What Happens to an IP Licence When the Licensor Enters CIRP

An intellectual property licence granted by a company does not automatically survive when the licensor is admitted to a corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (the Code); control of the licensed patent, trademark or software passes to a resolution professional who owes duties to the licensor's creditors, not the licensee. The licence is not terminated outright in most cases, but continued performance, including quality approvals and technical support, is often the first casualty. This post examines the licensee's position under the Code, the Trade Marks Act, 1999 and the Patents Act, 1970, and the drafting protections that must be negotiated before any sign of distress.

The Licence as an Executory Contract Once the Licensor Is Admitted

An intellectual property licence is executory on both sides. The licensor permits use, polices quality and often supplies updates or know-how; the licensee pays royalties and stays inside its field of use. The Code says nothing general about executory contracts. There is no power to assume or reject of the kind a United States trustee exercises, and no statutory list telling a resolution professional which contracts to keep. What exists is section 25(1) and section 25(2)(a), which require the resolution professional to preserve and protect the value of the corporate debtor and to take immediate custody and control of its assets. A licence throwing off steady royalties will usually be continued because continuing it preserves value. A licence priced below market, or one that fences off the field a resolution applicant wants to exploit, is a different proposition.

Does the Section 14 Moratorium Protect the Licensee?

The moratorium is often assumed to freeze everyone's position. For a licensee it does the opposite. Section 14(1)(a) bars the institution or continuation of proceedings against the corporate debtor, so the licensee cannot sue for specific performance, cannot press an injunction restraining dealings with the intellectual property, and cannot commence arbitration under the licence. Section 14(1)(d) blocks recovery of property in the corporate debtor's possession. Section 14(2A), which prevents termination of supplies critical to preserving value, protects supplies made to the corporate debtor and says nothing about supplies made by it. On every one of these provisions the licensee is on the wrong side.

Non-Performance Is the Real Risk, Not Termination

A resolution professional who regards the licence as burdensome rarely terminates it. Non-performance costs less. Quality approvals stop, technical support ends, escrow deposits are not refreshed, and the licensee holds a right it can use but cannot enforce. Its remedy is a damages claim admitted in the operational creditor class and paid at whatever the plan allows, frequently a small fraction. An application under section 60(5)(c) seeking a direction to perform is available in principle, but the tribunal weighs the licensee's interest against value maximisation, and the licensee has no vote in the committee of creditors.

Insolvency Termination and Step-In Rights After Gujarat Urja

Most carefully drafted licences let the licensee terminate, or convert to a paid-up licence, if the licensor becomes insolvent. Whether that right can be exercised after admission is governed by Gujarat Urja Vikas Nigam Limited v. Amit Gupta [(2021) 7 SCC 209]. The Supreme Court held that the National Company Law Tribunal has residuary jurisdiction under section 60(5)(c) over disputes arising from or in relation to the insolvency of the corporate debtor, and upheld a stay on the termination of a power purchase agreement triggered solely by the debtor's insolvency. The Court was careful about what it did not decide. It recorded that the Code contains no general provision invalidating ipso facto clauses, that the going-concern objective cannot by itself extinguish vested contractual rights, and that the result turned on the agreement being the corporate debtor's sole revenue contract, so that termination would have meant corporate death. The wider validity of such clauses was left to the legislature.

For a licensee that reads as a warning rather than a comfort. Where the licence is a material income stream for the licensor, expect the resolution professional to move under section 60(5)(c) and expect the tribunal to take that reasoning seriously. Where the licence is peripheral to the licensor's business, prospects are considerably better. Timing does more work here than drafting: a termination completed before the insolvency commencement date is a closed transaction, while one attempted after admission invites the challenge.

Why a Vesting Right Beats a Termination Right

A provision converting the licence into a perpetual, irrevocable, fully paid licence on a defined insolvency event is harder to resist than one that cancels the contract. It does not strip the estate of an income stream and it leaves the resolution professional with something. Better still is a fully paid licence granted at the outset, conditional on continued compliance, so that no post-admission act is needed at all. Rights that vest automatically are not exposed to the argument that the licensee is exercising a remedy during the moratorium.

Does the Licence Bind a Transferee Under a Resolution Plan?

This is the question that decides whether the licensee still has a business. Section 31(1) of the Code makes an approved resolution plan binding on the corporate debtor, its employees, members, creditors, guarantors and other stakeholders involved in the plan. Where the plan sells the intellectual property, or transfers the owning business as a going concern, the licence has to be located somewhere in that structure.

Proprietary Interest or Bare Permission

Characterisation decides the answer. A licence amounting to no more than a covenant not to sue is a personal right against the licensor and binds nobody else; a purchaser of the patent or the mark takes free of it. A licence operating as a grant of an interest in the registered right, recorded on the register, is a different instrument altogether. No Indian judgment authoritatively resolves the point in an insolvency setting, and counsel should say so to the board rather than dress up a preference as settled law. The working assumption should be that an unrecorded, non-exclusive licence expressed as a permission is at risk on a transfer, and that every step toward a recorded, exclusive, proprietary grant improves the position.

Section 31(5), in force since 26 May 2026, protects licences, permits, concessions and similar grants held by the corporate debtor from suspension or termination after plan approval. It protects grants made to the corporate debtor and does not preserve licences granted by it to third parties; the wording is easy to misread in a licensee's favour. Separately, a resolution applicant that has diligenced the licence, priced it and reflected it in the plan will generally take subject to it, because on approval section 31(1) itself becomes the source of the obligation. Getting the licence into the information memorandum is therefore an active step for the licensee, not a courtesy from the resolution professional.

Section 31(6) and Accrued Claims

Section 31(6), also live from 26 May 2026, codifies the clean slate by extinguishing claims against the corporate debtor and its assets that predate plan approval. Unpaid indemnity entitlements, warranty claims over defective know-how and damages for a pre-admission breach must be filed in the CIRP. A claim not filed is extinguished on approval whether or not the resolution professional knew of it. Extinguishment operates on claims, not on the continuing subsistence of the licence, and that distinction is worth maintaining expressly in correspondence: file the claim, and assert the licence separately.

Recordal, Exclusivity and Escrow: Three Levers That Change the Position

Registered User Status and Patent Recordal

Under section 49 of the Trade Marks Act, 1999 the registered proprietor and the proposed registered user apply jointly in writing to the Registrar, giving particulars of the degree of control the proprietor exercises over the permitted use, the goods or services covered, any conditions or restrictions, and whether the permitted use is for a defined period. Recordal makes the licensee a registered user, and section 52 then permits a registered user to institute infringement proceedings in its own name, joining the registered proprietor as a defendant. For patents, section 69 of the Patents Act, 1970 requires a person who becomes entitled as licensee or otherwise to an interest in a patent to apply to the Controller for registration of that interest, and section 69(5) restricts the use of an unregistered document as evidence of the licence unless the Controller or the court directs otherwise for reasons recorded in writing.

Recordal is inexpensive and routinely neglected in Indian licensing practice. It does two useful things once the licensor is in trouble. The licence appears on a public register that any competent resolution applicant's diligence will surface, which makes a later claim to have taken without notice difficult to sustain. And it converts an evidential fight into a formality, because arguing at the tribunal that the licensee holds an interest in a patent is a different conversation when the interest already sits on the Controller's register.

The Exclusive Licensee's Independent Standing to Sue

Section 109 of the Patents Act gives the holder of an exclusive licence the same right as the patentee to sue for infringement committed after the date of the licence, requires the patentee to be added as a defendant where not joined as a plaintiff, and directs the court to take the exclusive licensee's loss into account in awarding relief. A non-exclusive licensee has no equivalent standing. That counts twice in an insolvency: the exclusive licensee can defend its market on its own initiative while the licensor is paralysed by the process, and it holds something that looks far more like a carved-out interest than a permission. Exclusivity limited by field of use or by territory is usually acceptable to a licensor and is worth pressing for even where full exclusivity is not.

Is the Source Code Escrow Deposit Part of the Licensor's Estate?

Source code escrow is the standard mitigation for licensed software and it works, provided two conditions hold. The deposit must be current, which needs verification at defined intervals rather than a contractual promise to deposit. And the release triggers must include admission of a CIRP application, not merely liquidation or an undefined reference to insolvency. Where the arrangement is genuinely tripartite and the agent holds the material for the licensee, the deposit should fall outside the licensor's estate and beyond the reach of section 25(2)(a). Where the agent holds to the licensor's order, expect an argument that the material is estate property and that release amounts to a preferential disposition. That distinction is drafted, not discovered later.

Sub-Licences the Licensee Has Already Granted

A licensee cannot confer more than it holds. If the head licence falls away the sub-licences fall with it, leaving the licensee exposed on whatever quiet enjoyment warranties it gave downstream. Two protections belong in the head licence: an acknowledgement by the licensor that sub-licences convert into direct licences from it on the same terms if the head licence ends, and a matching cap on the licensee's liability to sub-licensees where continuity fails for reasons attributable to the head licensor.

What to Negotiate, and at What Point

Almost every effective mitigation has to be in place before there is any visible sign of distress. A licensee that begins negotiating protections once the licensor's audit report has been qualified is late, and anything conceded in that window is exposed to challenge as a preferential or undervalued transaction if a CIRP follows within the look-back period.

Two entries there deserve emphasis. A direct agreement with the licensor's lenders is the most underused protection in Indian licensing practice, and lenders will often give one because royalty income supports the borrower's cash flow. And an option to acquire the intellectual property outright on defined insolvency events, at a pre-agreed price or through an agreed valuation mechanism, moves the licensee from contractual claimant to bidder holding a contractual entitlement, which is a materially stronger position from which to deal with a resolution professional.

Frequently Asked Questions

Can a resolution professional simply terminate a licence granted by the corporate debtor?

There is no express power to reject contracts under the Code, so it depends on what the licence itself permits. Termination rights available to the licensor can be exercised, subject to the resolution professional's duty to preserve value. In practice the more common outcome is not termination but quiet non-performance, which leaves you with a damages claim in the process rather than a working licence.

Does the section 14 moratorium protect us as licensee?

No. Section 14 protects the corporate debtor. It bars you from suing the licensor, from continuing arbitration under the licence and from recovering property in the licensor's possession. Section 14(2A), which prevents termination of critical supplies, protects supplies made to the corporate debtor and not supplies the corporate debtor makes to you.

If a resolution plan sells the intellectual property, does our licence survive?

It turns on whether the licence is characterised as a proprietary interest in the registered right or as a personal contract with the licensor, and no Indian decision authoritatively settles that in an insolvency setting. A recorded, exclusive licence has a far stronger case than an unrecorded, non-exclusive one. The practical step is to engage with the resolution professional early so that the licence is disclosed in the information memorandum and reflected in the plan, because a plan approved under section 31(1) binds those it covers.

Is recording the licence with the Registry or the Patent Office worth the cost?

Yes, and the cost is trivial against what it protects. Registered user status under section 49 of the Trade Marks Act, 1999 gives you standing under section 52 to sue infringers in your own name. Registration under section 69 of the Patents Act, 1970 matters because section 69(5) restricts the admissibility of an unregistered licence as evidence of your interest in the patent unless the Controller or the court directs otherwise for recorded reasons.

We have accrued indemnity claims against the licensor. Must we file them?

Yes. File in response to the public announcement even where the amount is contingent or unquantified. Section 31(6) of the Code extinguishes claims against the corporate debtor and its assets on approval of a resolution plan, and a claim you never filed goes with the rest. Filing the claim is a separate exercise from asserting that the licence continues, and the two should be kept distinct in writing.

Will our source code escrow deposit be claimed as an asset of the estate?

That turns on structure. A tripartite agreement under which the agent holds the deposit for the licensee's benefit, with triggers including admission of a CIRP application, should keep the material outside the estate. A bilateral deposit held to the licensor's order is much more exposed, and you should expect the resolution professional to claim it under section 25(2)(a).

What is the difference between an exclusive and a non-exclusive intellectual property licence in an insolvency?

An exclusive licensee has independent standing to sue infringers under section 109 of the Patents Act, 1970, and generally holds an interest closer to a proprietary right than a bare permission, which strengthens its position if the licensor's intellectual property is later sold under a resolution plan. A non-exclusive licensee has no equivalent standing to sue and is more likely to be treated as holding a personal contract that a transferee can take free of, unless the licence has been recorded and the interest disclosed to the resolution applicant.

Can a licensee vote in the committee of creditors formed during the licensor's CIRP?

Only if the licensee also holds a financial or operational debt against the licensor that has been admitted in the insolvency resolution process. A licence by itself does not create voting rights in the committee of creditors. A licensee with an accrued claim, such as unpaid indemnity or a refund entitlement, should file that claim through the public announcement process to be considered for admission and any resulting vote.

What should a licensee do as soon as it learns the licensor has entered CIRP?

File any accrued claim with the interim resolution professional in response to the public announcement, request that the licence be disclosed in the information memorandum, and continue performing its own obligations under the licence so the resolution professional has no independent ground to treat the licensee as in default. Engaging early improves the chances the licence is reflected, and priced, in whatever resolution plan is eventually approved.

Does the Insolvency and Bankruptcy Code, 2016 give a resolution professional the power to reject a licence outright?

No. Unlike some foreign insolvency regimes, the Code contains no general power to assume or reject executory contracts. A resolution professional's decision to continue or discontinue performance under a licence is governed instead by the general duty under section 25(1) and section 25(2)(a) to preserve and protect the value of the corporate debtor, which in practice means valuable licences are usually continued and burdensome ones are often left to lapse through non-performance rather than formal termination.

How does a licensee protect a sub-licence it has already granted if the head licence is terminated?

A sub-licence cannot outlive the head licence unless the head licence itself provides otherwise, since a licensee cannot confer more rights than it holds. The protection has to be negotiated into the head licence in advance: an acknowledgement from the licensor that sub-licences convert automatically into direct licences on the same terms if the head licence ends, together with a cap on the licensee's own liability to sub-licensees for a failure of continuity attributable to the head licensor.

Is an option to acquire the intellectual property on the licensor's insolvency enforceable?

An option agreed at the time of licensing, exercisable on a defined insolvency event such as admission of a CIRP application, is a contractual entitlement the licensee can assert alongside its claim in the process. It converts the licensee from a contractual claimant competing with other creditors into a potential bidder for the underlying asset, which is generally a stronger position when dealing with a resolution professional or a rival resolution applicant.

Does the National Company Law Tribunal have jurisdiction over a dispute about the licence during CIRP?

Yes, under section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016, which gives the National Company Law Tribunal residuary jurisdiction over any question of law or fact arising from or in relation to the insolvency resolution proceedings of the corporate debtor. The Supreme Court confirmed the breadth of this jurisdiction in Gujarat Urja Vikas Nigam Limited v. Amit Gupta [(2021) 7 SCC 209], though the outcome in any individual case still depends on how material the licence is to the licensor's business.

Vikrant D. Shetty | Vikrant D. Shetty leads the Insolvency, Corporate and Commercial Practice at the law firm Vikrant D. Shetty & Associates, Advocates & Solicitors, which advises licensors, licensees, financial creditors and corporate debtors on the treatment of commercial contracts and intellectual property arrangements in proceedings before the National Company Law Tribunal (NCLT), Mumbai Bench, and advises Indian and international clients on licensing arrangements, commercial contracts and joint ventures.

Related reading: Can Contracts Be Entered Into During a CIRP: What Counterparties Need to Know.

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.