Judgment Analysis

Judgment Analysis: Right of Termination of Contract vis-à-vis Boilerplate insolvency related Termination Clauses in Contract

That the Hon’ble Supreme Court in Tata Consultancy Services Limited v. Vishal Ghisulal Jain, Civil Appeal No 3045 of 2020 once again enunciated the principles of limiting the power of NCLT/NCLAT while adjudicating upon an application with respect to the Contractual disputes of the parties, during the Corporate Insolvency Resolution Process (“CIRP”) of the Corporate Debtor.

The issue for consideration before the Apex Court in the aforesaid judgement is as follows:

• 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
• Whether in the exercise of such a residuary jurisdiction, it can impose an ad-interim stay on the termination of the Facilities Agreement.

The facts in brief in the present case are as follows:

A Facility Agreement was terminated by the Appellant on ground of multiple lapses by the Corporate Debtor in fulfilling its contractual obligations, which it failed to remedy satisfactorily.

The Corporate Debtor denied the contentions of the Appellant and submitted that it had rectified all the concerns as and when raised by the Appellant.

Now, the interesting part in the present judgement is that the alleged default had occurred much before the initiation of CIRP and various communications were made to address such default by the Appellant hence, the subsequent insolvency of the Corporate Debtor has no relation with the termination of the Contract.

That the Hon’ble Supreme Court while distinguishing from its earlier judgement in Gujarat Urja Vikas Nigam Limited Vs. Amit Gupta and Ors. (2021) 7 SCC 209, in which the Power Purchase Agreement was terminated on ipso facto clauses i.e., on account of insolvency of the Corporate Debtor held that NCLT/NCLAT correctly stayed the termination of the PPA as the same would result in the corporate death of the corporate debtor. The relevant paras are reproduced hereunder:

• 71. In the present case, the PPA was terminated solely on the ground of insolvency, since the event of default contemplated under Article 9.2.1(e) was the commencement of insolvency proceedings against the Corporate Debtor. In the absence of the insolvency of the Corporate Debtor, there would be no ground to terminate the PPA. The termination is not on a ground independent of the insolvency. The present dispute solely arises out of and relates to the insolvency of the Corporate Debtor.
• 72. Ms Ramachandran and Mr Diwan have contended that CA 1956, PIA and BRA do not contain any provisions equivalent to Sections 25(2)(b) and 18(f)(vi) of the IBC which empower the RP to exercise rights for the benefit of the Corporate Debtor in certain adjudicatory proceedings. They submit that Section 60(5)(c) of the IBC must be read in consonance with Sections 25(2)(b) and 18(f)(iv), which would be rendered nugatory if NCLT becomes the exclusive forum for the enforcement of all the Corporate Debtor‘s rights. Section 25(2)(b) of the IBC provides:
  • ―Section 25 – Duties of resolution professional
    (2) For the purposes of sub-section (1), the resolution professional shall undertake the following actions, namely:-
  • (b) represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration proceedings;
  • Section 18(f)(vi) provides: ―
    “Section 18 – Duties of interim resolution professional
    The interim resolution professional shall perform the following duties, namely:- ……
    (f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including—
    (vi) assets subject to the determination of ownership by a court or authority;
• 73. We are inclined to agree with the submission made by Mr Singh that merely because a duty has been imposed on the IRP or the RP, it does not mean that the jurisdiction of the NCLT is circumscribed under section 60(5)(c) of the IBC. In Embassy Property (supra), it was argued that the term ―property‖ under Section 3(27) of the IBC includes a mining lease granted by government and the lRP is duty bound under Section 20(1) of the IBC to preserve the value of the property of the Corporate Debtor. Hence, the submission was that the RP can invoke the jurisdiction of the NCLT to adjudicate upon a dispute relating to non extension of the lease. However, Justice V. Ramasubramanian, speaking for this Court, observed that ―the said argument cannot be sustained for the simple reason that the duties of a resolution professional are entirely different from the jurisdiction and powers of NCLT”
• 74. Therefore, we hold that the RP can approach the NCLT for adjudication of disputes that are related to the insolvency resolution process. However, for adjudication of disputes that arise dehors the insolvency of the Corporate Debtor, the RP must approach the relevant competent authority. For instance, if the dispute in the present matter related to the non-supply of electricity, the RP would not have been entitled to invoke the jurisdiction of the NCLT under the IBC. However, since the dispute in the present case has arisen solely on the ground of the insolvency of the Corporate Debtor, NCLT is empowered to adjudicate this dispute under Section 60(5)(c) of the IBC.
• 91. The residuary jurisdiction of the NCLT under Section 60(5)(c) of the IBC provides it a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings. If the jurisdiction of the NCLT were to be confined to actions prohibited by Section 14 of the IBC, there would have been no requirement for the legislature to enact Section 60(5)(c) of the IBC. Section 60(5)(c) would be rendered otiose if Section 14 is held to be the exhaustive of the grounds of judicial intervention contemplated under the IBC in matters of preserving the value of the corporate debtor and its status as a going concern‘. We hasten to add that our finding on the validity of the exercise of residuary power by the NCLT is premised on the facts of this case. We are not laying down a general principle on the contours of the exercise of residuary power by the NCLT. However, it is pertinent to mention that the NCLT cannot exercise its jurisdiction over matters dehors the insolvency proceedings since such matters would fall outside the realm of IBC. Any other interpretation of Section 60(5)(c) would be in contradiction of the holding of this Court in Satish Kumar Gupta (supra).

The Hon’ble Apex Court in Tata Consultancy (supra.) while distinguishing it from its earlier judgement in Gujarat Urja (supra.) observed that the ‘…there is nothing to indicate that the termination of the Facilities Agreement was motivated by the insolvency of the corporate debtor…” and further held as follows:

• …Thus, we are of the view that the NCLT does not have any residuary jurisdiction to entertain the present contractual dispute which has arisen dehors the insolvency of the Corporate Debtor. In the absence of jurisdiction over the dispute, the NCLT could not have imposed an ad-interim stay on the termination notice. The NCLAT has incorrectly upheld the interim order of the NCLT.

The Hon’ble Supreme Court has also issued a note of caution to NCLT and NCLAT of them intervening in the contractual right to terminate a contract in the following words:

• 28. While in the present case, the second issue formulated by this Court has no bearing, we would like to issue a note of caution to the NCLT and NCLAT regarding interference with a party’s contractual right to terminate a contract. 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….