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I. Supreme Court: NCLT cannot adjudicate contractual dispute if termination of contract is based on grounds unrelated to Corporate Debtor's insolvency
The Hon'ble Supreme Court ("SC") has in its judgement dated November 23, 2021, in the matter of TATA Consultancy Services Limited v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Private Limited [ Civil Appeal No 3045 of 2020] held that, the residuary jurisdiction of the National Company Law Tribunal ("NCLT") cannot be invoked if the termination of a contract is based on grounds unrelated to the insolvency of the corporate debtor.
Tata Consultancy Services Limited ("Appellant") entered into a facilities agreement dated December 01, 2016 with S. K. Wheels Private Limited ("Corporate Debtor") to avail services in the nature of facilities from the Corporate Debtor.
There were multiple lapses by the Corporate Debtor in fulfilling its contractual obligations. The Corporate Debtor failed to remedy satisfactorily such contractual breaches. Thereafter, the Appellant notified the Corporate Debtor by way of an e-mail dated August 01, 2018, that it intended to invoke the penalty clause of the facilities agreement for the alleged contractual breaches. However, the Appellant could not initiate recovery proceedings on account of the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 ("IBC"). Thereafter, a termination notice was issued by the Appellant.
Subsequently, the Corporate Debtor disputed the issuance of the termination notice on the ground that no material breaches had occurred and that the Corporate Debtor was not given a period of 30 (thirty) days to cure the defects before the agreement was terminated as per the facilities agreement. Thereafter, the Corporate Debtor filed a miscellaneous application before the NCLT under Section 60(5)(c) of the IBC for quashing of the contract termination notice. The NCLT granted an ad-interim stay and observed that, prima facie it appeared that the contract was terminated without serving the requisite notice of 30 (thirty) days ("NCLT Order").
Thereafter, the National Company Law Appellate Tribunal ("NCLAT") by way of its order dated June 24, 2020, upheld the NCLT Order and observed therein that, NCLT had correctly stayed the operation of the termination notice since the main objective of the IBC is to ensure that the Corporate Debtor continues as a going concern. The NCLAT referred to Section 14 of the IBC to highlight that a moratorium is imposed to ensure the smooth functioning of the Corporate Debtor and to safeguard its status as a going concern ("NCLAT Order"). Aggrieved by the NCLAT Order, the Appellant preferred the present Appeal before the SC ("Appeal").
- Whether the NCLT can exercise its residuary jurisdiction under Section 60(5)(c) of the IBC to adjudicate upon the contractual dispute between the parties.
- Whether in the exercise of such a residuary jurisdiction, it can impose an ad-interim stay on the termination of the facilities agreement.
Contentions raised by the Appellant:
- The NCLT has misconstrued the provisions of Section 14 of the IBC which relate to the provision of goods and services to the Corporate Debtor once the moratorium is imposed. In the present case, the Appellant was availing of the services of the Corporate Debtor, to which Section 14 of the IBC had no application.
- The termination notice was issued to the Corporate Debtor not because it was undergoing Corporate Insolvency Resolution Process ("CIRP"), but due to the material breaches of the agreement and several opportunities were provided to the Corporate Debtor to remedy those breaches before the issuance of the termination notice.
- Since the facilities agreement was not the sole contract of the Corporate Debtor, termination of the said facilities agreement would not lead to its corporate death and is not against the objective of IBC.
- Additionally, the NCLT under Section 60(5)(c) of the IBC could not have invoked its residuary powers where there was a patent lack of jurisdiction. The IBC does not permit a statutory override of all contracts entered with the Corporate Debtor. A third party has a contractual right of termination.
- Reliance was placed on Gujarat Urja Vikas v. Amit Gupta and Others [(2021) 7 SCC 209] wherein the SC had injuncted a third party from terminating its contract with the corporate debtor therein, because there were concurrent findings of the NCLT and the NCLAT that the contract in question was the sole contract of the corporate debtor and the termination of the contract by the third party was merely on the ground of initiation of CIRP, without there being any contractual default on part of the corporate debtor.
Contentions raised by the Corporate Debtor:
- The NCLT is vested with the jurisdiction under Section 60(5)(c) of the IBC to adjudicate issues relating to fact or law in respect of a company undergoing CIRP.
- Section 238 of the IBC has an overriding effect over other laws and reliance was placed on the decision of the SC inAshoka Marketing v. Punjab National Bank [1990) 4 SCC 406] wherein it was held that two special laws containing non-obstante clauses must be interpreted harmoniously by looking at the purpose of the laws.
- In Gujarat Urja Vikas (supra), the SC has held that the residuary jurisdiction of the NCLT under Section 60(5)(c) of the IBC gives it a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings. Further, it was held that Section 14 of the IBC is not exhaustive of the grounds of judicial intervention contemplated under the IBC, otherwise, Section 60(5)(c) of the IBC would be rendered ineffective and one such ground of intervention is when the status of the Corporate Debtor as a going concern is in jeopardy.
- The Corporate Debtor had two main sources of income – a dealership of Maruti vehicles and the facilities agreement with the Appellant. The dealership was terminated before the initiation of CIRP, thus, the only existing source of income as of the date of initiation of CIRP was the facilities agreement. Hence, the termination of the facilities agreement would adversely affect the Corporate Debtor.
Observations of the Supreme Court
The SC while adjudicating upon the issues in the present Appeal, distinguished the facts in the case of Gujarat Urja Vikas (supra) and the instant case. While examining the ingredients of Section 14 of the IBC, it was observed that the Appellant was neither supplying any goods or services to the Corporate Debtor in terms of Section 14(2) of the IBC, nor was it recovering any property that was in possession or occupation of the Corporate Debtor as the owner or lessor of such property as envisioned under Section 14(1)(d) of the IBC. Thus, the SC concluded that Section 14 of the IBC was indeed not applicable. Further, the Appellant had time and again informed the Corporate Debtor that its services were deficient, and it was falling foul of its contractual obligations. The SC observed that there was nothing to indicate that the termination of the facilities agreement was motivated by the insolvency of the Corporate Debtor.
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