What Franchisees Can and Cannot Do When a Franchisor Enters CIRP
A franchisee cannot terminate a franchise agreement merely because the franchisor has been admitted to the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016, since the National Company Law Tribunal can restrain an insolvency-only termination under Section 60(5)(c) of the Code where the franchise network is the corporate debtor's principal business. Royalty and other payment obligations ordinarily continue during the moratorium, since there is no general right of set-off during CIRP. This post sets out what a franchisee can and cannot do once CIRP begins, including termination, continued supply, the trade mark licence, and recovery of deposits.
Why the Franchise Agreement Survives Admission Even Though the Brand Owner Has Failed
India has no franchise statute. A franchise arrangement is a bundle held together by contract: a trade mark licence, a supply arrangement, a services and training commitment, a territorial covenant and a payment schedule, sitting on top of the Trade Marks Act, 1999 and the Indian Contract Act, 1872. Admission of the franchisor into CIRP does not dissolve that bundle. The agreement continues as an executory contract of the corporate debtor, with obligations outstanding on both sides.
Almost every franchise agreement carries an insolvency termination clause, and most franchisees assume it is self-executing. It is not. An ipso facto clause invoked on the insolvency ground alone is the weakest exit available to a franchisee, and a franchisee that pulls the trigger without thinking is more likely to end up as a respondent than as a free agent.
Section 14 Does Not Freeze the Contract, but Section 60(5)(c) Might
Read literally, section 14 of the Code does not stop a counterparty from terminating a contract. It bars suits and proceedings against the corporate debtor, stops the corporate debtor from alienating its assets, blocks enforcement of security interests, and prevents recovery of property occupied by the corporate debtor. Termination of a franchise agreement by a franchisee does not fall neatly within any of those limbs.
The restraint comes from the residuary jurisdiction instead. In Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta [(2021) 7 SCC 209] the Supreme Court allowed the National Company Law Tribunal (NCLT) to restrain termination of a power purchase agreement where the sole ground of termination was the counterparty's insolvency and the agreement was the corporate debtor's only revenue-generating contract, so that termination would have driven the company to corporate death. The reasoning transfers. A franchisor whose revenue is the royalty stream from a network stands in a comparable position, and a resolution professional will say so.
The Boundary Drawn by the Facilities Agreement Case
The outer limit was fixed shortly afterwards. In Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Pvt. Ltd. [(2022) 2 SCC 583] the Supreme Court set aside orders that had stopped a service recipient from terminating a facilities agreement with a corporate debtor. Residuary jurisdiction under section 60(5)(c), the Court held, is not a roving licence to supervise commercial contracts; the dispute must arise solely from or relate to the insolvency of the corporate debtor. Termination in that case rested on repeated deficiency in service and an exercised contractual cure mechanism, not on the fact of admission, and the tribunal should not have interfered.
For a franchisee that genuinely wants out, the lesson is blunt. Do not lead with the insolvency clause. Lead with substantive default: failure to supply, collapse of quality control, withdrawal of training, non-renewal of the licence chain behind the mark. Serve the cure notice, keep the correspondence, and let the record show that insolvency was the context rather than the cause.
What Does the Resolution Professional Owe the Franchise Network, and What Does It Not Owe?
Section 20 of the Code requires the interim resolution professional to manage the operations of the corporate debtor as a going concern, and section 25 places on the resolution professional the duty to preserve and protect the assets of the corporate debtor, including continued business operations. In a franchisor CIRP the network is the business. A resolution professional who lets outlets close is destroying the enterprise value a resolution applicant would otherwise pay for.
That duty is real but it is not a guarantee of performance. The resolution professional has no independent purse. Keeping a supply chain running usually requires interim finance, which needs committee of creditors approval under section 28, and the cost of running the business as a going concern is treated as insolvency resolution process cost under section 5(13). A franchisee that wants continued supply should ask for it in writing as a CIRP-cost arrangement, with quantities and payment terms, rather than waiting for the field team to reappear.
Must Royalty Be Paid During CIRP When Support Has Already Degraded?
The instinct is to stop paying. It is usually the wrong first move. Royalty is a receivable of the corporate debtor and a resolution professional is obliged to pursue it. There is no general statutory right of set-off during CIRP; mutual dealings are set off in liquidation under the liquidation regulations, not in a resolution process, and tribunals have been unsympathetic to franchisees who withheld payment and characterised it afterwards as adjustment.
The workable position is to keep paying while building an evidenced record of the franchisor's shortfall: written notice of each failure, a running quantification of the loss, and a reservation of rights in every remittance advice. That record does two things. It supports a claim in Form B, and it supplies the independent breach that makes termination defensible if the network collapses.
The Trade Mark Licence Is the One Asset the Franchisee Does Not Own
A franchise licence is permission to use someone else's mark. Under the Trade Marks Act, 1999, permitted use is defined in section 2(1)(r), and a licensee may be entered on the register as a registered user under sections 48 and 49 with the proprietor's consent. Registration is optional and most Indian franchisees never bother. The omission matters in insolvency, because a registered user has a recorded interest that any diligence exercise will surface, while an unrecorded licensee stays invisible until it makes itself heard.
What Happens to the Trade Mark Licence When the Mark Moves Under a Resolution Plan?
Section 31 makes an approved resolution plan binding on the corporate debtor, its employees, members, creditors, guarantors and other stakeholders. Where the plan leaves the marks inside the corporate debtor and says nothing about subsisting contracts, the franchise licence continues, because the entity that granted it survives. Two structures break that comfort. The first is a plan clause empowering the resolution applicant to review, renegotiate or terminate existing contracts, which has become standard drafting. The second is a plan that hives the intellectual property out to a transferee entity, in which case the licence granted by the corporate debtor does not automatically bind the transferee unless the plan says it does.
A franchisee therefore has one narrow but real window: the period between circulation of the plan and its approval. Asking for the licence to be listed in the schedule of preserved contracts costs nothing and is far easier than arguing afterwards that a transferee is bound by a licence it never signed.
Franchisee Concerns Mapped Across the CIRP and the Plan
Franchisee concern | Position during CIRP | Position after plan approval | Practical step |
Termination on the insolvency ground | Clause survives on paper, but exercise on that ground alone invites a section 60(5)(c) application by the resolution professional | Spent as to the CIRP; a fresh right arises only on a new default by the reconstituted franchisor | Terminate, if at all, on documented substantive breach |
Continued supply of branded stock | No statutory entitlement; depends on going-concern decisions and committee of creditors funding | Depends on the resolution applicant's network plan | Ask for a written supply commitment as a CIRP-cost arrangement |
Royalty and continuing fees | Payable in full; there is no general right of set-off during CIRP | Payable to the reconstituted franchisor on plan terms | Pay, record the shortfall in writing, reserve rights on each remittance |
Trade mark licence | Continues as a contract of the corporate debtor, but the mark itself is a transferable asset | Survives only if the plan preserves it or the marks stay inside the corporate debtor | Seek listing in the schedule of preserved contracts; consider section 49 registration |
Refundable security deposit | Claim in Form B; characterisation as operational debt is contested | Extinguished under section 31(6) except to the extent the plan provides | File early with the deposit receipt and ledger, and argue characterisation |
Prepaid fees and stock advances | Operational debt claim; payout tracks the plan's treatment of operational creditors | Extinguished under section 31(6) on approval | Quantify undelivered goods and services line by line in Form B |
Territorial exclusivity | Contractual only; the resolution professional has no duty to enforce it against third parties | May be restructured by the resolution applicant under an approved plan | Raise it in writing with the resolution professional before the plan is finalised |
Deposits, Prepaid Fees and the Cliff Edge in Section 31(6)
Franchise arrangements almost always involve money sitting with the franchisor: a refundable security deposit, an upfront franchise fee amortised over the term, prepaid marketing contributions, and advances against stock. Recovery of each depends on characterisation.
Operational debt is defined in section 5(21) as a claim in respect of the provision of goods or services, employment, or dues payable under law. A refundable security deposit is not consideration for anything the franchisee supplied, and tribunals have declined to treat pure deposits as operational debt in more than one matter. Advances against undelivered stock and prepaid fees for services the franchisor never rendered are a better fit, though the point is not settled. The practical answer is to file in Form B as an operational creditor with the deposit receipt, the ledger and a line-by-line quantification of what was paid for and never received, and to be ready to argue characterisation rather than assume it.
The realistic recovery position should reach the board without softening. Operational creditors in most approved plans receive liquidation value or a modest percentage of admitted claims, paid over time. A franchisee carrying its deposit as recoverable in the ordinary course is mis-provisioning.
Then comes the cliff. Section 31(6) of the Code, inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2026 and in force since 26 May 2026, extinguishes all claims against the corporate debtor and its assets on approval of a resolution plan. The clean slate is now statutory rather than judicial. Every accrued franchisee claim not dealt with in the plan disappears on the approval date, including damages for the franchisor's failures during the CIRP itself. Continuing to operate the outlet preserves nothing.
Territorial Exclusivity and the Franchisee Who Is Itself Insolvent
Exclusivity is usually the most valuable term in a franchise agreement and the first thing a resolution applicant wants to redraw. Applicants routinely propose converting profitable outlets to company-owned units, consolidating territories, or migrating the network to a different fee model. A franchisee is rarely a financial creditor, so it has no seat in the committee of creditors and no vote on the plan. Its leverage is what an operational creditor can muster: an objection before the adjudicating authority under section 60(5), and an appeal under section 61(3) on the narrow ground that the plan contravenes section 30(2). Neither is a strong hand, which is why the useful work happens earlier and in writing.
When the Franchisee Is the One in Insolvency
The reverse case is more common than the literature suggests. A franchisor whose franchisee is admitted to CIRP faces two problems at once. Section 14(1)(d) prevents recovery of signage, fit-out and equipment in the franchisee's possession, so self-help repossession is unavailable. Terminating on the insolvency ground alone runs into the same Gujarat Urja reasoning where the franchise is the franchisee's only business.
Brand exposure is the sharper risk. Quality control obligations do not pause because a licensee is in insolvency, and a proprietor that permits continued use of its mark by an outlet running below specification weakens the mark itself. The workable response is a written standstill with the resolution professional conditioned on brand standards audits, a requirement that the outlet either meets specification or ceases to display the mark, and insistence that any resolution applicant seek consent under the change-of-control clause. Section 29A screens resolution applicants for eligibility under the Code; it does not screen them for suitability as a licensee of the brand. The consent clause is the only gate the franchisor controls.
Frequently Asked Questions
Can a franchisee terminate as soon as the franchisor is admitted to CIRP?
You can serve the notice, but an insolvency-only termination right is the most fragile route available. The resolution professional can apply under section 60(5)(c) to restrain it, and if the franchise network is the corporate debtor's business, the Gujarat Urja reasoning supports that application. Termination founded on documented substantive breach is far harder to disturb.
Must royalty continue during the moratorium if support has collapsed?
In most cases yes. The obligation is contractual and the moratorium does not suspend it. There is no general right of set-off during CIRP, so withholding simply creates a receivable the resolution professional can pursue. Pay, record the shortfall in writing, quantify it, and reserve rights.
Is a refundable franchise deposit an operational debt?
It is contested. A deposit is not consideration for goods or services the franchisee provided, and tribunals have refused admission on that basis. File the claim in Form B with supporting documents, characterise the amount carefully, and keep deposits separate from advances against undelivered goods, which sit on stronger ground.
Does the trade mark licence survive if a resolution applicant buys the brand?
Only if the plan says so, or if the marks remain inside the corporate debtor and the plan does not authorise contract termination. Where the plan transfers the intellectual property to a separate entity, the licence does not automatically follow. Ask for the licence to be scheduled as a preserved contract while the plan is still being finalised.
What happens to accrued claims once the plan is approved?
Section 31(6), in force since 26 May 2026, extinguishes all claims against the corporate debtor and its assets on approval. Anything the plan does not provide for is gone, including damages for supply failures during the CIRP. There is no residual right to sue the reconstituted company afterwards.
What can a franchisor do when its franchisee enters CIRP and standards slip?
Document each breach of brand specification, require corrective action within a defined period, and make continued use of the mark conditional on compliance. Repossession of fit-out is blocked by section 14(1)(d), so the leverage is the licence itself and the change-of-control consent that any resolution applicant will need.
Can a franchisee recover unpaid marketing fund contributions during the franchisor's CIRP?
Marketing fund contributions are usually pooled and spent by the franchisor on the network's behalf, which makes them harder to trace as recoverable property than a deposit. Unless the franchise agreement earmarks the fund as held in trust for franchisees, an unspent balance is likely to be treated as an asset of the corporate debtor rather than money held on the franchisee's behalf, and any shortfall is best pursued as an operational debt claim in Form B rather than assumed to be automatically recoverable.
Does a franchisee need to file a formal claim if it intends to keep operating the outlet?
Yes. Continuing to operate the outlet does not preserve a claim once Section 31(6) of the Insolvency and Bankruptcy Code, 2016 extinguishes unresolved claims on approval of the resolution plan. A franchisee with a deposit, prepaid fee, or supply shortfall should file in Form B during the claims process regardless of whether it intends to keep running the outlet under the reconstituted franchisor.
Can a franchisee sit on the committee of creditors in the franchisor's CIRP?
Rarely. The committee of creditors under Section 21 of the Code is composed of financial creditors, and a franchisee's claims, such as a security deposit or prepaid fees, are ordinarily treated as operational debt rather than financial debt. An operational creditor has no vote on the resolution plan, though it retains the right to raise objections under Section 60(5) and to appeal an approved plan under Section 61(3) on limited statutory grounds.
What is the practical difference between an operational debt claim and a financial debt claim for a franchisee?
Financial debt under Section 5(8) of the Code arises from a disbursement against the consideration for the time value of money, such as a loan. Operational debt under Section 5(21) arises from a claim in respect of goods, services, employment, or statutory dues. A franchisee's claims, deposits, prepaid fees, and supply shortfalls, are almost always operational debt, which places the franchisee outside the committee of creditors and typically results in a lower recovery than financial creditors receive under an approved plan.
Can a resolution applicant require a franchisee to accept new territory or pricing terms to keep the franchise?
Yes, in practice, though not by unilateral fiat. A resolution applicant cannot rewrite an existing franchise agreement without either the franchisee's consent or express authority under the approved resolution plan. Many plans include a clause empowering the resolution applicant to renegotiate or terminate existing contracts, which effectively gives it leverage to propose new terms, and a franchisee facing this should treat the plan approval stage, not the post-approval negotiation, as its real opportunity to object.
What should a franchisee do immediately on learning that the franchisor has entered CIRP?
Confirm the moratorium date and the resolution professional's contact details from the public announcement under Section 15 of the Code, continue performing payment obligations while documenting any shortfall in supply or support in writing, and avoid terminating on the insolvency ground alone. A franchisee should also calendar the claims deadline for filing in Form B, since a missed deadline can mean a claim is never admitted into the process at all.
Is a franchisee entitled to individual notice before the franchisor is admitted to CIRP?
No. The Code does not require the resolution professional to give individual notice to every counterparty, including franchisees. Admission to CIRP is publicised through a public announcement under Section 15 of the Code, ordinarily in newspapers and on the corporate debtor's website, which is treated as sufficient notice to affected parties, including franchisees who must monitor for it themselves rather than wait to be contacted directly.
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 franchisors, franchisees, financial creditors and corporate debtors on brand licensing, distribution and franchise arrangements, on proceedings before the National Company Law Tribunal (NCLT), Mumbai Bench, and on matters before the Bombay High Court 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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