to foreclose, recover or enforce a security interest, including under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and recovery of any property by an owner or lessor where that property is occupied by or in the possession of the corporate debtor.
Read that list for what is absent. Section 14 does not stop contractual rights from accruing; a claim for non-delivery arises when delivery fails, and what the moratorium bars is pursuing it against the corporate debtor by suit, arbitration or execution rather than filing it with the resolution professional. Section 14 does not oblige a counterparty to keep performing, save in the two situations below. It leaves the buyer's own commercial decisions alone, so qualifying an alternative source, shifting volumes and issuing default notices to build a record are all open. And it contains no general bar on termination, although the ground relied on matters a great deal.
Section 14(1)(d) and the Tooling Left on the Supplier's Floor
Manufacturing buyers lose ground here fastest. Buyer-owned tooling, moulds, dies, jigs, test fixtures and bailed raw material commonly sit inside the supplier's plant. Section 14(1)(d) bars recovery of property by an owner or lessor where the property is occupied by or in the possession of the corporate debtor. Title is not the test; possession is, and appellate benches have applied the bar even where the underlying lease or bailment ended before commencement. A buyer that has not physically retrieved its tooling before the insolvency commencement date is left negotiating with the resolution professional or applying to the Adjudicating Authority under section 60(5), and the resolution professional has every incentive to keep the tooling where it is, because a plant with its tooling in place is far easier to sell as a going concern. The fix is logistical rather than legal.
Sections 14(2) and 14(2A) Point at Suppliers, Not at Buyers
Section 14(2) prevents the supply of essential goods or services to the corporate debtor from being terminated, suspended or interrupted during the moratorium, and regulation 32 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 confines essential supplies to electricity, water, telecommunication services and information technology services, and only where they are not a direct input to the output produced by the corporate debtor. Section 14(2A) goes further: a supply that the interim resolution professional or resolution professional considers critical to protecting value and managing operations as a going concern cannot be terminated, suspended or interrupted during the moratorium, unless the corporate debtor has not paid dues arising from that supply during the moratorium period. Both provisions run one way, protecting the debtor's inward supply chain, and a buyer purchasing from an insolvent supplier draws nothing from either. The mirror position is the trap: in tiered manufacturing the same counterparty is often customer and vendor at once, and a company supplying components to the corporate debtor may be held to that supply while its own orders go unfilled.
Section 25 and Why the Resolution Professional Is the Real Counterparty
Section 25 of the Code requires the resolution professional to preserve and protect the assets of the corporate debtor, including its continued business operations. That makes the resolution professional the person who decides which contracts get raw material, machine time and attention. Cash-generating contracts are performed; loss-making ones are quietly starved. A buyer whose opening move is a strident breach notice tends to drop down that queue, while a buyer arriving with payment in advance against each dispatch, or an offer to settle a sub-supplier's dues so the line restarts, usually gets continuity and better information. Both tracks can be run together: preserve the record in writing while negotiating commercially.
Five Fact Patterns and the Route That Actually Works
The table maps the situations that arise most often in the first weeks after admission, and the route that produces a result rather than a letter.
Scenario | Force majeure available to the buyer? | What section 14 permits or bars | Better contractual route |
Supplier in CIRP, deliveries continue at reduced volume | No. Not a listed event, and the buyer is not prevented from performing. | Bars suit, arbitration and execution against the debtor. Does not bar accrual of claims or alternative sourcing. | Service level threshold on rolling on-time in-full performance, releasing exclusivity. |
Supplier stops delivering after admission | No. This is the supplier's breach, not a supervening external event. | Notice and termination remain open; the damages claim must be filed with the resolution professional. | Independent material breach trigger with a short cure period and a written cure plan. |
Buyer's tooling and dies held at the supplier's plant | Irrelevant. The clause creates no proprietary remedy. | Section 14(1)(d) bars recovery of property in the debtor's possession; a section 60(5) application is needed. | Duplicate tooling, or storage at a third-party warehouse the buyer controls. |
Contract allows termination on insolvency | Not force majeure at all; a separate ipso facto right. | Vulnerable: Gujarat Urja restrained termination sought solely on the ground of CIRP. | Performance and payment triggers evidenced independently of the insolvency filing. |
Buyer also supplies components to the same debtor | No, and the question runs the other way. | Sections 14(2) and 14(2A) may compel continued supply; non-payment of moratorium period dues is the exception. | Set-off and netting wording, plus cash-in-advance rights on payment deterioration. |
Two rows deserve emphasis. Termination founded on an insolvency trigger is the weakest route available and the one most contracts default to, and recovery of the buyer's own property is a section 14 problem that no drafting cures once possession has passed.
Drafting the Exit in Advance, and the First Fortnight After Admission
Triggers That Do Not Mention Insolvency
Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta [(2021) 7 SCC 209] is the reason a buyer should not depend on an insolvency-triggered termination right. The Supreme Court upheld the National Company Law Tribunal's exercise of jurisdiction under section 60(5)(c) of the Code to restrain a power purchaser from terminating a power purchase agreement solely on the ground that insolvency had commenced, that agreement being the corporate debtor's only source of revenue, so that termination would have driven it to liquidation and defeated the Code's object of revival. The Court declined to rule generally on the validity of ipso facto clauses and left that to the legislature. The ruling is narrow, but plan on the assumption that a termination which looks insolvency-driven will be restrained where the contract is central to the debtor's survival.
Draft triggers that stand on their own evidence instead. On-time in-full delivery below a stated percentage over a rolling three-month window. Two consecutive failed quality or process audits. Failure to maintain an agreed buffer stock, verified by monthly certificate. Loss or non-renewal of a licence or certification required for the goods. Failure to meet a written cure plan within a stated period. Each is measurable from records the buyer already keeps, each will usually accrue before any insolvency filing if the supplier is genuinely failing, and none requires the word insolvency to appear in the notice.
Continuity Machinery Worth Paying For
Buffer stock held at the buyer's own premises, sized to the qualification lead time for an alternative source, is the most useful protection available and the first thing traded away in price negotiations. After that: a second source kept warm with a small guaranteed annual volume; escrow of tooling drawings, process specifications, bills of material and source code, released on performance triggers rather than on an insolvency event; a licence to manufacture or have manufactured, granted in advance and expressed to survive termination; step-in rights over sub-supplier contracts, backed by direct agreements with the sub-suppliers that matter; and an obligation to store buyer-owned tooling at an identified third-party warehouse, which keeps it outside the corporate debtor's possession and so outside section 14(1)(d).
What Should a Buyer Do in the Fourteen Days After a Supplier's Admission?
Read the public announcement and diary the dates. Claims are due by the date stated in it, fourteen days from the insolvency commencement date, and regulation 12 of the CIRP Regulations lets a creditor who misses that date submit a claim with proof on or before the ninetieth day from commencement, with reasons for the delay; anything later depends on discretion and cannot be planned for. Then stop the bleeding. Freeze advances, prepayments and open credit. Reconcile payments against deliveries and quantify pre-commencement damages so the Form B claim rests on evidence. Locate every item of buyer-owned property and, if any of it remains outside the supplier's premises, keep it there. Write to the resolution professional seeking written confirmation whether the contract will be performed, which yields either continuity or a documented refusal. Check whether the company supplies anything to the corporate debtor that might be designated critical. Begin qualifying an alternative source at once, because qualification lead time, not law, usually determines the loss.
Frequently Asked Questions
Can a buyer declare force majeure because its supplier has been admitted into CIRP?
Almost never. Force majeure in India is contractual, and the usual clause neither lists insolvency nor protects a party who has not been prevented from performing. It excuses the party whose performance is obstructed, which here would be the supplier. Declaring it also concedes that nobody is in breach, which is fatal to the damages claim you probably want to keep.
Does the section 14 moratorium prevent a buyer from terminating the contract?
There is no general bar on termination in section 14. But if the only ground is the commencement of insolvency, the corporate debtor or the resolution professional can apply under section 60(5) and, on the reasoning in Gujarat Urja, may obtain an order restraining termination where the contract is central to survival. Terminating on independent performance grounds, properly evidenced, is a much stronger position.
Can a buyer recover tooling or moulds it owns from the supplier's plant?
Not unilaterally, once the property is in the corporate debtor's possession on the commencement date. Section 14(1)(d) bars recovery by an owner or lessor of property occupied by or in the possession of the corporate debtor. The route is a request to the resolution professional and then an application under section 60(5), which usually turns on showing that the asset is not needed for operations.
Can a buyer be forced to keep supplying a customer that has entered CIRP?
Yes, in a defined situation. Section 14(2) protects electricity, water, telecommunication and information technology services, and section 14(2A) lets the resolution professional designate a supply as critical to preserving value and running the business as a going concern. The express exception is non-payment of dues arising during the moratorium, so keep that ledger separate from the pre-commencement ledger.
How does a buyer pursue damages for non-delivery during the moratorium?
The right accrues normally, but enforcement is redirected. It cannot be pursued by suit, arbitration or execution against the corporate debtor. File it with the resolution professional as an operational creditor claim, supported by purchase orders, acknowledgements, cover-purchase invoices and the price differential, and expect it to be dealt with in the resolution plan at a discount.
Does section 56 offer a way out where the force majeure clause does not?
Rarely. Energy Watchdog holds that an express force majeure clause brings the matter within section 32 and displaces section 56, and that a contract is not frustrated merely because performance has become costlier. A supplier's insolvency does not make performance impossible, and frustration cannot be founded on the other party's own default.
What is the deadline for a buyer to file a damages claim after a supplier enters CIRP?
Claims are generally due by the date stated in the public announcement made after admission, which is fourteen days from the insolvency commencement date. Regulation 12 of the CIRP Regulations allows a creditor who misses that date to submit a claim with proof, along with reasons for the delay, up to the ninetieth day from commencement; anything filed later depends on the resolution professional's discretion.
Why is a resolution professional more likely to keep supplying a buyer who pays in advance?
Section 25 of the Insolvency and Bankruptcy Code requires the resolution professional to preserve and protect the corporate debtor's assets and continued business operations, which means contracts that generate cash and reduce risk to the estate tend to receive raw material, machine time and attention, while loss-making contracts are quietly starved. A buyer offering payment in advance against dispatch, or help clearing a sub-supplier's dues so a line restarts, is more likely to secure continuity than one that opens with a strongly worded breach notice.
Can escrow of source code or tooling drawings protect a buyer if a supplier becomes insolvent?
Escrow can help because it places the asset outside the supplier's possession before financial distress arrives, and a deposit held by a third-party agent is enforceable against that agent rather than against the corporate debtor or its moratorium. The arrangement works best when a licensed copy, rather than the only copy, is deposited, the licence is granted at the outset and triggered on a release event, and the escrow agent is paid directly so the arrangement does not lapse if the distressed supplier stops paying fees.
What is buffer stock and why is it considered the most useful continuity protection?
Buffer stock is inventory held at the buyer's own premises, sized to cover the qualification lead time needed to bring an alternative source online. Because it sits with the buyer rather than the supplier, it is unaffected by the supplier's insolvency, the section 14 moratorium, or any dispute over possession of buyer-owned assets, which is why it is often the single most effective protection available even though it is frequently the first item traded away during price negotiations.
Does the section 14 moratorium stop a buyer from qualifying an alternative supplier?
No. Section 14 leaves a buyer's own commercial decisions untouched; it bars proceedings, enforcement, and recovery of property against the corporate debtor, but it does not prevent the buyer from qualifying a second source, shifting order volumes, or issuing default notices to build a documentary record. Beginning this process promptly is generally more decisive than any legal step, since qualification lead time, rather than the law, usually determines the size of the eventual loss.
Can a buyer set off amounts it owes a supplier against a claim for non-delivery once the supplier enters CIRP?
Contractual set-off is generally not available as insolvency set-off once a supplier enters CIRP; the buyer typically has to pay what it owes in full and separately prove its own claim with the resolution professional, unless the contract contains a broad, cross-agreement set-off right drafted in advance. This is why building explicit set-off and netting wording into the contract before any distress arises matters considerably more than trying to rely on general equitable set-off after admission.
Vikrant D. Shetty | Vikrant D. Shetty leads the Insolvency and Arbitration Practice and the Corporate and Commercial Law Practice at the law firm Vikrant D. Shetty & Associates, Advocates & Solicitors, which advises buyers, suppliers, financial creditors and corporate debtors on supply and manufacturing contracts, force majeure and termination disputes, and proceedings before the National Company Law Tribunal (NCLT), Mumbai Bench, and appears before the Bombay High Court in matters involving contractual enforcement and insolvency.
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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