Supreme Court on NCLT’s Powers under IBC, 2016

[Swarnendu Chatterjee is a Principal Associate at Saraf and Partners, Law Offices in New Delhi and Sneha Rath is a 3rd year B.A., LL.B. (Hons.) student at National Law University Odisha]

The Supreme Court in Gujarat Urja Vikas v. Amit Gupta had propounded that the residuary powers of the National Company Law Tribunal (NCLT) under section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC) can be invoked to terminate a contract only if it involves “questions of law and fact that relate to or arise during an insolvency resolution process”. However, the scope regarding whether the exercise of the NCLT’s residuary powers extend to matters unrelated to the insolvency process, such as breach of public law and public interest (including breach of fundamental rights) under the said contract, was left unexamined and unanswered. This post analyses how the Supreme Court, through its intervention recently in Tata Consultancy Services Limited v. Vishal Ghisulal Jain, has provided the much needed clarification to balance the sweeping powers granted to the NCLT under section 60(5)(c) of the IBC in dealing with termination of contracts pursuant to initiation and continuation of the corporate insolvency resolution process (CIRP), i.e. during moratorium under section 14 of the IBC.

Facts of the Case

Tata Consultancy Services Limited (TCS) had entered into a Build Phase Agreement followed by a Facilities Agreement with SK Wheels Private Limited, the corporate debtor, wherein the agreement obligated the corporate debtor to provide premises with certain specifications and facilities to TCS for conducting examinations for educational institutions. The CIRP was initiated against the corporate debtor and, thereafter, pursuant to clause 11(b) of the Facilities Agreement, TCS unilaterally terminated the same on the ground of non-compliance with the terms of the agreement by the corporate debtor. Subsequently, an application was filed by the corporate debtor before the NCLT against the termination notice by TCS.

The NCLT, by an interim order, stayed the termination of the agreement by TCS, which was subsequently upheld by the National Company Law Appellate Tribunal (NCLAT) based on the reasoning that the objective of the IBC, which was to ensure that the corporate debtor remains a going concern during the CIRP, had to be preserved. The NCLAT had further made two observations on sections 14 and 25 of the IBC, wherein it referred to section 14 of the IBC to highlight that a moratorium was imposed for the smooth functioning of the corporate debtor to safeguard its status as a going concern, and that the responsibility of the resolution professional under section 25 of the IBC was to preserve the corporate debtor as a going concern. TCS challenged the aforesaid ruling by the NCLAT before the Supreme Court.

Issues for Discussion

Upon considering the appeal, the Supreme Court framed two issues which arose for consideration :

  • Whether contractual disputes could be adjudicated by the NCLT while exercising its residuary jurisdiction under section 60(5)(c) of the IBC; and
  • Whether an ad-interim stay could be imposed on the termination of the agreement pursuant to the exercise of residuary jurisdiction.

Judgement

Through its decision in Tata Consultancy, the Supreme Court has factually distinguished its judgement in Gujarat Urjato uphold that the NCLT can adjudicate contractual disputes and sanction ad-interim stay while exercising its residuary jurisdiction under section 60(5)(c) of the IBC, provided such disputes deal with a question of insolvency and have a direct co-relation or nexus with the insolvency of the corporate debtor. This exception crafted in Gujarat Urja was not followed in the present matter as, in the opinion of the Supreme Court, the order passed by the NCLT and subsequently upheld by the NCLAT was solely based on a procedural non-conformity (i.e. not providing a 30 day notice) by TCS. Thus, by setting aside the order of the NCLAT for being a bad law, the Supreme Court observed the following: 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 CIR process”.

Existing Jurisprudence on the Jurisdictional Powers of NCLT & NCLAT

Citing Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, the Supreme Court remarked that the non-obstante clause, i.e. section 238 of the IBC, is an established position in law that gives overriding power to the provisions of IBC against any other law conflicting with them. Therefore, it was concluded that an application filed under section 8 of the Arbitration and Conciliation Act, 1996 to resort to arbitration shall not dilute the mandatory requirement for consideration of application and examination of materials under section 7 of the IBC to determine the existence of default with respect to debt payment. Thereafter, the Court extensively relied on Gujarat Urja to establish that where a dispute arising out of commercial contracts is in the context of insolvency proceedings, the NCLT shall, by virtue of section 238 of the IBC, have overriding jurisdiction on such disputes, as against what the parties might have agreed to in their contractual agreements (in this case, with arbitration being mentioned in clause 12(d) of the agreement for dispute resolution between TCS and the corporate debtor).

The Court further admitted that the view of the NCLAT that a moratorium (to institute or continue with suits, foreclosure of any security interest or recovery of property by an owner or lessor) was imposed on the corporate debtor under section 14 IBC was incorrect, as TCS was neither supplying goods or services to (under section 14 (2)) nor recovering any property in possession or occupation from (section 14(1) (d)), the corporate debtor. In furtherance to this, the exception in Gujarat Urja was highlighted.

Analysis & Conclusion

The Supreme Court, through its decision in Tata Consultancy, has actively made an effort to consolidate the underlying principles around the scope of the jurisdictional powers of the NCLT and the NCLAT, some of which were left untouched in Gujarat Urja. Indisputably, section 238 of the IBC has a non-obstante clause that gives overriding powers to IBC provisions. However, in Embassy Property Developments Private Limited v. State of Karnataka, the Supreme Court, while admitting that section 60(5)(c) of the IBC is very broad in granting sweeping powers to the NCLT for deciding questions of law or fact, arising out of or in relation to insolvency resolution, clarified that such powers are limited by lack of jurisdiction in matters unrelated to CIRP and that may possibly fall within the domain of public law. This is because only a superior court vested with powers of judicial review over an administrative action can be called into question in such matters. Therefore, disputes falling within a domain of law that has a statutory remedy available must take a recourse to the same.

It must be borne in mind that the NCLT and the NCLAT are creatures of a special statute, which were established not under the IBC but under the Companies Act, 2013. In the present case, the termination notice of the agreement was not caused by insolvency proceedings against the corporate debtor, but was a consequence of deficiency of services and payments claimed under the agreement. As this was a purely contractual dispute with no question of CIRP involved, the NCLT lacked jurisdiction in deciding the same under section 60(5) (c) IBC.

One of the final observations of the Court that the NCLT’s judgement lacked factual analysis on how the going concern of the corporate debtor would have been jeopardized seems driven by its judgements in Indus Biotech and Innoventive Industries Ltd. v. ICICI Bank. The underlying principle set by the Supreme Court is that the adjudicating authority must objectively assess the whole situation and apply its mind before interfering with the issues of termination of contracts during the pendency of the CIR process and the moratorium being in place.

In light of this, the judgment of the Supreme Court in Tata Consultancy renders clarity to the legal position with respect to the contractual obligations and extent of the residuary jurisdiction by the NCLT and the NCLAT while adjudicating such disputes.

Swarnendu Chatterjee & Sneha Rath

About the author

Add comment

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Top Posts & Pages

Topics

Recent Comments

Archives

web analytics

Social Media