Introduction
The Insolvency and Bankruptcy Code, 2016 (“IBC”) was established to streamline insolvency processes and facilitate corporate restructuring in India. It was not designed to resolve intricate commercial disputes or serve merely as a debt recovery mechanism. However, as Indian firms increasingly integrate into global business networks, insolvency tribunals face challenges that extend beyond conventional debtor-creditor dynamics. A pressing issue in this context is whether a corporate debtor can be held in “default” under the IBC if foreign sanctions restrict payments to a creditor.
Understanding the Sanctions Context
This dilemma is highlighted by the designation of some Indian entities on the Specially Designated Nationals (“SDN”) List by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) under Executive Order 13846, related to Iran sanctions. Being listed as an SDN leads to a blockade of assets under U.S. jurisdiction and prohibits U.S. entities from engaging with listed individuals. This becomes particularly pertinent for Indian subsidiaries of U.S. multinationals, which must comply with both Indian regulations and their parent company’s home country laws.
When a creditor of an Indian subsidiary of a U.S.-based company is listed by OFAC, payments to such creditors may contravene U.S. laws, exposing the subsidiary and its parent company to severe consequences. Nonetheless, sanctioned Indian entities might initiate insolvency proceedings against these subsidiaries, arguing that debts are enforceable under Indian law and should not be negated by foreign sanctions.
The Ahmedabad Case and Implications
This complex issue surfaced in Flint Group India Private Limited v. C J Shah & Co., where the National Company Law Tribunal (“NCLT”) Ahmedabad ruled on March 26, 2026, that OFAC sanctions did not justify non-payment of dues. The decision is currently under appeal at the National Company Law Appellate Tribunal (“NCLAT”), which has placed the matter in abeyance, indicating it should not be considered a binding precedent. This appeal could significantly influence whether sanctions can delay or prevent IBC proceedings.
Redefining “Default” Under IBC
The statutory definition of “default” under Section 3(12) of the IBC involves the non-payment of due debt. Tribunals traditionally focus on the existence and non-payment of a debt. However, they are now challenged to consider whether a debt can be deemed “payable” if foreign laws allegedly prohibit payment. Debtors argue that if payment is legally impossible due to sanctions, non-payment should not constitute a default. Conversely, creditors contend that a debt remains valid even if payment is temporarily hindered by foreign sanctions.
Institutional Competence and Jurisdictional Challenges
Another issue is whether insolvency tribunals are equipped to adjudicate these disputes. The Supreme Court of India has clarified that insolvency proceedings should not replace civil or commercial litigation. Cases like Mobilox Innovations Private Limited v. Kirusa Software Private Limited emphasize rejecting Section 9 applications where genuine disputes exist. Given that sanctions entail interpreting foreign laws and regulations, commercial courts or arbitration may be more appropriate forums for such matters.
The Role of Force Majeure and Legal Impossibility
Contractual clauses, such as force majeure or change-in-law provisions, may also come into play, potentially suspending payment obligations due to regulatory actions. Whether such clauses apply requires careful contract interpretation, potentially supporting the presence of a dispute in operational creditor proceedings under Section 9 of the IBC.
OFAC Relaxations and Their Impact
Recent OFAC relaxations, allowing certain transactions involving Iranian-origin products until August 21, 2026, might influence the ongoing debate. While this could potentially facilitate payments, it does not necessarily resolve pre-existing disputes retrospectively. Companies may still need legal, banking, and internal clearances to proceed with transactions involving sanctioned parties.
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Conclusion: Balancing Domestic and Global Considerations
The core question is whether Indian insolvency law should accommodate foreign sanctions. While unilateral sanctions lack automatic legal force in India, multinational corporations often align their operations with global compliance obligations. The pending NCLAT decision is anticipated to provide critical clarity on how sanctions-related restrictions intersect with “default” under Section 3(12) of the IBC, and whether they constitute a pre-existing dispute.
Ultimately, the evolving interpretations of “default” under the IBC will significantly influence the resolution of insolvency disputes in a globalized economy sensitive to sanctions. The outcome of the NCLAT appeal, alongside OFAC’s temporary sanctions relief, will continue to shape the legal and commercial landscape.
About the Authors: Yogendra Aldak is an Executive Partner and Tamanna Sharma is a Senior Associate at Lakshmikumaran & Sridharan Attorneys.
Disclaimer: The views expressed are those of the authors and do not necessarily reflect the views of Bar & Bench.
