The fate of contracts entered into by the debtor during bankruptcy and insolvency proceedings can vary depending on several factors, including the type of contract, the stage of the insolvency process, and the decisions made by the relevant authorities. Here are some general considerations for what can happen to contracts during these proceedings: Continuation of Contracts: Critical Contracts: In many cases, critical contracts that are essential for the ongoing operation of the debtor's business may be continued. These contracts may include leases, supply agreements, employment contracts, and customer contracts. The goal is to maintain business continuity and preserve the value of the debtor's assets. Consent or Approval: The debtor, the insolvency resolution professional (IRP), or the resolution professional (RP) may seek the consent or approval of the counterparty or the National Company Law Tribunal (NCLT) to continue performing under these critical contracts. Rejection of Contracts: Non-Essential Contracts: Contracts that are not essential for the debtor's business or are burdensome may be rejected or terminated. The IRP or RP, with the approval of the NCLT, can decide to discontinue these contracts to reduce costs and liabilities. Unprofitable Contracts: Contracts that are unprofitable or have unfavorable terms may also be rejected to improve the debtor's financial position. This can include contracts that involve significant financial obligations or obligations that cannot be met. Renegotiation of Contracts: Contract Renegotiation: In some cases, the parties to a contract may agree to renegotiate the terms of the contract to make it more favorable for both parties, especially if the original terms are no longer feasible due to the insolvency. Impact on Rights of Parties: Automatic Stay: The initiation of insolvency proceedings often results in an automatic stay, which temporarily prohibits legal actions, including contract enforcement, against the debtor. This allows the debtor and the insolvency professional to assess the situation and make decisions about contracts. Contractual Rights: Parties to contracts may assert their contractual rights during insolvency proceedings. For example, secured creditors may have rights to specific assets, and these rights are typically respected in the proceedings. Notification and Communication: Notice to Counterparties: The debtor or the insolvency professional is typically required to notify contract counterparties about the commencement of insolvency proceedings and any proposed actions regarding contracts. Court Approval: NCLT Approval: Significant decisions regarding contracts, such as termination, continuation, or modification, often require approval from the NCLT or other relevant authorities overseeing the insolvency process. It's important to note that the treatment of contracts during bankruptcy and insolvency proceedings can be complex and depends on various factors, including the specific laws and regulations governing insolvency in the jurisdiction, the nature of the contracts, and the objectives of the insolvency process. Parties involved in contracts with a debtor in insolvency proceedings should seek legal counsel to understand their rights and obligations and to navigate the complexities of the situation.

Dear client, The debtors’ contracts during the insolvency and bankruptcy proceedings in India is a very crucial issues affecting the creditors and suppliers, employees and other stakeholders of the contract. Under the insolvency and bankruptcy code, 2016 is the primary act which govern the contracts during the corporate insolvency resolution process (CIRP) and liquidation. Under the Indian law, contracts do not automatically terminate the contract upon the insolvency proceedings. These are subjected to evolution, renegotiation or rejection based on the commercial feasibility and the viability of the resolution process. The major role is played by the resolution professional in determining which contracts will be continued and which should be terminated. Moratorium under the section 14 of the IBC – when there are insolvency proceedings are initiated, the national company law tribunal (NCLT) imposes a moratorium period under the section 14 of IBC. In the period it will freeze all the legal proceedings, execution of judgments, decrees and recovery actions against the debtors and transfer or disposal of assets of the debtors. The moratorium ensures that no party can sue the debtor for contractual breaches during the process of insolvency. Essential and non-essential contracts – the essential contracts include agreement necessary to the company and this cannot be terminated abruptly. Non- essential contracts agreements do not affect the survival of the debtor’s business and it can be renegotiated, suspended, or rejected based on the commercial feasibility. Treatment of contract during insolvency proceedings: An executory contract is a contract whether neither party is fully performed its duty, the resolution professional has the power to either continue the contract if it benefits the company or reject contracts that are financially unviable. Termination of contracts during insolvency: Contracts can be terminated if the contract contains an insolvency termination clause and the NCLT allows its enforcement. If the contract is unprofitable and if a counterparty fails to perform obligations and the Resolution professional if he finds it necessary to terminate. Contracts cannot be terminated if a contract is necessary for the debtor’s business survival and if the termination violates under section 14 and affects the resolution process. I hope this answer helps. In case of future queries please feel free to contact us. Thank you