CHAPTER V ADMINISTRATION AND DISTRIBUTION OF THE ESTATE OF THE BANKRUPTCentral

Section 168 of The Insolvency and Bankruptcy Code, 2016.

(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—
1. (a)an order discharging the obligations of the applicant or the bankrupt under the contract; and
2. (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.

Summary

This rule applies to contracts that a person entered into before they were officially declared bankrupt.
Any other person who is a party to that contract can ask the bankruptcy court to cancel the contract and end their obligations under it.
The other party can also ask the court for compensation, known as damages, for any failure to carry out the contract.
Any compensation or damages that the court decides the bankrupt person must pay can be claimed as a regular bankruptcy debt.
If the bankrupt person signed the contract together with a partner or another joint party, that other person can be sued or sue on the contract without including the bankrupt person.

Practical examples

1On January 10, 2026, Ramesh entered into a contract to paint Amit's office for 50,000 rupees. Before Ramesh could start the work, Amit was declared bankrupt on February 15, 2026. Ramesh did not want to be stuck in a contract with someone who could not pay him. Ramesh applied to the Debt Recovery Tribunal for an order to cancel his obligation to paint the office and to claim 5,000 rupees for the paint materials he had already bought.

2Suman and her business partner Vicky jointly signed a contract in March 2026 to buy a commercial vehicle from a dealer, and Vicky was later declared bankrupt in May 2026. Under the insolvency rules, the dealer can sue Suman directly for the unpaid balance of the vehicle without having to include Vicky, the bankrupt partner, in the lawsuit.

FAQ

1. Can a business partner cancel a contract under Section 168 of the Insolvency and Bankruptcy Code, 2016 if the other party goes bankrupt?

Yes. Under Section 168 of the Insolvency and Bankruptcy Code, 2016, any party to a contract made before the bankruptcy can apply to the tribunal to cancel the contract and claim damages.

2. How are damages from cancelled contracts treated under Section 168 of the 2016 Indian Insolvency Code?

Under Section 168 of the 2016 Indian Insolvency Code, any damages ordered by the tribunal to be paid by the bankrupt person are treated as a bankruptcy debt that can be proved and paid out of the bankrupt's estate.

3. Can I sue a joint signer of a contract without including the bankrupt under Section 168 of the Bankruptcy Code?

Yes. Under Section 168 of the Bankruptcy Code, if the bankrupt person is a joint party to a contract, the other joint signer can be sued or can sue on the contract without joining the bankrupt person in the legal proceedings.

Test yourself

Q1.Under Section 168 of the Insolvency and Bankruptcy Code, 2016, what can a contracting party (other than the bankrupt) do if they have an active contract with a bankrupt person that was signed before the bankruptcy?

Q2.Under Section 168 of the Insolvency and Bankruptcy Code, 2016, how are any contract damages awarded to a non-bankrupt party by the Adjudicating Authority classified?

Q3.Under Section 168 of the Insolvency and Bankruptcy Code, 2016, if the bankrupt person is a joint party to a contract alongside another person, what are the rules regarding legal action on that contract?

Q4.Under Section 168 of the Insolvency and Bankruptcy Code, 2016, which contracts fall under the scope of this provision?

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