The Hon'ble Supreme Court in a recent judgment in Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain, Resolution Professional SK Wheels Pvt. Ltd.1 has held that the NCLT by virtue of the residuary jurisdiction under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 ("IBC") is empowered to adjudicate upon contractual disputes that are essential to the success of the CIRP. In this article, we briefly navigate through the facts and findings which led to the Hon'ble Supreme Court to arrive at its decision in the above-mentioned case.

  1. Brief Facts

The appellant and the corporate debtor entered into a Facilities Agreement on 1 December 2016 ("Facilities Agreement"). The Facilities Agreement obligated the corporate debtor to provide premises with certain specifications and facilities to the appellant for conducting examination for educational institutions. Clause 11(b) under the Facilities Agreement empowered either party to terminate the agreement immediately by written notice to the other party provided that a material breach committed by the latter was not cured within thirty days of the receipt of the notice. A termination notice was issued by the appellant to the corporate debtor on 10 June 2019 which came into effect immediately.

The facts leading up to the issuance of the notice are contested by both the parties. As per the appellant, there were multiple lapses by the corporate debtor in fulfilling its contractual obligations, which it failed to remedy satisfactorily. The appellant accordingly notified the corporate debtor on 1 August 2018 that it intended to invoke the penalty clause of the Facilities Agreement for the alleged contractual breaches.

The Corporate Insolvency Resolution Process ("CIRP") was initiated against the corporate debtor on 29 March 2019. The appellant alleged that it came to know about the CIRP against the corporate debtor when the electricity board disconnected the supply of electricity to the corporate debtor on 24 April 2019. The appellant claimed that the material breaches by the corporate debtor resulted in a liability of INR 20,78,500. It did not initiate recovery proceedings on account of the moratorium imposed under Section 14 of the IBC. The appellant issued a notice of termination dated 10 June 2019 in terms of Clause 11(b) of the Facilities Agreement.

The corporate debtor, on the other hand, submitted that certain routine operational requirements were highlighted by the appellant from time to time, which were rectified within a reasonable duration. The corporate debtor had allegedly invested INR 8.35 crores (INR 83.5 million) to fulfil its contractual obligations. The corporate debtor claimed that it complied with the directions of the appellant and cured all minor deficiencies pointed out. The corporate debtor further submitted that while the electricity was disconnected by the electricity board in April 2019, it was eventually restored.

The corporate debtor contested the issuance of the termination notice on the ground that no material breaches had occurred, and in an event, a thirty-day period was to be given to a party to cure the defects before the agreement could be terminated under clause 11(b) of the Facilities Agreement.

  1. Proceedings before the NCLT and NCLAT

The corporate debtor instituted a miscellaneous application before the National Company Law Tribunal ("NCLT") under Section 60(5)(c) of the IBC for quashing the termination notice. The NCLT passed an order dated 18 December 2019 granting an ad-interim stay on the termination notice issued by the appellant and directed the appellant to comply with the terms of the Facilities Agreement. The NCLT observed that prima facie it appeared that the contract was terminated without serving the requisite notice of thirty days. Aggrieved by the order, the appellant preferred an appeal before the National Company Law Appellate Tribunal ("NCLAT"). The NCLAT by its order dated 24 June 2020 upheld the order of the NCLT observing that it had correctly stayed the operation of the termination notice since the main objective of the IBC was to ensure that the corporate debtor remains a going concern. The NCLAT referred to Section 14 to highlight that a moratorium is imposed to ensure the smooth functioning of the corporate debtor to safeguard its status as a going concern. Further, NCLAT held that it is the responsibility of the Resolution Professional ("RP") under Section 25 of the IBC to preserve the corporate debtor as a going concern. The judgment of the NCLAT gave rise to the present appeal before the Hon'ble Supreme Court.

The moot questions culled out by the Hon'ble Supreme Court were as follows:

  1. Whether the NCLT could exercise its residuary jurisdiction under Section 60(5)(c) of the IBC to adjudicate upon the contractual dispute between the parties; and
  1. Whether in the exercise of such a residuary jurisdiction, it could impose an ad-interim stay on the termination of the Facilities Agreement.
  1. Findings of the Hon'ble Supreme Court

The Apex Court, at the outset, noted that the Facilities Agreement provided for resolution of disputes by way of arbitration. However, a reference was then made to Section 238 of the IBC which stated that the IBC had an overriding effect on all other laws, including any instrument having effect by virtue of law. The Hon'ble Supreme Court referred to the decision in Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund2 to reiterate the overriding effect of Section 238 of the IBC.

Similarly, in Gujarat Urja Vikas v. Amit Gupta & Ors.3 it was noted that the Apex Court had held that a power purchase agreement which was a bilateral commercial contract, was an 'instrument' under Section 238 of the IBC. Notably, the power purchase agreement provided that the disputes between the parties relating to the agreement would be entertained by Gujarat Electricity Regulatory Commission. But since Section 238 provides an overriding effect to the provisions of the IBC over any instrument having effect by law, it was held that the NCLT had jurisdiction over the disputes which arose in the context of insolvency proceedings.

The Hon'ble Supreme Court then referred to Section 60(5)(c) which grants residuary jurisdiction to the NCLT to adjudicate any question of law or fact, arising out of or in relation to the insolvency of the corporate debtor. Accordingly, the Apex Court held that the Facilities Agreement being an 'instrument' under Section 238 of the IBC can be overridden by the provisions of the IBC. The existence of an arbitration clause referring disputes to arbitration did not oust the jurisdiction of the NCLT to exercise its residuary powers under Section 60(5)(c) of the IBC. On the appellant's argument that the NCLT and the NCLAT had virtually re-written the agreement, the Apex Court held that the NCLT and NCLAT were vested with the responsibility of preserving the corporate debtor's survival and could intervene if an action by a third party could cut the legs out from under the CIRP.

Towards the end of the judgment, the Apex Court issued a note of caution to the NCLT and NCLAT regarding interference with a party's contractual right to terminate a contract. It was observed that even if the contractual dispute arose in relation to the insolvency, a party could be restrained from terminating the contract only if it is central to the success of the CIRP. Crucially, the termination of the contract should result in the corporate death of the corporate debtor.

On facts, the Apex Court held that the order of the NCLT dated 18 December 2019 did not indicate that the NCLT has applied its mind to the centrality of the Facilities Agreement to the success of the CIRP and corporate debtor's survival as a going concern. The NCLT had merely relied upon the procedural infirmity on part of the appellant in the issuance of the termination notice, i.e., the appellant did not give thirty days' notice period to the corporate debtor to cure the deficiency in service. Similarly, the NCLAT, in its impugned judgment, had averred that the decision of the NCLT preserved the 'going concern' status of the corporate debtor but there is no factual analysis on how the termination of the Facilities Agreement would put the survival of the corporate debtor in jeopardy.

Accordingly, the Hon'ble Supreme Court set aside the judgment of the NCLAT dated 24 June 2020 and the present appeal was dismissed. The proceedings initiated against the appellant stood dismissed for absence of jurisdiction.

Comments

The instant judgment has very carefully carved out the circumstances where the termination of a contract would be prevented by NCLT or NCLAT through an ad-interim stay by virtue of the residual powers vested in them under Section 60(5)(c) of the IBC. The termination of a contract may be prevented only if it is central for the success of CIRP. If the agreement were to be terminated, then the corporate death of the corporate debtor must be certain. It is only in such limited circumstances would NCLT or NCLAT use its powers to prevent termination of a contract. The instant judgment plays a fine balance between private contractual rights and the public interest of saving the corporate debtor from getting liquidated.

Footnotes

1 Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain, Resolution Professional SK Wheels Pvt. Ltd., Civil Appeal No. 3045 of 2020.

2 Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, 2021 6 SCC 436.

3 Gujarat Urja Vikas v. Amit Gupta & Ors., 2021 7 SCC 209.

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