Netting Arrangements vs. Insolvency Regime in India: A Tug of War between Finality and Resolution

The Insolvency and Bankruptcy Code, 2016 (IBC) reshaped India’s insolvency framework, yet it says little about close-out netting, where contracts are terminated on default and mutual obligations are set off into one net sum. This gap matters as the derivatives market grows, and becomes apparent when a counterparty to a qualified financial contract seeks to net its obligations against a corporate debtor undergoing insolvency.

This paper critically examines the interface between the Bilateral Netting of Qualified Financial Contracts Act, 2020 (Netting Act) and the IBC, i.e., Sections 14, 43 to 51 and 238 of the IBC. Sections 6 and 10 of the Netting Act make close-out netting effective despite insolvency, but Section 238 of the IBC claims the same overriding force, with no stated hierarchy. The IBC lacks an express carve-out for qualified financial contracts. This creates uncertainty, since a broad reading of the moratorium could stay netting or expose it to challenge as a preference. This risks higher capital costs and de facto preference over unsecured creditors.

The United States, the United Kingdom and the European Union protect netting through safe harbour rules, but India has no equivalent in its insolvency law. Without statutory coordination, financial institutions and resolution professionals cannot tell how the two regimes interact.

This paper argues that India must adopt a calibrated statutory framework reconciling contractual finality with collective resolution. The proposed framework combines statutes, judicial decisions, regulatory notifications, international standards and comparative legislation with scholarly commentary, ensuring both financial stability and creditor equality.