IBC Section 168: Obligations under contracts

Section 168 of Insolvency and Bankruptcy Code, 2016: Obligations under contracts

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) This section shall apply where a contract has been entered into by the bankrupt with a person before the bankruptcy commencement date.

(2) Any party to a contract, other than the bankrupt under sub-section (1), may apply to the Adjudicating Authority for-

(a) an order discharging the obligations of the applicant or the bankrupt under the contract; and

(b) payment of damages by the party or the bankrupt, for non-performance of the contract or otherwise.

(3) Any damages payable by the bankrupt by virtue of an order under clause (b) of sub-section (2) shall be provable as bankruptcy debt.

(4) When a bankrupt is a party to the contract under this section jointly with another person, that person may sue or be sued in respect of the contract without joinder of the bankrupt.

Legal Commentary & Landmark Judgments: Section 168

Section 168 governs the enforcement, performance, and statutory adoption of existing contracts entered into by the bankrupt prior to bankruptcy.

Trustee's Right to Adopt: The bankruptcy trustee may adopt and enforce any contract of the bankrupt that is beneficial to the estate, subject to Section 153 creditor approvals.
Counter-Party Right to Apply: A counter-party to a contract with the bankrupt may apply to the Adjudicating Authority for an order rescinding the contract and awarding damages.
Damages Ranking in Distribution: Any damages awarded to the counter-party by reason of rescission rank as an unsecured debt in the bankruptcy distribution.

Key Landmark Precedents:

Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain (2022) 2 SCC 583: The Supreme Court held that while insolvency trustees can enforce beneficial contracts, the Adjudicating Authority cannot rewrite fundamental contractual bargains.
Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (2021) 7 SCC 209: Recognized the paramount duty of the insolvency practitioner to evaluate contractual enforceability solely through the prism of collective estate benefit.

Courtroom Practice & Strategic Litigation Guidance:

Where a pre-bankruptcy contract provides essential ongoing cash inflows, the trustee must formally communicate statutory adoption to the contracting party within 30 days to prevent unilateral termination.