Which Restrictive Covenants Survive a Resolution Plan Takeover

Section 27 of the Indian Contract Act, 1872 makes a post-employment non-compete void in India, so a resolution applicant that acquires a corporate debtor's business inherits contracts it cannot enforce against departing employees or promoters once their engagement ends. Confidentiality and non-solicitation clauses stand on a different footing and generally survive a resolution plan's change of control. This post examines which restrictive covenants an acquirer can actually enforce after a plan is approved under the Insolvency and Bankruptcy Code, 2016, which covenants the company owes to third parties survive under Section 31(6) of that Code, and how to structure the promoter exit documents accordingly.

Section 27 Sets the Ceiling, and a Change of Control Does Not Raise It

Section 27 of the Indian Contract Act, 1872 declares every agreement by which a person is restrained from exercising a lawful profession, trade or business void to that extent. India did not adopt the English reasonableness test. A restraint is either outside section 27 or it is void, and the only statutory doorway is the goodwill exception. Acquirers arriving from jurisdictions where a twelve month non-compete is routine consistently underestimate how absolute this is.

During Employment the Covenant Lives; After Termination It Does Not

The dividing line was drawn in Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd. [AIR 1967 SC 1098]. Negative covenants operative during the period of the contract of employment, when the employee is bound to serve the employer exclusively, are generally not regarded as restraints of trade and do not attract section 27. Such a covenant is enforceable unless the contract is unconscionable, excessively harsh, unreasonable or one-sided. The Court also placed the onus on the party supporting the restraint to show it is reasonably necessary to protect its interests.

The mirror image was confirmed in Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan [(2006) 4 SCC 227; 2006 INSC 161, decided 22 March 2006], where a right of first refusal that was to operate after the promotion agreement had run its course was held void. A restrictive covenant extending beyond the term of the contract is void and unenforceable; the doctrine of restraint of trade has no application during the continuance of the contract and applies only once it ends.

Krishan Murgai and the Argument That Never Quite Worked

In Superintendence Company of India (P) Ltd. v. Krishan Murgai [(1981) 2 SCC 246, decided 9 May 1980], an inspection and surveying business tried to restrain a terminated branch manager who had set up a near-identical competing firm. The appeal failed. The restriction was too wide, offended section 27, and the Court declined to rewrite it into something narrower. Employers have been trying variations of that argument ever since, and Indian courts have not moved.

The practical translation for an acquirer is blunt. Whatever the employment contracts of the corporate debtor say about post-termination competition, the acquirer has inherited clauses that will not be enforced against departing employees. Deciding otherwise is a commercial choice about retention, not a legal remedy.

The Goodwill Exception and the Promoter Non-Compete: A Genuinely Open Question

This is the interesting part of the problem, and counsel should treat it as unsettled rather than pretending otherwise.

What the Statutory Exception Actually Requires

Exception 1 to section 27 permits one who sells the goodwill of a business to agree with the buyer to refrain from carrying on a similar business within specified local limits, so long as the buyer carries on a like business there, and provided the limits appear to the court reasonable having regard to the nature of the business. Four elements do the work: a sale of goodwill, a buyer, specified local limits, and the buyer's continued conduct of a like business. Drop any one and the exception is unavailable.

Why a Promoter in a Resolution Plan Is Not an Obvious Seller of Goodwill

The analogy is attractive. A promoter walks away, the resolution applicant takes the business and its goodwill, and the promoter agrees not to compete. Structurally it looks like a sale. Look closer and the difficulties surface. In most plans the promoter is not the seller of anything: the corporate debtor's shares are extinguished or written down by operation of the plan and the tribunal's order, not by a negotiated transfer from the promoter. There is often no consideration flowing to the promoter at all, and where section 29A applies the promoter is by definition excluded from the transaction rather than a party to it. A covenant given by someone who conveyed nothing and received nothing has weak claim to an exception framed around a bargain between seller and buyer.

The counter-argument is not hopeless. Goodwill in an owner-managed Indian business frequently sits with the promoter personally, in customer relationships and supplier credit rather than in the entity, and what the acquirer pays for is precisely the ability to hold those relationships without the promoter recreating the business next door. Where a plan is accompanied by a separate settlement in which the promoter releases claims, transfers residual holdings or personal brand rights, and receives value for doing so, the transaction begins to look much more like the bargain Exception 1 contemplates. The position has not been squarely tested on these facts, and a covenant of this kind should be presented to a client as arguable rather than safe.

Structuring to Improve the Odds

Document the goodwill as a distinct subject matter with its own attributed consideration, rather than folding it into a general settlement sum. Specify geographic limits in real terms, the districts or states in which the business actually operates, because a covenant expressed to apply across India invites the width objection that sank Krishan Murgai. Tie the duration to the acquirer carrying on a like business in those limits, so the covenant tracks the language of the exception. Take the covenant from the individual promoter, not from a holding vehicle. And keep the term proportionate; a covenant running for three years is easier to defend than one running for ten.

Confidentiality Rests on a Different Foundation and Generally Survives

A confidentiality obligation does not restrain anyone from practising a trade. It restrains the use of particular information. That is why it sits outside section 27 and why an acquirer's position on confidential information is far stronger than its position on competition. Indian courts protect trade secrets and confidential business information through the law of confidence and contract, and the obligation is not extinguished because the shareholding above the employer has changed hands.

The line that matters in practice is between genuine confidential information and the general skill and experience an employee accumulates. A clause drafted so broadly that it captures everything the person learned on the job invites a court to read it as a disguised non-compete. Define categories: customer pricing files, formulations, source code, supplier terms, bid models. Avoid a catch-all. And do not put a fixed expiry on trade secret protection when the information will still be secret after the period ends.

Non-Solicitation Occupies the Uncertain Middle

Indian decisions on non-solicitation are not uniform. Clauses restraining the poaching of employees have fared better than non-competes, on the footing that they do not stop anyone from working. Customer non-solicitation is harder, because a clause that prevents a person from dealing with a defined set of customers can operate as a restraint on trade in substance whatever it is called.

Two drafting habits improve survival prospects. Prohibit soliciting rather than dealing, so that the departing person may accept unsolicited approaches but may not go after the account. Identify the protected population by reference to actual contact during a defined look-back period rather than the entire customer list, which also makes proof of breach far easier.

The Covenant Map for a Resolution Applicant

The grid below is the one to run over the corporate debtor's contract stack before signing, and again when drafting the promoter exit papers.

Covenants the Company Owes Others: Does Section 31(6) Wipe Them Out?

The question runs in the other direction as well, and it is the one acquirers most often forget to ask. Suppose the corporate debtor gave a distributor an exclusive territory, or promised a joint venture partner that it would not compete in a product line, or granted a licensee a covenant not to appoint a rival. Does the clean slate clear those?

An Obligation to Refrain Is Not a Claim

Section 31(6) of the Insolvency and Bankruptcy Code, 2016 (the Code), inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2026 and in force since 26 May 2026, extinguishes all prior claims against the corporate debtor and its assets on approval of the plan. The word doing the work is claim. A claim in the scheme of the Code is a right to payment or a right to remedy for breach giving rise to a right to payment. A continuing negative covenant is not that. It is a subsisting contractual obligation to refrain from conduct, and it has no admitted value in the resolution process because nobody files a claim for it.

The better view is therefore that the covenant binds the company after approval, and the acquirer takes the business subject to it. Accrued damages for a breach that occurred before approval are a different matter; those are claims, and they go. The distinction is between the historic money and the live restraint, and it is the distinction that catches acquirers who assumed the plan cleared everything.

What Should an Acquirer Check for at Diligence?

Run a covenant sweep across the contract stack, not just a debt sweep. Distribution agreements, exclusive supply arrangements, joint venture and shareholder documents, licence agreements and settlement deeds are where these obligations hide, and none of them will appear in the list of admitted claims. Where a covenant conflicts with the acquirer's post-acquisition plans, the answer is to negotiate a release or a variation with the counterparty before closing, not to hope the plan disposed of it.

It is also worth resisting the temptation to draft the plan so as to purport to extinguish such covenants by name. A tribunal approving a plan is exercising a statutory power over claims and the distribution of value; asking it to release the company from continuing contractual restraints owed to solvent third parties who have no claim in the process is a materially different request, and one that invites an appeal.

What the Promoter Settlement Documents Should Carry

A confidentiality covenant with defined categories and no sunset on trade secrets, which is the enforceable core of the package. A goodwill covenant structured to fit Exception 1, with attributed consideration and specified limits, presented to the client as an arguable rather than settled protection.

Assignment of any intellectual property, personal brand names, domains and social handles the promoter holds individually, because those transfer by conveyance and do not depend on the restraint analysis at all. A non-disparagement clause, which is not a restraint of trade. And a deferred consideration or holdback tranche that falls away on breach, since a payment structure achieves commercially what an injunction may not.

Frequently Asked Questions

Can an acquirer enforce a post-employment non-compete against a senior employee of the corporate debtor?

Practically, no. Section 27 of the Indian Contract Act, 1872 makes an agreement in restraint of trade void, and Indian courts do not enforce post-termination non-competes against employees regardless of seniority or how the clause is worded. Taking control through a resolution plan does not change that. Treat retention as a commercial problem to be solved with pay structure and notice periods.

Does a non-compete from an outgoing promoter stand a better chance?

It is the strongest covenant available, and the question is genuinely open. The argument is that the promoter is analogous to a seller of goodwill and so falls within Exception 1 to section 27. The difficulty is that in most plans the promoter conveys nothing and receives nothing, which weakens the analogy. Structure it as a documented sale of goodwill with attributed consideration and real geographic limits, and advise the client that it is arguable rather than safe.

Do confidentiality obligations survive a change of control under a resolution plan?

Yes. A confidentiality obligation restrains the use of information rather than the exercise of a trade, so section 27 does not touch it, and it is owed to the company whose ownership has changed rather than to the former shareholders. Keep the drafting tight: a clause broad enough to capture the employee's general skill and experience risks being read as a disguised non-compete.

Are non-solicitation clauses enforceable in India?

The case law is mixed. Employee non-solicitation has fared better than customer non-solicitation, because it does not prevent anyone from earning a living. A customer clause that bars dealing rather than soliciting is more likely to be struck down as a restraint in substance. Prohibit active solicitation, define the protected customers by actual contact in a look-back period, and keep the duration modest.

Does section 31(6) extinguish restrictive covenants the company owed to third parties?

The better view is that it does not. Section 31(6) extinguishes claims, and a claim under the Code is essentially a right to payment. A live obligation to refrain from competing, or to respect a distributor's exclusive territory, is not a right to payment and nobody files it in the process. Accrued damages for a pre-approval breach are claims and do go. Run a covenant sweep at diligence rather than assuming the plan cleared them.

What works instead of a non-compete for keeping key people after a takeover?

Longer notice periods with a garden leave right, which operates during employment and so escapes section 27. Deferred or performance-linked consideration that lapses on early departure. Enforceable confidentiality and employee non-solicitation covenants. Assignment of intellectual property and brand assets held personally. None of these depends on restraining anyone from working, which is why they hold.

Can a resolution applicant require a fresh non-compete from a departing promoter as part of the plan itself, rather than relying on old employment contracts?

Yes, and this is generally the better approach. A freshly negotiated covenant tied to the promoter exit documents, structured around the goodwill exception in Exception 1 to Section 27 of the Indian Contract Act, 1872 with attributed consideration and defined geographic limits, stands a materially better chance than attempting to enforce a pre-existing employment or shareholder covenant that was never drafted with a change of control in mind.

Is a non-compete clause in a shareholders' agreement treated any differently from one in an employment contract?

No. Section 27 of the Indian Contract Act, 1872 applies to a restraint of trade regardless of the document in which it appears, so a non-compete owed by a shareholder or promoter is void to the same extent as one owed by an employee, unless it independently qualifies for the goodwill exception under Exception 1 to that section.

Does the length of a garden leave period affect its enforceability in India?

Garden leave is generally supportable because it operates during the continuance of employment, when the employee remains on the payroll and bound to the employer, so it falls outside Section 27 in the same way as other restraints operative during employment. An unreasonably long garden leave period, however, risks being challenged as unconscionable or one-sided, so acquirers should keep the period proportionate and pair it with full pay.

What remedies are available if a departing employee breaches an enforceable confidentiality obligation?

An acquirer can seek an injunction restraining continued use or disclosure of the confidential information, damages for breach of contract or breach of confidence, and in appropriate cases an account of the profits made through the misuse. Because confidentiality obligations are not restraints of trade, courts are considerably more willing to grant injunctive relief here than in a disguised non-compete dispute.

Does NCLT approval of a resolution plan also validate the enforceability of every individual covenant contained within it?

No. The National Company Law Tribunal approves the resolution plan as a package dealing with claims and the distribution of value; it does not separately adjudicate whether each restrictive covenant within the plan or the promoter exit documents would survive scrutiny under Section 27 of the Indian Contract Act, 1872. A covenant's enforceability remains a question for a civil court if it is later disputed.

Can deferred or equity consideration be forfeited if a former promoter breaches a confidentiality obligation?

Yes, generally. A holdback or deferred consideration structure that lapses on a defined breach of confidentiality is a payment mechanism rather than a restraint on the promoter's ability to work, so it does not attract Section 27 and is enforceable, subject to Section 74 of the Indian Contract Act, 1872 if the amount withheld is challenged as a penalty rather than a genuine pre-estimate of loss.

Is a non-disparagement clause enforceable against a departing promoter or employee in India?

Yes. A non-disparagement clause restrains a person from making damaging statements about the business, not from carrying on a trade or profession, so it falls outside Section 27 of the Indian Contract Act, 1872 in the same way a confidentiality clause does, and is enforceable as an ordinary contractual obligation like any other negative covenant not amounting to a restraint of trade.

Vikrant D. Shetty | Vikrant D. Shetty leads the Corporate and Insolvency Practice at the law firm Vikrant D. Shetty & Associates, Advocates & Solicitors which advises Indian and international clients on commercial contracts, restrictive covenants, shareholder agreements and joint ventures, acts for resolution applicants and creditors before the National Company Law Tribunal (NCLT), Mumbai Bench, and appears before the Bombay High Court in matters involving contractual enforcement and injunctive relief.

Related reading: Can Directors Be Personally Liable for a Company's Unpaid Tax Dues.

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.