Section 168 - Obligations Under Contracts: Insolvency and Bankruptcy Code, 2016
Section 168 deals with contractual obligations where a bankrupt entered into an agreement before the bankruptcy commencement date. It provides a route for the other contracting party to seek discharge of obligations and damages from the Adjudicating Authority.
Section 168: Statutory provisions
168. Obligations under contracts.
(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-
- an order discharging the obligations of the applicant or the bankrupt under the contract; and
- 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.
Source: India Code - Insolvency and Bankruptcy Code, 2016; IBBI published text of the Code (PDF).
Meaning and scope of Section 168
Sub-section (1): Contracts entered into before bankruptcy
The provision concerns a contract made before the bankruptcy commencement date. The timing of the agreement is important: Section 168 is not a general mechanism for every contract entered into during the administration of a bankruptcy estate.
Sub-section (2): Application for discharge and damages
The other contracting party may approach the Adjudicating Authority to seek discharge of contractual obligations and an order for damages. Whether relief is granted, and on what terms, depends on the facts and the applicable law; discharge is not automatic merely because bankruptcy has commenced.
Sub-section (3): Damages as a provable bankruptcy debt
If damages are payable by the bankrupt pursuant to an order under Section 168(2)(b), they are treated as a provable bankruptcy debt. This enables the claim to be addressed through the bankruptcy claims and distribution process, subject to applicable procedures and priorities.
Sub-section (4): Joint contracting parties
Where the bankrupt contracted jointly with another person, the other joint party may sue or be sued on the contract without making the bankrupt a party to those proceedings. The provision addresses joinder; it does not itself decide the merits of the contractual dispute.
Practical considerations
A party considering relief should identify the contract and its date, the bankruptcy commencement date, the outstanding obligations, evidence of non-performance and the basis for any claimed damages. The appropriate forum and procedural rules should be checked before filing.
For individuals and partnership firms, Section 179 sets out the Adjudicating Authority framework, subject to the Code's applicable provisions. The statutory bankruptcy regime in Sections 94 to 187 was brought into force from 1 December 2019 insofar as it relates to personal guarantors to corporate debtors; application to other categories should not be assumed without checking commencement notifications.
Illustrative example
Suppose a person entered into a supply agreement before the bankruptcy commencement date but subsequently became bankrupt. The supplier may seek an order concerning the parties' remaining contractual obligations and damages. If the Adjudicating Authority orders the bankrupt to pay damages under Section 168(2)(b), the amount is provable as a bankruptcy debt, rather than automatically becoming an immediately recoverable priority payment.
Related legal provisions
Section 167 addresses extortionate credit transactions; Section 169 concerns continuation of bankruptcy proceedings after the bankrupt's death; and Sections 171 and 178 address proof of debt and priority of payment. The Indian Contract Act, 1872 may also be relevant to underlying contractual rights, subject to the insolvency framework.
Frequently asked questions
Does bankruptcy automatically terminate a pre-existing contract?
No. Section 168 provides a mechanism for an eligible contracting party to apply for relief; it does not say that every existing contract automatically terminates.
Can the bankrupt apply under Section 168(2)?
The right to apply under this specific subsection is given to a party to the contract other than the bankrupt.
Are damages awarded against the bankrupt paid immediately?
Section 168(3) states that such damages are provable as a bankruptcy debt. Their treatment is subject to the applicable claims and distribution provisions.
Must the bankrupt be joined in proceedings against a joint contractor?
Section 168(4) permits the other joint contracting party to sue or be sued in respect of the contract without joining the bankrupt.
Official legal resources
Consult the India Code entry for the Insolvency and Bankruptcy Code, the IBBI legal framework for amendments and regulations, and the Indian Contract Act for relevant general contract-law principles.
This article is general legal information, not advice for any particular dispute. Check the current statutory text, commencement notifications and applicable rules before relying on a provision.