Supreme Court: In a landmark case the Division Bench of Dhananjaya Y Chandrachud* and A S Bopanna, JJ., clarified the residuary powers of NCLT under Insolvency and Bankruptcy Code (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.”
Factual Background
The appellant and the Corporate Debtor had entered into a Build Phase Agreement followed by a Facilities Agreement whereby the Corporate Debtor was obligated to provide premises with certain specifications and facilities to the appellant for conducting examinations for educational institutions. Clause 11(b) of the Facilities Agreement states that either party is entitled 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.
Invoking the termination clause, a termination notice was issued by the appellant owing to multiple lapses in fulfilling its contractual obligations; i.e. insufficiency of housekeeping staff and their malpractices in respect of entering attendance etc. by the Corporate Debtor when the malpractices were not rectified by the Corporate Debtor despite being highlighted from time to time. The said notice came into effect immediately.
Proceedings before the NCLT and NCLAT
The Corporate Debtor instituted a miscellaneous application before the NCLT under Section 60(5)(c) of the IBC for quashing of the termination notice. The NCLT passed an order granting an ad-interim stay opining that the contract was terminated without serving the requisite notice of thirty days. In appeal, the NCLAT upheld the interim order NCLT.
Question of Law
Based on the appeal, two issues had arisen for 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.
Is NCLT empowered to intervene where the agreement expressly provides for Arbitration?
Although, Clause 12 (d) of the Facilities Agreement provides that the disputes between the parties shall be a subject matter of arbitration, Section 238 of IBC provides that the IBC overrides other laws, including any instrument having effect by virtue of law.
While considering whether a reference to arbitration made under Section 8 of the Arbitration and Conciliation Act 1996 in terms of the agreement between the parties would affect the jurisdiction of the NCLT, the Supreme Court in Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, (2021) 6 SCC 436, had held that “even if an application under Section 8 of the 1996 Act is filed, the adjudicating authority has a duty to advert to contentions put forth on the application filed under Section 7 of IB Code, examine the material placed before it by the financial creditor and record a satisfaction as to whether there is default or not. If the irresistible conclusion by the adjudicating authority is that there is default and the debt is payable, the bogey of arbitration to delay the process would not arise despite the position that the agreement between the parties indisputably contains an arbitration clause.”
Further, Section 60(5) (c) grants residuary jurisdiction to the NCLT to adjudicate any question of law or fact, arising out of or in relation to the insolvency resolution of the Corporate Debtor. Therefore, despite Clause 12 (d) providing that any dispute between the parties relating to the agreement could be the subject matter of arbitration, the Facilities Agreement being an ‘instrument’ under Section 238 of the IBC can be overridden by the provisions of the IBC.
NCLT’s Residuary Powers under IBC
In Gujarat Urja Vikas v. Amit Gupta, (2021) 7 SCC 209, it was held that the NCLT’s jurisdiction is not limited by Section 14 of IBC in terms of the grounds of judicial intervention envisaged under the IBC. 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.
Therefore, rejecting the argument of the appellant that the NCLT and NCLAT had re-written the agreement changing its nature from a determinable contract to a non-terminable contract overlooking the mandate of Section 14 of the Specific Relief Act 1963, the Bench opined that IBC is a complete code and Section 238 overrides all other laws. Therefore, the NCLT in its residuary jurisdiction is empowered to stay the termination of the agreement if it satisfies the criteria laid down in the Gujarat Urja’s 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.”
Factual Analysis
Noticeably, the Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor and electricity supply was disconnected for the Corporate Debtor by the Electricity Board. The Corporate Debtor in its email alleged that the appellant had failed to make the requisite payments and the electricity was disconnected as a result.
Before the initiation of the CIRP, the appellant had on multiple instances communicated to the Corporate Debtor that there were deficiencies in its services. The Corporate Debtor was put on notice that the penalty and termination clauses of the Facilities Agreement may be invoked. The termination notice dated 10 June 2019 also clearly laid down the deficiencies in the services of the Corporate Debtor.
Therefore, the Bench opined that there was nothing to indicate that the termination of the Facilities Agreement was motivated by the insolvency of the Corporate Debtor. 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.”
Thus, the Bench held that the NCLT did not have any residuary jurisdiction to entertain the instant contractual dispute which had arisen dehors the insolvency of the Corporate Debtor and in the absence of jurisdiction over the dispute; the NCLT could not have imposed an ad-interim stay on the termination notice.
A Cautionary Note to NCLT and NCLAT
Additionally, the Bench issued a note of caution 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 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 Bench added,
“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.”
Verdict
The Bench held that the NCLT had merely relied upon the procedural infirmity on part of the appellant in the issuance of the termination notice, i.e., it did not give thirty days’ notice period to the Corporate Debtor to cure the deficiency in service but there was no factual analysis on how the termination of the Facilities Agreement would put the survival of the Corporate Debtor in jeopardy to invoke residuary powers of NCLT. Accordingly, the judgment of NCLT and NCLAT was set aside with a direction to dismiss proceedings initiated against the appellant. [TATA Consultancy Services Ltd. v. SK Wheels Pvt. Ltd., 2021 SCC OnLine SC 1113, decided on 23-11-2021]
Kamini Sharma, Editorial Assistant has put this report together
Appearance by:
For the Appellant: Advocate Fereshte D Sethna
For the Respondent: Advocate Sowmya Saikumar
*Judgment by: Justice Dhananjaya Y Chandrachud
