New Delhi, November 25, 2021: The Supreme Court has recently opined that if contractual dispute arises in relation to insolvency, a party can be restrained from terminating contract only if it is central to the success of the Corporate Insolvency Resolution Process (CIRP).
A Division Bench of Justice Dr. Dhananjaya Y Chandrachud & Justice A.S. Bopanna observed that National Company Law Tribunal (NCLT) cannot exercise its residuary jurisdiction u/s 60(5)(c) of Insolvency & Bankruptcy Code (IBC) to adjudicate upon contractual dispute between parties.
The observation came pursuant to an appeal challenging the judgment passed by National Company Law Appellate Tribunal (NCLAT), whereby the interim order of the NCLT which stayed the termination by Tata Consultancy Services (Appellant) of its Facilities Agreement with SK Wheels Private Limited (Respondent), stood upheld.
The background of the case was that the Appellant and the Corporate Debtor entered into a Build Phase Agreement followed by a Facilities Agreement, which obligated the Corporate Debtor to provide premises with certain specifications and facilities to the Appellant for conducting examinations for educational institutions.
Later, a termination notice was issued by the Appellant to the Corporate Debtor which came into effect immediately. It was submitted on behalf of the Appellant that there were multiple lapses by the Corporate Debtor in fulfilling its contractual obligations, which it failed to remedy satisfactorily. Accordingly, the Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor.
The appellant claimed that the material breaches by the Corporate Debtor had resulted in a liability of Rs.20,78,500. It did not initiate recovery proceedings on account of the moratorium imposed u/s 14 of the IBC. The appellant therefore issued a notice of termination in terms of Clause 11(b) of the Facilities Agreement.
On the other hand, the Corporate Debtor contested the issuance of the termination notice on the ground that no material breaches have occurred, and, in any event, a thirty days’ period was to be given to a party to cure the defects before the agreement can be terminated under Clause 11(b) of the Facilities Agreement.
After considering the arguments, the Top Court noted that the Appellant had time and again informed the Corporate Debtor that its services were deficient, and it was falling foul of its contractual obligations.
There is nothing to indicate that the termination of the Facilities Agreement was motivated by the insolvency of the Corporate Debtor, added the Court.
The Apex Court found that the trajectory of events made it clear that the alleged breaches noted in the termination notice dated June 10, 2019 were not a smokescreen to terminate the agreement because of the insolvency of the Corporate Debtor.
Thus, NCLT does not have any residuary jurisdiction to entertain the present contractual dispute which has arisen dehors the insolvency of the Corporate Debtor, and therefore, in the absence of jurisdiction over the dispute, the NCLT could not have imposed an ad-interim stay on the termination notice, concluded the Apex Court.
Speaking for the Bench, Justice Chandrachud said that the order of the NCLT does 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 has merely relied upon the procedural infirmity on part of the appellant in the issuance of the termination notice, it did not give thirty days’ notice period to the Corporate Debtor to cure the deficiency in service, added the Bench.