This article is based on the analysis of the case decided by the Hon'ble National Company Law Appellate Tribunal (NCLAT) in the matter of Tata Consultancy Services Limited v. Vishal Ghisulal Jain (decided on June 24, 2020), arising out of Order dated 18.12.2019 passed by National Company Law Tribunal, Mumbai Bench (NCLT), in M.A. No. 2954/2019 in Company Petition (IB) 4301 (MB)/ 2018). The NCLAT has upheld the view of the NCLT, that a contract termination notice issued by Tata Consultancy Services Limited (Appellant) to S.K Wheels Private Limited (Corporate Debtor), a company undergoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC) should be stayed.
Facts of the case: The Appellant and the Corporate Debtor had entered into a Facilities Agreement on 01.12.2016. As per the terms of the said agreement the Corporate Debtor was under the obligation to inter alia fit the premises with the materials as per specification mentioned in the agreement and provide certain facilities to enable conduct of examinations deploying National Technology Infrastructure for the Appellant's clients. Thereafter, the Hon'ble NCLT vide order dated 29.03.2019 initiated CIRP proceedings against the Corporate Debtor.
Subsequent to the initiation of the CIRP against the Corporate Debtor, the Appellant terminated the Facilities Agreement vide termination notice dated 10.06.2019 due to material breach in the Facilities Agreement and failure to remedy such breaches by the Corporate Debtor. Pursuant to the notice of termination the Corporate Debtor filed proceedings before the NCLT seeking, inter alia, stay of the termination notice issued by the Appellant. The NCLT vide order dated 18.12.2019 granted an interim stay on the notice for termination of the Facilities Agreement issued by the Appellant, in order to enable the Corporate Debtor to remain a going concern.
Issue: Whether the termination of the Facilities Agreement is valid pursuant to Section 14 of the IBC.
Arguments: The Appellant stated that the NCLT had failed to appreciate that a valid notice of termination was issued by the Appellant and that the notice of termination was not in contravention of Section 14 of the IBC. In view of the above submissions the learned counsel for the Appellant sought direction to set aside the impugned order dated 18.12.2019.
The Corporate Debtor stated that as per the Facilities Agreement, the Corporate Debtor was under the obligation to, inter alia, fit the premises with the materials as per specification mentioned in the agreement and provide certain facilities. Previously, when there was a situation pertaining to noncompliance with the terms of the Facilities Agreement, the parties had discussed the same and mutually resolved the same. Further, it was stated that all the deficiencies were cured at the cost of the Corporate Debtor. Furthermore, meetings were held in April and May 2019, whereby, the Interim Resolution Professional intimated the Appellant that no prejudice would be caused to the Appellant and all the services and facilities would be provided as contained in the Facilities Agreement.
The learned counsel for the Corporate Debtor further submitted that the Appellant issued termination notice as per the Clause 11(b) of the Facilities Agreement, however, the same was not in accordance with the said clause. As per the above stated Clause 11(b), a 30 days' notice needs to be given in the event of any material breach by either party. However, no notice was received in this case by the Corporate Debtor.
On the contrary, the Appellant stated that it had noticed the material breaches of obligations by the Corporate Debtor including deployment of personnel lacking requisite level of scale, non-adherence of design guidelines, non-replacement of furniture and air conditioners, etc., pursuant to which several notices seeking for remedy of such breaches were issued, however, the Corporate Debtor failed to remedy the contractual breaches which led to the serving of a termination notice.
To this eud, it was stated by the Corporate Debtor that they had cured all the deficiencies, and issuance of the termination notice after the initiation of CIRP was against the object of the IBC.
OBSERVATIONS OF THE NCLAT
The NCLAT observed that as per the termination clause of the Facilities Agreement, it is mandatory to issue notice to the party in the event of a material breach and if the same is not cured, the aggrieved party was liable to terminate the agreement. It was also observed that in view of Section 14 of the IBC, once a moratorium was imposed by the adjudicating authority and upon appointment of Interim Resolution Professional, the Interim Resolution Professional will be at the helm of affairs of the company in view of the suspension of the board of directors of the Corporate Debtor. Further, the IBC sets out that it is the duty of Resolution Professional to preserve and protect the assets of the Corporate Debtor, and lays down the functions he may perform in order to ensure the same. It was observed that as per the IBC, post the initiation of the CIRP, the Corporate Debtor shall function and continue its business activities. It is the duty of the Interim Resolution Professional/ Resolution Professional, as the case may be, to keep the Corporate Debtor as a going concern.
DECISION OF THE NCLAT
The appeal was disposed, and it was held that the NCLT has rightly stayed the termination of notice and there is no illegality in the order dated 18.12.2019 passed by the NCLT.
This judgement can lead to some interesting debatable issues. One of the major shortcomings observed here is that the NCLT/NCLAT has failed to deduce the reasoning at length for why and how Section 14 of IBC is made applicable to commercial agreements.
Although the NCLAT has made a deliberate attempt to safe guard the object of the IBC, by encouraging the business of Corporate Debtor to continue as a going concern and viable in order to avoid any liquidation, the complexity still arises due to the absence of a convincing reason as to how IBC empowers the NCLT/ NCLAT, as the case may be, to adjudicate the stay on a commercial agreement of the Corporate Debtor for the time being under Section 14 of IBC despite fulfilment of all the compliances with termination clause as given in the Facilities Agreement by the Appellant. The minutia involved in the said commercial dispute has decent scope to be challenged on significant grounds in near future.
Originally published by INDIAN LEGAL IMPETUS® on JULY 2020. Vol. XIII, Issue VII
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