Insolvency and Bankruptcy Code 2016 – s.60(5)(c) – Contractual dispute – Residuary jurisdiction of NCLT u/s.60(5)(c), if can be invoked – Build Phase Facilities Agreement entered into between appellant and respondent-Corporate Debtor, followed by a Facilities Agreement – Corporate Debtor provided premises with certain specifications, facilities to the appellant for conducting examinations for educational institutions – Termination notice issued by appellant – Ad-interim stay on the notice granted by NCLT – Order upheld by NCLAT – On appeal, held: Appellant was availing the services of the Corporate Debtor and was using the property leased by it – Before the initiation of Corporate Insolvency Resolution Process (CIRP), the appellant had on multiple instances communicated to the Corporate Debtor that there were deficiencies in its services and that the penalty and termination clauses of the Facilities Agreement may be invoked – 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 – In the present case, there is nothing to indicate that the termination of the Facilities Agreement was motivated by the insolvency of the Corporate Debtor – Thus, NCLT does not have any residuary jurisdiction to entertain the present contractual dispute which arose dehors the insolvency of the Corporate Debtor – Judgment of NCLAT set aside – Proceedings initiated against the appellant dismissed for absence of jurisdiction.
Insolvency and Bankruptcy Code 2016 – s.238 – Held: s.238 provides that the IBC overrides other laws, including any instrument having effect by virtue of law.
Insolvency and Bankruptcy Code 2016 – ss.14, 60(5)(c) – Held: In Gujarat Urja Vikas v. Amit Gupta & Ors. reported as 2021 (3) SK WHEELS PVT. LTD.
SCALE 776 it was held that the NCLT’s jurisdiction is not limited by s.14 in terms of the grounds of judicial intervention envisaged under the IBC – It can exercise its residuary jurisdiction u/s.60(5)(c) to adjudicate on questions of law and fact that relate to or arise during an insolvency resolution process – Further, narrow exception crafted in Gujarat Urja must be borne in mind by the NCLT and NCLAT even while examining prayers for interim relief – Exercise of the NCLT’s residuary powers should be governed by the said decision - Note of caution issued to the NCLT and NCLAT regarding interference with a party’s contractual right to terminate a contract.
Disposing of the appeal, the Court
HELD: 1.1 Section 238 provides that the IBC overrides other laws, including any instrument having effect by virtue of law. 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. Clause 12
(d) of the Facilities Agreement provides that any dispute between the parties relating to the agreement could be the subject matter of arbitration. However, the Facilities Agreement being an ‘instrument’ under Section 238 of the IBC can be overridden by the provisions of the IBC. 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. [Paras 18, 21][1094-A-B; 1096-B-C, E-G]
Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund Decision of Supreme Court dtd.26.03.2021 in Arbitration Petition (Civil) No.48 of 2019 – relied on.
1.2 While the duty of the RP and the jurisdiction of the NCLT cannot be conflated, in Gujarat Urja, this Court has clarified that the RP can approach the NCLT for adjudication of disputes which relate to the insolvency resolution process. But when the dispute arises dehors the insolvency of the Corporate Debtor, the RP must approach the relevant competent authority (para 72). The NCLT in its residuary jurisdiction is empowered to stay the termination of the agreement if it satisfies the criteria laid down by this Court in Gujarat Urja. 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. [Paras 22, 23][1097-B, D-E]
Gujarat Urja Vikas v. Amit Gupta & Ors. (2021) 7 SCC
209 : 2021 (3 ) SCALE 776 – relied on.
1.3 Admittedly, 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). It is availing of the services of the Corporate Debtor and is using the property that has been leased to it by the Corporate Debtor. Thus, Section 14 is indeed not applicable to the present case. However, in Gujarat Urja it was held that the NCLT’s jurisdiction is not limited by Section 14 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. 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. This is evident from the appellant’s communications dated 1 August 2018, 17 September 2018, 1 October 2018 and 11 October 2018. In its email dated 13 October 2018 the appellant specifically noted that the housekeeping staff being provided by the Corporate Debtor was inadequate. The appellant was apparently constrained to deploy its own staff for housekeeping, evinced from its email dated 19 November 2018. The Corporate Debtor has admitted that the appellant was using its own housekeeping staff and deducting the costs from the invoice. The appellant again intimated the Corporate Debtor to change faulty batteries of the UPS and provide cleaning products in its email dated 3 February 2019. The termination notice dated
10 June 2019 also clearly lays down the deficiencies in the services of the Corporate Debtor. [Pras 24, 25][1099-E-G; 1100-D-G]
SK WHEELS PVT. LTD.
1.4 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. It is evident 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. The trajectory of events makes it clear that the alleged breaches noted in the termination notice were not a smokescreen to terminate the agreement because of the insolvency of the Corporate Debtor. 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. [Paras 26, 27][1101-D-G]
1.5 A note of caution is issued 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. Crucially, the termination of the contract should result in the corporate death of the Corporate Debtor. The narrow exception crafted by this Court in Gujarat Urja must be borne in mind by the NCLT and NCLAT even while examining prayers for interim relief. 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, i.e., it did not give thirty days’ notice period to the Corporate Debtor to cure the deficiency in service. The NCLAT, in its impugned judgment, has averred that the decision of the NCLT preserves the ‘going concern’ status of the Corporate Debtor but there is no factual analysis on how the termination of the Facilities Agreement would put the survival of the Corporate Debtor in jeopardy. Admittedly, this Court has clarified the law on the present subject matter in Gujarat Urja after the pronouncements of the NCLT and NCLAT. The exercise of the NCLT’s residuary powers should be governed by the said decision. The judgment of the NCLAT is set aside. The proceedings initiated against the appellant stand dismissed for absence of jurisdiction. [Para 28-31][1101-G-H; 1102-A; 1103-A-E]
Ashoka Marketing v. PNB (1990) 4 SCC 406 : [1990]
3 SCR 649; Embassy Property Developments (Private) Limited v. State of Karnataka (2020) 13 SCC 308 : [2019] 17 SCR 559 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
This page is for informational and research purposes only and does not constitute legal advice. Consult a qualified advocate for advice specific to your situation.