IRP and RP Liability for Contracts Entered During CIRP

Vikrant D. Shetty

Oct 12

12 min read

Updated: Oct 21

IRP and RP Liability for Contracts Entered During CIRP

An Interim Resolution Professional or Resolution Professional who contracts to manage a corporate debtor as a going concern under Sections 20 and 25 of the Insolvency and Bankruptcy Code, 2016 generally acts as the debtor's agent, so liability runs to the estate rather than the professional personally. Personal liability can still arise where the IRP or RP exceeds the statutory mandate, acts in bad faith, or contracts without Committee of Creditors approval for a transaction outside the ordinary course of business. Amounts due under CIRP-period contracts rank as insolvency resolution process costs under Section 30(2)(a). This article examines that liability position and its practical limits.

The Going Concern Obligation: Section 20 of the IBC

Section 20 of the Insolvency and Bankruptcy Code, 2016 imposes on the IRP the duty to manage the operations of the corporate debtor as a going concern. This is not a discretionary power but a statutory obligation: the IRP must take all measures as may be necessary to protect and preserve the value of the property of the corporate debtor and manage its operations as a going concern. The obligation continues with the RP after the CoC is constituted and the RP is appointed to replace the IRP.

In practice, managing operations as a going concern inevitably requires contracting. A manufacturing company needs raw materials. A construction company needs subcontractors. A service business needs to retain staff. Each of these contractual relationships entered into after the CIRP commencement date creates obligations, and potential liabilities, that must be situated within the IBC framework.

Section 25: The RP's Powers and Functions

Section 25 of the IBC sets out the duties of the RP, including the duty to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor. The RP is also required to represent and act on behalf of the corporate debtor with third parties and in legal proceedings. These powers are exercised on behalf of the corporate debtor, not in the RP's personal capacity, which is the starting point for analysing liability.

CIRP Costs: The Priority Treatment of Post-Commencement Obligations

The IBC treats costs incurred by the IRP and RP in managing the corporate debtor during CIRP as 'insolvency resolution process costs', commonly referred to as CIRP costs. Under Section 30(2)(a) and Regulation 31 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, CIRP costs, including fees payable to the IRP and RP, costs of managing the corporate debtor as a going concern, and costs of other professionals appointed during CIRP, are required to be paid in priority ahead of all other payments under the resolution plan. In liquidation, CIRP costs rank as the first charge under the Section 53 waterfall.

This priority treatment is significant for counterparties. A supplier who enters into a contract with the corporate debtor during CIRP, knowing that the IRP or RP is in control, has a strong basis to argue that amounts due under that contract are CIRP costs, entitled to priority payment. Courts have affirmed this position, though the characterisation of any given contract obligation as a 'CIRP cost' requires a factual assessment of whether the obligation was incurred in managing the corporate debtor as a going concern.

Personal Liability of the IRP and RP: The Agency Question

The foundational question is whether the IRP or RP acts as an agent of the corporate debtor, in which case contractual liability runs to the debtor and not to the insolvency professional personally, or acts in a personal capacity such that the professional is personally exposed. The IBC's scheme strongly suggests the former: the IRP and RP act as statutory officers empowered to manage and represent the corporate debtor; their authority is derived from statute, not from any consensual agency relationship with the corporate debtor's board.

Courts have generally held that an IRP or RP who enters into a contract in the course of managing the corporate debtor as a going concern does so on behalf of the corporate debtor, not personally. The corporate debtor's estate is liable under such contracts, and obligations incurred are properly characterised as CIRP costs to be paid in priority from the estate. The insolvency professional does not personally guarantee the performance of the corporate debtor under such contracts.

When Personal Liability May Arise

Personal liability of an IRP or RP may arise in specific circumstances. First, where the IRP or RP exceeds the authority conferred by the IBC and enters into contracts that go beyond what is necessary to manage the corporate debtor as a going concern, for example, committing the corporate debtor to new long-term capital expenditure without CoC approval. Second, where the IRP or RP acts fraudulently or in breach of fiduciary duty. Third, where the IRP or RP provides a personal guarantee or representation to a counterparty. Courts have emphasised that insolvency professionals must operate strictly within the scope of their statutory authority to remain insulated from personal liability.

CoC Approval for Material Contracts

The CoC holds supervisory authority over the CIRP process and must approve material decisions made by the RP. The IBBI Regulations provide that the RP must seek CoC approval for any transaction that falls outside the ordinary course of business. Entering into a material contract, whether for significant procurement, major professional engagements, or interim financing, without CoC approval exposes the RP to regulatory challenge and, in theory, to a claim that the obligation should not be treated as a CIRP cost binding on the estate. Practitioners advising IPs should ensure that a clear approval process is documented for all material contracts entered during CIRP.

What Is Interim Finance Under Section 20(2)(b) of the IBC?

Section 20(2)(b) of the IBC expressly permits the IRP to raise interim finance for the purposes of managing the corporate debtor as a going concern, subject to approval of the CoC. Interim finance obligations rank as CIRP costs and enjoy priority in the Section 53 waterfall. The terms of interim finance, including any security offered, require CoC approval and must be structured carefully to avoid creating preferential arrangements that could be challenged after the CIRP.

Which Supply Contracts Are Protected Under Section 14(2) of the IBC?

Section 14(2) of the IBC provides that the moratorium order does not prevent the supply of essential goods or services to the corporate debtor. These include electricity, water, telecommunications, and information technology services. Suppliers of these services cannot terminate, suspend, or interrupt supply during the moratorium merely because the corporate debtor had pre-CIRP arrears. The IRP or RP must, however, pay for supplies received during the CIRP period as an obligation of the corporate debtor, and these amounts are CIRP costs entitled to priority payment.

What Did the Supreme Court Hold About Contracts Made During CIRP?

The position of contracts during insolvency was clarified by the Supreme Court in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta [(2021) 7 SCC 209], which concerned the attempted termination of an essential contract on the ground of the counterparty's insolvency. The Court recognised the central role of the resolution professional in keeping the corporate debtor running as a going concern and held that a contract central to the debtor's survival could not be terminated solely because insolvency had commenced, where doing so would defeat the object of the resolution process. The decision confirmed that the moratorium and the going-concern objective shape how contracts are treated during the corporate insolvency resolution process, and it is the key authority on the interaction between contractual rights and the RP's mandate.

Running the Business and the Priority of CIRP Costs

The resolution professional is charged with managing the affairs of the corporate debtor and keeping it operating as a going concern, which frequently requires entering into or continuing contracts for supplies, services, and finance during the process. Obligations properly incurred by the resolution professional in keeping the business running are treated as insolvency resolution process costs, and such costs enjoy priority in the statutory waterfall, being paid ahead of the claims that predate the insolvency. This priority is what gives counterparties the confidence to continue dealing with a company in insolvency, because it assures them that debts incurred during the process for the going concern will be met before ordinary pre-insolvency claims.

The Limits of Personal Liability and Good-Faith Protection

A recurring concern for insolvency professionals is their personal exposure for decisions taken while running the debtor. The framework protects a resolution professional who acts in good faith and within the mandate of the process, and liabilities properly incurred for the corporate debtor are those of the estate rather than of the professional personally. That protection is not unlimited, however, and a professional who acts beyond authority, negligently, or in breach of duty can attract personal liability. The practical lesson for insolvency professionals is to act within the mandate, document decisions carefully, obtain the committee's approval where required, and rely on the good-faith protection the law provides, so that liabilities incurred in running the business rest where they belong, with the estate.

Frequently Asked Questions

Are contracts entered by the IRP or RP binding on the corporate debtor?

Yes. Contracts entered by the IRP or RP in the course of managing the corporate debtor as a going concern, within the scope of their statutory authority under the IBC, are binding on the corporate debtor's estate. Obligations arising under such contracts are characterised as CIRP costs and entitled to priority payment under the resolution plan or in liquidation.

Is an IRP or RP personally liable for contracts entered during CIRP?

Generally, no. An IRP or RP who acts within the scope of their statutory authority contracts on behalf of the corporate debtor and does not incur personal liability. Personal liability may arise where the insolvency professional exceeds their authority, acts fraudulently, or provides a personal guarantee to a counterparty.

What is the priority of CIRP costs in a resolution plan?

Under Section 30(2)(a) of the IBC and Regulation 31 of the CIRP Regulations, CIRP costs must be paid in priority ahead of any distribution to creditors under the resolution plan. In liquidation, CIRP costs rank first in the Section 53 waterfall, ahead of workmen dues, secured creditor claims, and all other obligations.

Does the IRP or RP need CoC approval for all contracts?

No. Contracts entered in the ordinary course of business to manage the corporate debtor as a going concern do not require specific CoC approval for each transaction. However, material contracts, those outside the ordinary course, involving significant expenditure, or creating long-term obligations, require CoC approval. The RP should document the CoC's approval for all material transactions.

Can a supplier who contracted with the IRP during CIRP claim priority for unpaid dues?

Yes. Amounts due to a supplier who contracted with the corporate debtor during CIRP for goods or services provided in managing the corporate debtor as a going concern are CIRP costs. These amounts enjoy priority in both the resolution plan distribution and the liquidation waterfall under Section 53. The supplier should ensure contemporaneous documentation confirms the contract was entered during CIRP and in connection with the going concern management.

What happens to CIRP-period contracts if the corporate debtor goes into liquidation?

If the CIRP fails and the corporate debtor enters liquidation, contracts entered by the IRP or RP during CIRP generate obligations that rank as CIRP costs in the Section 53 waterfall, payable first before any distribution to other creditors. The liquidator may disclaim onerous post-commencement contracts but cannot disclaim obligations that have already accrued and were incurred in the course of managing the corporate debtor as a going concern.

What is interim finance under Section 20(2)(b) of the IBC, and how is it treated in the waterfall?

Interim finance is funding the IRP or RP raises during CIRP, with Committee of Creditors approval, to keep the corporate debtor operating as a going concern under Section 20(2)(b) of the Insolvency and Bankruptcy Code, 2016. Amounts due on interim finance, including any interest agreed, are treated as insolvency resolution process costs and rank for payment in full under Section 30(2)(a) before any distribution to other creditors under a resolution plan, or ahead of the general waterfall under Section 53 if the corporate debtor is later liquidated. Lenders providing interim finance typically require CoC approval and often security over unencumbered assets before advancing funds.

Can a supplier refuse to perform an essential supply contract once CIRP begins?

No, not for the categories Section 14(2) of the Insolvency and Bankruptcy Code, 2016 protects. The provision bars suppliers of essential goods and services, including electricity, water, telecommunications, and information technology services, from discontinuing supply during the moratorium on the ground that dues remain unpaid from before the insolvency commencement date, so long as the corporate debtor pays for supply going forward. A supplier that terminates or suspends an essential supply in breach of this protection risks a direction from the Adjudicating Authority to restore service, since continuity of these services is treated as necessary to keep the debtor a going concern.

What recourse does a counterparty have if a resolution professional enters a material contract without Committee of Creditors approval?

A counterparty dealing in good faith with an RP who lacked authority for a transaction outside the ordinary course of business is not automatically deprived of its remedy against the corporate debtor's estate, since the RP's failure to obtain CoC approval is primarily an internal governance lapse that exposes the RP rather than voiding the contract outright. The counterparty can still press its claim for payment as an insolvency resolution process cost where the contract genuinely served the going-concern objective. Separately, the CoC or an aggrieved stakeholder can apply to the Adjudicating Authority under Section 60(5) to challenge the RP's conduct.

Can the IRP or RP terminate a contract the corporate debtor entered into before CIRP began?

The IRP and RP inherit the corporate debtor's existing contracts and do not have a general statutory power to terminate them simply because CIRP has commenced; termination still depends on the terms of the contract itself and any breach that has occurred. Where a pre-CIRP contract is loss-making, the IRP or RP can decline to perform further obligations that are not necessary to keep the business running as a going concern, subject to whatever liability that non-performance creates for the estate. Contracts essential to continued operations are generally kept alive, while non-essential or commercially unfavourable ones are the first to be reassessed.

Does the Section 14 moratorium prevent a counterparty from terminating its contract with the corporate debtor?

The moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 restrains proceedings and enforcement action against the corporate debtor, but it does not by its express terms bar a counterparty from exercising a contractual termination right triggered by insolvency, except for the essential supplies protected under Section 14(2). The Supreme Court's decision in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta [(2021) 7 SCC 209] nonetheless restrained termination of a contract essential to the corporate debtor's survival where ending it would result in the corporate death of the debtor, so the position outside Section 14(2) turns on the facts of each contract.

Can a contract signed by the IRP or RP be challenged later as a preferential or undervalued transaction?

A contract genuinely entered into to manage the corporate debtor as a going concern, on arm's length terms and within the IRP or RP's mandate, is not the kind of transaction Sections 43 and 45 of the Insolvency and Bankruptcy Code, 2016 target, since those provisions look back at transactions before the insolvency commencement date rather than at the professional's own conduct during CIRP. A transaction entered during CIRP at an undervalue or otherwise outside the going-concern objective can still attract scrutiny in a subsequent liquidation, which is one reason CoC approval and contemporaneous documentation of the commercial rationale matter.

Who signs a contract during CIRP, the corporate debtor or the IRP or RP personally?

The contract is executed for and on behalf of the corporate debtor, with the IRP or RP signing in their capacity as the professional in charge of its management rather than in their personal capacity. The signature block and recitals should make that representative capacity explicit, since ambiguous execution is one of the few circumstances in which a court may later treat the professional as having contracted personally. Counterparties negotiating contracts during CIRP should confirm this capacity is stated clearly in the contract itself, alongside confirmation of any CoC approval where the transaction is outside the ordinary course of business.

What happens to unpaid CIRP-period dues if the corporate debtor has no assets left when CIRP fails?

Insolvency resolution process costs, including dues from contracts entered during CIRP, are meant to be paid in full ahead of all other claims under Section 30(2)(a) and, on liquidation, under Section 53(1)(a) of the Insolvency and Bankruptcy Code, 2016. Where the corporate debtor's realisable assets are genuinely insufficient to cover even these costs, counterparties bear the shortfall in practice despite their statutory priority, because priority determines the order of payment and not the existence of funds to pay. This risk is why suppliers dealing with a corporate debtor in CIRP price in some diligence on the state of the estate before extending fresh credit.