Supreme Court Clarifies NCLT’s Jurisdiction in Contract Termination During CIRP: Tata Consultancy Services vs. SK Wheels (2021)

Introduction

Date of the Judgment: 23 November 2021

Citation: (2021) INSC 717

Judges: Dr Dhananjaya Y Chandrachud, J, A S Bopanna, J

Can a contract be terminated during the Corporate Insolvency Resolution Process (CIRP)? The Supreme Court of India recently addressed this question, clarifying the extent to which the National Company Law Tribunal (NCLT) can intervene in contractual disputes during insolvency proceedings. This case revolves around a Facilities Agreement between Tata Consultancy Services (TCS) and SK Wheels Private Limited, where TCS terminated the agreement, leading to a legal battle over the NCLT’s jurisdiction.

The core issue was whether the NCLT could use its residuary powers under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC) to halt the termination of a contract, especially when the termination was allegedly due to breaches of contract rather than the insolvency itself. The Supreme Court, in this judgment, clarifies the limits of the NCLT’s powers in such matters.

The judgment was delivered by a two-judge bench comprising Justice Dr. Dhananjaya Y Chandrachud and Justice A.S. Bopanna. Justice Dr. Dhananjaya Y Chandrachud authored the judgment.

Case Background

Tata Consultancy Services Limited (TCS) and SK Wheels Private Limited, the Corporate Debtor, entered into a Build Phase Agreement on 24 August 2015, followed by a Facilities Agreement on 1 December 2016. Under this Facilities Agreement, SK Wheels was to provide premises with specific facilities for TCS to conduct examinations for educational institutions.

Clause 11(b) of the Facilities Agreement allowed either party to terminate the agreement immediately by written notice if the other party committed a material breach that was not cured within thirty days of receiving notice. TCS issued a termination notice to SK Wheels on 10 June 2019, citing multiple breaches of contract.

TCS claimed that SK Wheels had failed to meet its contractual obligations, including maintaining the required skill level of personnel, adhering to furnishing and design guidelines, and ensuring proper maintenance and cleanliness. These issues were raised in several communications between August 2018 and February 2019. SK Wheels, on the other hand, argued that it had rectified most of the issues and that the termination was a result of the initiation of the CIRP against them on 29 March 2019.

The Corporate Debtor also alleged that the appellant had failed to make the requisite payments and the electricity was disconnected as a result. TCS responded that payments were made for periods before March 2019 and there was a delay in making payments for March 2019 because the Corporate Debtor requested a change in bank account details. No invoice was raised for April 2019.

Timeline

Course of Proceedings

SK Wheels filed a miscellaneous application before the NCLT under Section 60(5)(c) of the IBC, seeking to quash the termination notice issued by TCS. The NCLT, on 18 December 2019, granted an interim stay on the termination notice, observing that the contract was terminated without serving the required thirty-day notice period. The NCLT directed TCS to adhere to the terms of the Facilities Agreement.

TCS appealed the NCLT order before the National Company Law Appellate Tribunal (NCLAT). The NCLAT, on 24 June 2020, upheld the NCLT’s order, emphasizing that the main objective of the IBC is to ensure that the Corporate Debtor remains a going concern. The NCLAT referred to Section 14 of the IBC, highlighting the moratorium imposed to ensure the smooth functioning of the Corporate Debtor and the responsibility of the Resolution Professional (RP) under Section 25 of the IBC to preserve the Corporate Debtor as a going concern. The NCLAT concluded that the NCLT had rightly stayed the termination notice.

Legal Framework

The case primarily revolves around the interpretation of Section 60(5)(c) and Section 238 of the Insolvency and Bankruptcy Code, 2016 (IBC), alongside Section 14 of the Specific Relief Act, 1963. Section 60(5)(c) of the IBC grants the NCLT jurisdiction to entertain any question of law or fact arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor. Section 238 of the IBC stipulates that the provisions of the IBC override any other law that is inconsistent with it.

Section 238 of the IBC states:
“The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

Section 14 of the Specific Relief Act, 1963, lists contracts that cannot be specifically enforced, including contracts that are determinable in nature.
“Section 14 – Contracts not specifically enforceable
The following contracts cannot be specifically enforced, namely: —
(a) where a party to the contract has obtained substituted performance of contract in accordance with the
provisions of section 20;
(b) a contract, the performance of which involves the performance of a continuous duty which the court cannot
supervise;
(c) a contract which is so dependent on the personal qualifications of the parties that the court cannot enforce
specific performance of its material terms; and
(d) a contract which is in its nature determinable.”

The interplay of these provisions determines the extent to which the NCLT can intervene in contractual matters during insolvency proceedings. The Supreme Court also considered Section 14 of the IBC, which imposes a moratorium on certain actions against the corporate debtor during CIRP, but noted its inapplicability to the present case since TCS was availing of the services of the Corporate Debtor and not the other way around.

Arguments

Arguments on behalf of the Appellant (TCS):

• The NCLT misread Section 14 of the IBC, which does not apply when the Corporate Debtor provides services to the appellant.
• The Facilities Agreement, being a determinable contract, was made non-terminable by the impugned order, which overlooks Section 14 of the Specific Relief Act, 1963.
• The termination notice was due to material breaches of the agreement and not the CIRP.
• The Facilities Agreement is not the sole contract of the Corporate Debtor, and its termination would not lead to corporate death.
• The NCLT cannot use its residuary powers under Section 60(5)(c) of the IBC where there is a lack of jurisdiction.
• The duty of the RP under Section 25 of the IBC does not override contractual rights.
• Reliance on Gujarat Urja Vikas v. Amit Gupta & Ors. was misplaced, as in that case, the contract was the sole contract of the corporate debtor and the termination was solely on the ground of initiation of CIRP.

Arguments on behalf of the Respondent (Resolution Professional of SK Wheels):

• The NCLT has jurisdiction under Section 60(5)(c) of the IBC to adjudicate issues relating to a company undergoing CIRP.
• Section 238 of the IBC overrides other laws, including the Indian Contract Act, 1872 and the Specific Relief Act, 1963.
• The NCLT has wide discretion under Section 60(5)(c) to ensure the Corporate Debtor survives as a going concern.
• The Corporate Debtor was not given a thirty-day notice to cure the breach as required by the Facilities Agreement.
• The termination was a result of the appellant becoming aware of the CIRP.
• The Facilities Agreement was the main source of income for the Corporate Debtor and its termination would adversely affect the Corporate Debtor.
• Reliance on Gujarat Urja was correct as the termination of an agreement which is the main source of revenue generation of the Corporate Debtor is against the objective of the IBC.

The arguments on behalf of TCS focused on the contractual nature of the dispute and the limited scope of NCLT’s jurisdiction, while the arguments on behalf of the RP emphasized the need to protect the Corporate Debtor as a going concern and the overriding effect of the IBC.

The innovativeness of the argument by the RP was in asserting that the NCLT’s jurisdiction under Section 60(5)(c) is broad enough to protect the Corporate Debtor’s status as a going concern, even if it means overriding contractual terms. TCS argued that the termination was a result of material breach and not the CIRP.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. 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.
2. Whether in the exercise of such a residuary jurisdiction, it can impose an ad-interim stay on the termination of the Facilities Agreement.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund: The Court followed this precedent to reiterate the overriding effect of Section 238 of the IBC.
• Gujarat Urja Vikas v. Amit Gupta & Ors. [(2021) 7 SCC 209]: The Court distinguished this case, clarifying that NCLT’s jurisdiction under Section 60(5)(c) can only be invoked when the dispute arises solely from or relates to the insolvency of the corporate debtor.
• Ashoka Marketing v. PNB: The Court referred to this case to highlight the principle that two special laws containing non-obstante clauses must be interpreted harmoniously.
• Embassy Property Developments (Private) Limited v. State of Karnataka: The Court relied on this case to reiterate that the duties of the RP are entirely different from the jurisdiction and powers of the NCLT.
• Section 14, Insolvency and Bankruptcy Code, 2016: The Court noted that Section 14 of the IBC was not applicable in this case.
• Section 25, Insolvency and Bankruptcy Code, 2016: The Court clarified that while the RP has a duty to preserve the Corporate Debtor as a going concern, this does not determine the jurisdiction of the NCLT.
• Section 60(5)(c), Insolvency and Bankruptcy Code, 2016: The Court interpreted the scope of this provision, clarifying that it cannot be invoked when the termination of a contract is based on grounds unrelated to the insolvency of the Corporate Debtor.
• Section 238, Insolvency and Bankruptcy Code, 2016: The Court relied on this provision to highlight that the IBC overrides all other laws.
• Section 14, Specific Relief Act, 1963: The Court noted that the NCLT and NCLAT had overlooked the mandate of Section 14 of the Specific Relief Act, which states that a contract which is in its nature determinable cannot be specifically enforced.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the termination of the Facilities Agreement was due to alleged contractual breaches by SK Wheels, and not because of the initiation of the CIRP. The Court emphasized that the NCLT’s residuary jurisdiction under Section 60(5)(c) of the IBC cannot be invoked in cases where the termination of a contract is based on grounds unrelated to the insolvency of the Corporate Debtor. The Court also noted that the Facilities Agreement was not central to the survival of the Corporate Debtor, and therefore, the NCLT’s intervention was not warranted.

The Court was also influenced by the fact that the NCLT and NCLAT had overlooked the mandate of Section 14 of the Specific Relief Act, which states that a contract which is in its nature determinable cannot be specifically enforced. The Court also noted 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.

The Court also emphasized that the NCLT and NCLAT should be wary of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor’s sole contract.

Fact:Law

Logical Reasoning

Final Decision

The Supreme Court set aside the judgment of the NCLAT and held that the NCLT did not have the jurisdiction to adjudicate upon the contractual dispute between the parties. The Court clarified that the NCLT’s residuary jurisdiction under Section 60(5)(c) of the IBC cannot be invoked in cases where the termination of a contract is based on grounds unrelated to the insolvency of the Corporate Debtor. The Court also held that the NCLT cannot impose an ad-interim stay on the termination of the Facilities Agreement since it did not have jurisdiction over the dispute.

The Supreme Court held that the NCLT and NCLAT had overlooked the mandate of Section 14 of the Specific Relief Act, which states that a contract which is in its nature determinable cannot be specifically enforced. The Court also noted 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.

The Court also emphasized that the NCLT and NCLAT should be wary of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor’s sole contract.

Ratio Decidendi

The ratio decidendi of this case is that the NCLT’s residuary jurisdiction under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016, cannot be invoked to adjudicate contractual disputes when the termination of a contract is based on grounds unrelated to the insolvency of the Corporate Debtor. This judgment clarifies that the NCLT’s jurisdiction is limited to matters directly arising from or related to the insolvency resolution process and does not extend to all contractual disputes involving the Corporate Debtor. The NCLT cannot interfere in contractual matters which are not directly related to the insolvency of the Corporate Debtor.

This judgment also clarifies that the NCLT and NCLAT should be wary of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor’s sole contract.

Obiter Dicta

While the primary focus of the judgment was on the scope of NCLT’s jurisdiction, the Supreme Court made several incidental observations (obiter dicta) that offer additional guidance:

• The Court reiterated that the duty of the Resolution Professional (RP) to preserve the Corporate Debtor as a going concern under Section 25 of the IBC does not override contractual rights.
• The Court emphasized that the NCLT and NCLAT should be wary of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor’s sole contract.
• The Court noted that the NCLT and NCLAT had overlooked the mandate of Section 14 of the Specific Relief Act, which states that a contract which is in its nature determinable cannot be specifically enforced.
• The Court noted 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.
• The Court clarified that Section 14 of the IBC, which imposes a moratorium on certain actions against the corporate debtor during CIRP, is not applicable when the Corporate Debtor provides services to the appellant.

These observations provide additional context and guidance on the interpretation and application of the IBC and the Specific Relief Act in the context of insolvency proceedings.

Impact of the Judgment

The Supreme Court’s judgment in Tata Consultancy Services Limited vs. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Private Limited has significant implications for the interpretation and application of the Insolvency and Bankruptcy Code, 2016, particularly concerning the jurisdiction of the NCLT in contractual disputes during the Corporate Insolvency Resolution Process (CIRP). The judgment has the following impacts:

• Clarification of NCLT’s Jurisdiction: The judgment clarifies that the NCLT’s residuary jurisdiction under Section 60(5)(c) of the IBC is limited to matters directly related to the insolvency resolution process and does not extend to all contractual disputes involving the Corporate Debtor. This will prevent the NCLT from interfering in contractual matters that are not directly linked to the insolvency proceedings.
• Protection of Contractual Rights: The judgment reinforces that contractual rights are not automatically overridden by the initiation of CIRP. It emphasizes that the NCLT cannot use its powers to prevent the termination of contracts when the termination is based on valid contractual breaches, and not the insolvency of the corporate debtor.
• Emphasis on Section 14 of the Specific Relief Act: The judgment highlights the importance of Section 14 of the Specific Relief Act, 1963, which states that a contract that is determinable in nature cannot be specifically enforced. This will prevent the NCLT from ordering specific performance of determinable contracts.
• Precedential Value: This judgment serves as a significant precedent for future cases involving contractual disputes during CIRP. It will guide the NCLT and NCLAT in determining the scope of their jurisdiction and will ensure that the IBC is interpreted and applied in a manner that is consistent with the principles of contract law and the Specific Relief Act.
• Balancing Interests: The judgment strikes a balance between the need to protect the Corporate Debtor as a going concern and the need to respect contractual rights. It clarifies that while the RP has a duty to preserve the Corporate Debtor as a going concern, this does not give the NCLT carte blanche to interfere in contractual matters that are not directly related to the insolvency of the Corporate Debtor.
• Guidance for Resolution Professionals: The judgment provides guidance to Resolution Professionals (RPs) on the extent of their powers and duties. It clarifies that the RP’s duty to preserve the Corporate Debtor as a going concern does not override contractual rights.
• Judicial Restraint: The Court emphasized that the NCLT and NCLAT should be wary of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor’s sole contract.

In summary, this judgment has a significant impact on the interpretation of the IBC and will ensure that the NCLT’s jurisdiction is exercised in a manner that is consistent with the principles of contract law and the Specific Relief Act.