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(Supreme Court of India)
Civil Appeal No 3045 of 2020
The appeal stemmed from a ruling given on June 24, 2020 by the National Company Law Appellate Tribunal (“NCLAT”). The NCLAT affirmed an interim order issued by the National Company Law Tribunal (“NCLT” or “Adjudicating Authority”) on December 18, 2019, preventing the appellant from terminating its Facilities Agreement with SK Wheels Private Limited (“Corporate Debtor” or “Respondent”) on December 1, 2016.
The Division Bench of Justice Dhananjaya Y Chandrachud and Justice A S Bopanna, JJ., discussed and clarified NCLT’s residuary powers under the Insolvency and Bankruptcy Code in this historic judgement (IBC).
The Bench stated, “In terms of Section 238 and the law laid down by this Court, the existence of a clause for referring the dispute between parties to arbitration 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 National Company Law Tribunal (“NCLT”) cannot exercise its residuary jurisdiction under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to rule on the contractual dispute between the parties, according to the Hon’ble Supreme Court of India (“SC”). Previously, the National Company Law Appellate Tribunal (“NCLAT”) confirmed the NCLT’s judgement staying the Appellant’s termination notice to the Corporate Debtor, stating that the IBC’s principal goal is to guarantee that the Corporate Debtor remains a going concern, citing sections 14 and 25 of the IBC. The Supreme Court overturned the NCLAT’s ruling, stating that there was no factual analysis of how the termination would jeopardise the Corporate Debtor’s survival.
The appellant and the Corporate Debtor executed a Build Phase Agreement on August 24, 2015, and a Facilities Agreement on December 1, 2016, respectively. The Corporate Debtor was obligated to provide the appellant with premises and facilities that satisfied specific conditions for conducting educational institution examinations under the Facilities Agreement.
Significant violations by the Corporate Debtor, according to the appellant, resulted in a liability of Rs.20,78,500/-. It did not begin recovery operations because of the moratorium imposed under section 14 of the IBC. As a result, the appellant issued a termination notice under Facilities Agreement Clause 11(b). The Corporate Debtor, on the other hand, disputed the issuance of the termination notice, claiming that no material breaches had occurred and, in any case, the Facilities Agreement required a thirty-day period for a party to cure defects before the agreement could be terminated under Clause 11 of the agreement (b). The notice took effect right away.
PROCEEDINGS before the NCLT and NCLAT:
Under Section 60(5)(c) of the IBC, the Corporate Debtor filed a miscellaneous application with the NCLT to have the termination notification quashed. The NCLT granted an ad-interim stay, noting that the contract was cancelled without the thirty-day notice required by law. On appeal, the NCLAT upheld the NCLT’s interim decision. According to clause 11(b) of the Facilities Agreement, any party has the right to terminate the agreement immediately by written notice to the other party if the latter fails to rectify a substantial violation within thirty days of receipt of the notification.
The Appellant placed a termination notice on the Corporate Debtor, which went into effect immediately. It was contended on behalf of the Appellant that the Corporate Debtor had several shortcomings in meeting its contractual responsibilities, which it failed to effectively repair. As a result, the Corporate Insolvency Resolution Process (CIRP) was started. Despite the malpractices being highlighted from time to time, the appellant issued a termination notice invoking the termination clause due to multiple lapses in fulfilling its contractual obligations, namely, insufficiency of housekeeping staff and their malpractices in respect of entering attendance, etc. by the Corporate Debtor.
QUESTION OF LAW
Two issues arose for consideration as a result of the appeal;
(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.
NCLT’S RESIDUARY POWERS UNDER IBC
The NCLT’s authority is not limited by Section 14 of the IBC in terms of the reasons for judicial intervention contemplated under the IBC, according to Gujarat UrjaVikas v. Amit Gupta, (2021) 7 SCC 209. Under Section 60(5)(c), it can use its residuary jurisdiction to rule on legal and factual issues that arise throughout the insolvency resolution process.
In rejecting the appellant’s argument that the NCLT and NCLAT rewrote the agreement, changing its nature from a determinable to a non-terminable contract in violation of Section 14 of the Specific Relief Act 1963, the Bench held that the IBC is a complete code, and Section 238 overrides all other laws. As a result, the NCLT has the ability to postpone the termination of the agreement in its residuary jurisdiction if it meets the requirements set out in the Gujarat Urja case.
Hence, the Bench stated;
“In any event, the intervention by the NCLT and NCLAT cannot be characterized as the re-writing of the contract between the parties. The NCLT and NCLAT are vested with the responsibility of preserving the Corporate Debtor’s survival and can intervene if an action by a third party can cut the legs out from under the CIRP.”
The Electricity Board terminated the Corporate Debtor’s electricity supply, and the Corporate Insolvency Resolution Process (CIRP) was started against the Corporate Debtor. In an email, the Corporate Debtor alleged that the appellant had failed to make due payments and that the electricity had been disconnected as a result.
Prior to the start of the CIRP, the appellant had regularly informed the Corporate Debtor that its services were insufficient. The Corporate Debtor was warned that the Facilities Agreement’s penalty and termination provisions might be used against them. The Corporate Debtor’s service issues were also clearly noted in the termination letter dated 10th June 2019. As a result, the Bench determined that there was no evidence that the Corporate Debtor’s bankruptcy precipitated the termination of the Facilities Agreement.
The Bench observed,“The trajectory of events makes it clear that the alleged breaches noted in the termination notice dated 10 June 2019 were not a smokescreen to terminate the agreement because of the insolvency of the Corporate Debtor.”
As a result, the Bench determined that the NCLT lacked residuary jurisdiction to hear the current contractual dispute, which occurred outside of the Corporate Debtor’s bankruptcy, and that, without such power, the NCLT could not have imposed an ad-interim stay on the termination notice.
A Cautionary Note to NCLT and NCLAT
Furthermore, the Bench issued a cautionary note to the NCLT and NCLAT regarding interference with a party’s contractual right to terminate a contract; i.e., even if the contractual dispute arises as a result of insolvency, a party can only be barred from terminating the contract if it is critical to the CIRP’s success. Importantly, the contract’s cancellation should result in the Corporate Debtor’s corporate death.
“The narrow exception crafted by this Court in Gujarat Urja (supra) must be borne in mind by the NCLT and NCLAT even while examining prayers for interim relief.” The bench remarked.
The NCLT had merely relied on the appellant’s procedural error in issuing the termination notice, namely, that it did not provide the Corporate Debtor with a thirty-day notice period to cure the deficiency in service, but there was no factual analysis on how the termination of the Facilities Agreement would jeopardise the Corporate Debtor’s survival to invoke the NCLT’s residuary powers. As a result, the NCLT and NCLAT judgments were reversed, and the appellant was ordered to drop the proceedings.
Author: Poonam Nahar – a Student from Marathwada Mitra Mandal’s Shankarrao Chavan Law College (Pune), in case of any queries please contact/write back to us via email email@example.com or at Khurana & Khurana, Advocates and IP Attorney.
- 2021 SCC OnLine SC 1113, decided on 23-11-2021