Article

In the recent case of TATA Consultancy Services Limited v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Private Limited  in Civil Appeal No 3045 of 2020, the Bench of Hon’ble Apex Court consisting of Dr. Dhananjaya Y Chandrachud, J and A S Bopanna J, decided an appeal preferred against the order of National Company Law Appellate Tribunal  (NCLAT) upholding an ad-interim stay granted by the National Company Law Tribunal (NCLT) for staying termination by the Appellant of Facilities Agreement executed with the Corporate Debtor (SK Wheels Private Limited).

The Facilities Agreement obligated the Corporate Debtor to provide premises with certain specifications and facilities to the Appellant. The termination clause of the Facilities Agreement entitled the parties to terminate the agreement immediately by written notice to the other party provided that a material breach committed by the latter is not cured within thirty days of the receipt of the notice.

On account of alleged multiple lapses by the Corporate Debtor in fulfilling its contractual obligations, which were not cured satisfactorily, despite Appellant writing various e-mail communications, the Appellant issued the termination notice dated 10.06.2019 which immediately came into effect. This was subsequent to the initiation of Corporate Insolvency Resolution Process on 29.03.2019.

The corporate debtor denied the allegation of material breaches and challenged the termination of the Agreement on the ground that corporate debtor had cured the issues highlighted by the Appellant and that the Appellant did not serve mandatory notice of 30 days.

When RP filed application under section 60(5)(c) of the IBC, NCLT granted ad-interim stay on termination of the Agreement stating that it is the duty of Resolution Professional to preserve and protect the assets of the ‘Corporate Debtor’ (Section 25 of the IBC) along with the fact that moratorium under section 14 is imposed to ensure the smooth functioning of the Corporate Debtor and accordingly, granted stay on termination of the Agreement. The Order was upheld by NCLAT.

On Appeal, it was argued before the Supreme Court that section 14 shall not be applicable as it is the Appellant who is availing the services of the Corporate Debtor and the Facilities Agreement was not the sole contract of the corporate debtor, termination of which would lead to its corporate death. The Appellant also insisted on third party’s contractual right of termination and argued that IBC does not permit a statutory override of all contracts entered with the Corporate Debtor. Further, it was argued that the obligation under section 25 cannot be stretched to convert a determinable commercial contract into a non-terminable contract. The Appellant further challenged the exercise of residuary jurisdiction by the NCLT under Section 60(5)(c) of the IBC to decide a contractual dispute.

The Appellant further submitted that the ratio in Gujarat Urja Vikas v. Amit Gupta & Ors [(2021) 7 SCC 209] shall not be applicable since in the present matter, 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.

On the other hand, it was argued on behalf of the RP that firstly, the Appellant had not served the 30 day notice and secondly, the judgment in Gujarat Urja Vikas shall apply since the corporate debtor had only one source of income left out of the two when one dealership was already terminated before the initiation of CIRP.

Accordingly, the Court framed two issues for its consideration -:

 (i) 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; and

(ii) Whether in the exercise of such a residuary jurisdiction, it can impose an ad-interim stay on the termination of the Facilities Agreement?

The Apex Court analysed the arbitration clause provided in the Agreement along with the provision under Section 238 of the IBC which provides that the IBC overrides other laws, including any instrument having effect by virtue of law. The Court accordingly observed that the Facilities Agreement, being an ‘instrument’ under Section 238 of the IBC, can be overridden by the provisions of the IBC.

On analysis of section 60(5)(c) of the IBC, the Court observed that the existence of arbitration clause does not oust the jurisdiction of the NCLT to exercise its residuary powers under Section 60(5)(c) to adjudicate disputes relating to the insolvency of the Corporate Debtor. The Court further clarified that while RP can approach the Adjudicatory Authority for adjudication of disputes which relate to the insolvency resolution process, however, “when the dispute arises dehors the insolvency of the Corporate Debtor, the RP must apply to the Adjudicatory Autority.”

With respect to the objection by the Appellant that the adjudicatory Authority has, through its order, changed the nature of the Agreement from determinable to non-terminable, the Court clarified that intervention of NCLT/NCLAT, which are vested with responsibility of ascertaining the survival of the Corporate Debtor, cannot be said to be re-writing of the contract.

On the question of applicability of section 14, the Court agreed that section 14 shall not be applicable in the facts of the present case since the Appellant is neither supplying any goods or services to the corporate debtor in terms of Section 14 (2) nor is it recovering any property that is in possession or occupation of the corporate debtor as the owner or lessor of such property as envisioned under Section 14 (1) (d). The Appellant is, in fact only availing of the services of the Corporate Debtor by using the property that has been leased to it by the Corporate Debtor.

The Court, however, while referring to Gujarat Urja, was quick to add that jurisdiction of NCLT is not limited by Section 14 and that it can exercise its residuary jurisdiction under Section 60(5)(c) to adjudicate on questions of law and fact that relate to or arise during an insolvency resolution process. It was quoted from the judgment of Gujarat Urja – “If the jurisdiction of NCLT were to be confined to actions prohibited by Section 14 of IBC, there would have been no requirement for the legislature to enact Section 60(5)(c) of IBC. Section 60(5)(c) would be rendered otiose if Section 14 is held to be exhaustive of the grounds of judicial intervention contemplated under IBC in matters of preserving the value of the corporate debtor and its status as a “going concern”.

Having laid down the background, the Court went on to analyse the facts of the case. It was observed that the termination by the Appellant was not motivated by insolvency but by Corporate Debtor clearly having failed to fulfil its contractual obligations which the Appellant had brought to the attention of the corporate debtor before the initiation of CIRP through various e-mails. The deficiency of service was also highlighted in the Termination Notice by the Appellant.

In this background, the Court distinguished the facts in Gujarat Urja where the contract in question was terminated on the ground of insolvency itself which, as per the contract, constituted an event of default. In other words, the contractual dispute between the parties arose in relation to the insolvency of the corporate debtor and therefore it was amenable to the jurisdiction of the NCLT under Section 60(5)(c). This Court quoted from the judgment that “….NCLT has jurisdiction to adjudicate disputes, which arise solely from or which relate to the insolvency of the corporate debtor… The nexus with the insolvency of the corporate debtor must exist”.

Therefore, while heavily relying on the reasoning in the judgment of Gujarat Urja, the Apex Court laid down the law that the residuary jurisdiction of the NCLT cannot be invoked if the termination of a contract is based on grounds unrelated to the insolvency of the corporate debtor and since NCLT has no jurisdiction in such matters, the NCLT had incorrectly imposed an ad-interim stay on the termination of the Facilities Agreement.

Additionally, the Court also issued a note of caution for the NCLT/NCLAT regarding interference with a party’s contractual right to terminate a contract in the following words – “Even if the contractual dispute arises in relation to the insolvency, a party can 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”. The Court finally observed that NCLT had failed to apply its mind to “the centrality of the Facilities Agreement to the success of the CIRP and Corporate Debtor’s survival as a going concern” and therefore, the judgment of NCLAT that confirmed NCLT order of ad-interim stay on termination was set aside.