Essential Supplies, Licences and Ipso Facto Clauses in IBC

A business cannot be run as a going concern if its power is cut, its licences withdrawn or its key contracts terminated the moment it enters insolvency. The Code therefore protects essential and critical supplies, prevents the cancellation of government licences on the ground of insolvency, and allows the NCLT in limited cases to restrain termination of contracts. At the same time, suppliers must be paid for what they supply during the process. This note explains these protections and their limits.

1. Essential and Critical Supplies

Figure 1: Two categories of protected supplies

• Section 14(2). The supply of essential goods or services to the corporate debtor, as specified, shall not be terminated, suspended or interrupted during the moratorium.
• Regulation 32. The CIRP Regulations specify essential goods and services as electricity, water, telecommunication services and information technology services, to the extent they are not a direct input to the output produced or supplied by the corporate debtor; a power plant's fuel, for example, is not an essential supply in this sense.
• Section 14(2A). Inserted in 2020, it provides that where the interim resolution professional or resolution professional considers the supply of any goods or services critical to protect and preserve the value of the corporate debtor and manage its operations as a going concern, that supply shall not be terminated, suspended or interrupted during the moratorium, except where the debtor has not paid dues arising from such supply during the moratorium or in such circumstances as may be specified.
• Payment. Pre-insolvency dues are a claim in the process, but supplies made during the moratorium must be paid for; they form part of the insolvency resolution process costs under section 5(13), which are paid first in any plan or liquidation.

2. Licences and Government Grants

• Explanation to section 14(1). Added in 2020, it provides that a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the grant during the moratorium.
• Embassy Property Developments v State of Karnataka, 2019. The State refused to extend a mining lease of a corporate debtor in CIRP; the Supreme Court held that decisions of the government taken in the exercise of statutory powers under public law are subject to judicial review by the High Court, and the NCLT's jurisdiction under section 60(5) does not extend to such decisions.
• After the plan, 2026. Section 31(5), inserted by the 2026 Amendment, protects licences, permits and clearances granted to the corporate debtor from suspension or termination after a resolution plan is approved, supporting the clean slate given to the successful resolution applicant (Topic 42)

Figure 2: Protection of licences at each stage

3. Ipso Facto Clauses

• Meaning. A contractual term allowing a party to terminate or modify a contract merely because the other party has entered insolvency, regardless of any breach in performance.
• The Code's position. Unlike some other jurisdictions, the Code contains no general prohibition of ipso facto clauses; the Bankruptcy Law Reforms Committee and later the Insolvency Law Committee considered the issue, and protection has come mainly through section 14(2), section 14(2A), the Explanation on licences and the NCLT's residuary jurisdiction.

4. Gujarat Urja Vikas Nigam v Amit Gupta, 2021

• Facts. The State electricity utility sought to terminate a power purchase agreement with Astonfield Solar, a corporate debtor in CIRP, relying on a clause treating the debtor's insolvency as an event of default.
• Holding. Decided on 8 March 2021, the Supreme Court upheld the NCLT's order restraining termination under section 60(5)(c), which empowers the NCLT to decide any question arising out of or in relation to the insolvency resolution.
• Reasoning. The termination was based solely on the insolvency, the agreement was the debtor's only contract, and termination would have caused its corporate death, defeating the object of the Code.
• Caution. The Court stressed that its decision was confined to its facts, and that the NCLT must be wary of setting aside valid contractual terminations that would merely dilute the rights of the counterparty.

5. TCS v Vishal Ghisulal Jain, 2021

• Facts. TCS terminated a facilities agreement with SK Wheels, a corporate debtor in CIRP, on the ground of repeated deficiencies in services that had arisen before the insolvency.
• Holding. Decided on 23 November 2021, the Supreme Court set aside the NCLT's order staying the termination, since the termination was for reasons unrelated to the insolvency, and the dispute therefore fell outside the NCLT's jurisdiction under section 60(5)
• Further principle. Even where a termination is related to insolvency, the NCLT should intervene only where the contract is central to the success of the CIRP or to keeping the corporate debtor a going concern; SK Wheels had other business, so the termination would not cause its corporate death.

Figure 3: When the NCLT may restrain a termination

6. Powers over Contracts during the CIRP

• Section 20. The interim resolution professional may enter into contracts on behalf of the corporate debtor or amend or modify existing contracts, in order to keep the business running.
• Section 28. Certain actions, such as raising interim finance above the specified limit, creating security interests and changing the capital structure, require the prior approval of 66 per cent of the committee of creditors.
• Leases. A lessor cannot recover property in the debtor's possession during the moratorium (section 14(1)(d)); rent for the period of use during the process is generally paid as a process cost (Topic 22)

7. Frequently Asked Questions

Can an electricity distribution company disconnect supply to a company in CIRP for old dues?

No. Electricity is an essential supply under section 14(2) and Regulation 32, and cannot be cut off during the moratorium for dues before the insolvency; those dues are a claim in the process, while supply during the moratorium must be paid for.

Can the NCLT stop a customer from terminating a contract with a company in CIRP?

Only in a narrow class of cases: where the termination is solely because of the insolvency and would lead to the corporate death of the debtor, as in Gujarat Urja (2021). A termination for independent reasons, such as poor performance, is outside the NCLT's jurisdiction (TCS, 2021).

Can a regulator cancel a company's licence because it is in CIRP?

Not on the ground of insolvency, if the company pays current dues for the licence during the moratorium. A decision on other statutory grounds is reviewable by the High Court, not the NCLT.

8. Related Topics

• Topic 22: Moratorium under Section 14. The wider protection.
• Topic 31: Interim Finance and Process Costs. Paying for supplies during CIRP.
• Topic 72: Adjudicating Authority and Section 60(5). The NCLT's residuary jurisdiction.