Contractual Freedom vs. Insolvency Code: A Conundrum in View of Power Purchase Agreements


The Insolvency and Bankruptcy Code, 2016 (“Code”), has been a game-changer in the insolvency and recovery landscape as it replaces a host of overlapping legislations and simplifies the journey of the creditors seeking relief under a single umbrella mechanism. In addition to simplifying the recovery process, another noteworthy objective of the Code is maximizing the value of assets of a business undergoing insolvency. The Apex Court in Swiss Ribbons Pvt. Ltd. and Anr. vs. Union of India[1] has flagged the objective of the Code to bring back the corporate debtor into economic mainstream and efficiently run it as a going concern. The Code also has a non-obstante provision (Section 238) to enhance the efficacy and deliver on the promised objectives. In terms of the non-obstante clause, the Code has an overriding effect over any other law or an instrument, notwithstanding anything inconsistent therewith.


This article identifies the contours of contractual freedom of parties vis-à-vis the objectives of the Code, in light of the non-obstante clause and as decided by the Supreme Court in the context of a power purchase agreement.

Interplay Between the Code and Freedom Under Contractual Arrangements

As per the standard business practice in India, parties include a clause in the contracts that allows one party to terminate the contract, if an insolvency process is initiated against the other party (corporate debtor) under the relevant laws. However, if we see the practical ramification of such a contractual clause, each time a termination happens on the aforesaid ground, the corporate debtor loses its value significantly.

Tatva Legal, Hyderabad has an experienced team of corporate lawyers who, amongst other services, advise on a wide range of issues in relation to corporate legal consultancy and mergers & acquisitions, private equity and joint ventures.

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