Contractual Freedom Vs. Corporate Rescue: Taking Anti-Deprivation Rule beyond Gujarat Urja ruling

  • Vinod Kothari, Managing Partner and Sikha Bansal, Partner

Insolvency is a state of insufficiency – as such, the need to protect ‘whatever is there’ is quite
obvious. The rule of ‘anti-deprivation’ offers that protection.
Under normal circumstances, the autonomy of parties entering into contracts is well-established.
However, in insolvency, there is an inherent tension between contractual freedom and the objective
of corporate rescue and the need to ensure pari passu treatment to all claimants clamouring to share
what is insufficient, and therefore, contractual provisions are quite often subjected to either statutory
challenge or are read down or invalidated by courts. The anti-deprivation rule, also sometimes
called rule against ipso facto clauses in contracts, seeks to invalidate any contractual provision
which has the effect of depriving the insolvent’s estate of any right, property, or benefit, by the very
fact (hence, ipso facto) of the entity becoming insolvent. The rule of anti-deprivation thus seeks to
protect the insolvent’s estate (and consequentially, its creditors) from getting ‘deprived’ as such.

The full article is published in the Quinquennial of Insolvency and Bankruptcy Code, 2016  and can be read here.