The Judgment of the Court was delivered by
D.Y. Chandrachud, J.— This appeal arises from a judgment dated 24-6-2020 2020 SCC OnLine NCLAT 484 of the National Company Law Appellate Tribunal (“Nclat”). Nclat upheld the interim order dated 18-12-2019 2019 SCC OnLine NCLT 28273 of the National Company Law Tribunal (“NCLT” or “adjudicating authority”) which stayed the termination by the appellant of its facilities agreement dated 1-12-2016 with SK Wheels Pvt. Ltd. (“corporate debtor” or “respondent”).
Factual background
2. The appellant and corporate debtor entered into a build phase agreement on 24-8-2015 followed by a facilities agreement on 1-12-2016. The facilities agreement obligated corporate debtor to provide premises with certain specifications and facilities to the appellant for conducting examinations for educational institutions.
3. 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. Clause 11(b) reads as follows:
“11. Termination
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(b) Termination for material breach : Either party may terminate this Agreement immediately by a written notice to the other party in the event of a material breach which is not cured within thirty days of the receipt of the said notice period.”
4. A termination notice was issued by the appellant to corporate debtor on 10-6-2019 which came into effect immediately. The parties have contested the facts leading up to the issuance of the notice.
5. It has been submitted on behalf of the appellant that there were multiple lapses by corporate debtor in fulfilling its contractual obligations, which it failed to remedy satisfactorily. The appellant notified corporate debtor in its email dated 1-8-2018 that it intended to invoke the penalty clause of the facilities agreement for the alleged contractual breaches. Another email dated 17-9-2018 was sent to corporate debtor regarding non-compliance with the agreement. Following a site visit, the appellant in its email dated 1-10-2018 directed corporate debtor to take urgent steps to remedy the breaches. On 11-10-2018, the appellant put corporate debtor on notice that it would be constrained to invoke the penalty and termination clauses of the facilities agreement for the alleged non-compliance. On 13-10-2018, the appellant addressed an email to corporate debtor highlighting its concerns regarding the insufficiency of housekeeping staff and their malpractices in respect of entering attendance. Eventually on 19-11-2018, the appellant intimated to corporate debtor that it will deploy its housekeeping staff and deduct the costs from the invoice. On 3-2-2019, the appellant wrote an email to corporate debtor raising issues of power supply and shortage of housekeeping staff, among other deficiencies.
6. The corporate insolvency resolution process (“CIRP”) was initiated against corporate debtor on 29-3-2019. The appellant has alleged that it came to know about CIRP against corporate debtor when the Electricity Board disconnected the supply of electricity to corporate debtor on 24-4-2019.
7. On 29-5-2019, corporate debtor in its email alleged that the appellant had failed to make the requisite payments and the electricity was disconnected as a result. In its response dated 30-5-2019, the appellant stated that:
7.1. It came to know that a CIRP was initiated against corporate debtor when the electricity was disconnected.
7.2. There were no amounts due to corporate debtor.
7.3. It made the payments for periods before March 2019. There was a delay in making payments for March 2019 because corporate debtor requested a change in bank account details. No invoice was raised for April 2019.
8. The appellant claims that the material breaches by corporate debtor have resulted in a liability of Rs 20,78,500. It did not initiate recovery proceedings on account of the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
9. The appellant issued a notice of termination dated 10-6-2019 in terms of Clause 11(b) of the facilities agreement. The termination notice stated thus:
“Despite of all our sincere attempts in settling the crucial business issues, we have always received unvaried response from your end and these occurrences of non-observation have now culminated into breach of following terms and conditions of the Agreement:
1. Not maintaining the minimum level of skillset of personnel on exam and non-exam days which is non-compliance as per Annexure B, Table C, and also a process violation.
2. Furnishing and Designing guidelines (Annexure B, Table D) not being adhered to
(a) Furniture in broken condition
(b) Temperature and ventilation in labs, server room and UPS rooms not being maintained
(c) Deploying housing staff
(d) Cleanliness and upkeeping of the centre.
3. Branding and navigation not in synchronisation with Annexure F of facility agreement.
In view of all the aforestated events, consider this as a notice of termination as per Clause 11(b) of the Agreement which entitles Tata Consultancy Services Ltd. (“TCS”) to terminate the agreement with immediate effect by issuance of a written notice in the event of a material breach not being cured within 30 days.
Please take notice that the relationship between us as Client/Service Recipient and you as Service Provider/Vendor/LISP stands terminated with effect from 10th June.”
10. On behalf of corporate debtor, it is submitted that certain routine operational requirements were highlighted by the appellant from time to time, which were rectified within a reasonable duration. Corporate debtor has allegedly invested Rs 8.35 crores to fulfil its contractual obligations. According to corporate debtor, the deficiencies raised by the appellant in its letter dated 11-10-2018 were remedied by the end of October 2018. Corporate debtor has further submitted that certain other minor issues were cured by February 2019. The deficiency in relation to the housekeeping staff provided by corporate debtor was allegedly cured when the appellant hired its own staff. Corporate debtor has claimed that it complied with the directions of the appellant intimated in its email dated 3-2-2019 in respect of changing faulty batteries and providing cleaning products. Corporate debtor has further submitted that while the electricity was disconnected by the Electricity Board in April 2019, it was eventually restored. It is stated that certain meetings were held in April-May 2019 where the resolution professional (“RP”) informed the appellant that no prejudice would be caused to it and all the services and facilities will be provided according to the agreement, but the appellant unilaterally terminated the agreement with immediate effect on 10-6-2019. Corporate debtor has contested the issuance of the termination notice on the ground that no material breaches have occurred, and, in any event, a thirty days' period is to be given to a party to cure the defects before the agreement can be terminated under Clause 11(b) of the facilities agreement.
Proceedings before NCLT and Nclat
11. Corporate debtor instituted a miscellaneous application before NCLT under Section 60(5)(c) IBC for quashing of the termination notice. NCLT passed an order dated 18-12-2019 2019 SCC OnLine NCLT 28273 granting an ad interim stay on the termination notice issued by the appellant and directed the appellant to comply with the terms of the facilities agreement. NCLT observed 2019 SCC OnLine NCLT 28273 that prima facie it appeared that the contract was terminated without serving the requisite notice of thirty days. The conclusion of NCLT is extracted below : (BMW Financial Services case 2019 SCC OnLine NCLT 28273, SCC OnLine NCLT paras 7-8)
“7. Further whether the termination is good or bad in law, is a matter of inquiry, which requires examination of the fact and circumstances. In this scenario, we are of the prima facie view that the termination of the contract even without serving a notice to the corporate debtor is not correct.
8. In view of the same, we hereby stay the termination notice issued by the respondent. Until then the respondent shall adhere to the terms of contract without fail.”
12. Aggrieved by the order, the appellant preferred an appeal before Nclat. Nclat by its order dated 24-6-2020 2020 SCC OnLine NCLAT 484 upheld the order of NCLT observing that it had correctly stayed the operation of the termination notice since the main objective of IBC is to ensure that corporate debtor remains a going concern. Nclat referred to Section 14 to highlight that a moratorium is imposed to ensure the smooth functioning of corporate debtor to safeguard its status as a going concern. Further, it is the responsibility of RP under Section 25 IBC to preserve corporate debtor as a going concern. The relevant portions of the judgment are reproduced below : (Vishal Ghisulal Jain case 2020 SCC OnLine NCLAT 484, SCC OnLine NCLAT paras 12-14)
“12. From the order it is seen that the respondent herein was appointed as interim resolution professional (in short “IRP”) to carry out the functions as per law. In view of Section 14 once a moratorium was imposed by the adjudicating authority and on appointment of interim resolution professional, the interim resolution professional will be at the helm of affairs of the company in view of the suspension of the Board of Directors of the “corporate debtor”. As on the date of the imposition of moratorium the business and activities of the “corporate debtor” will have to be carried out for smooth functioning of the company and the company shall remain as a going concern. Apart from that the resolution professional shall ensure for smooth running of the company as a going concern and the resolution professional shall perform the duties as per Section 25 of the I&B Code. Under sub-section (2)(a) of Section 25, the resolution professional shall take immediate custody and control of all the assets of corporate debtor, including the business records of corporate debtor. Further sub-section 2(b) of Section 25 of the I&B Code states that
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‘2. (b) represent and act on behalf of corporate debtor with third parties, exercise rights for the benefit of corporate debtor in judicial, quasi-judicial or arbitration proceedings;’
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13. Further, the said provision sets out the duty of resolution professional to preserve and protect the assets of the “corporate debtor” and lays down the functions he may perform the same. In view of the duties cast upon the resolution professional, the resolution professional to keep corporate debtor as a going concern filed an application being CA (MB) No. 2954 of 2019 before the adjudicating authority seeking stay of termination of notice and sought direction to the appellant to continue the facilities agreement dated 1-12-2016.
14. The adjudicating authority after hearing the parties stayed 2019 SCC OnLine NCLT 28273 the termination of notice and directed the appellant herein to adhere to the terms of contract without fail. In view of the law, after initiation of CIRP the “corporate debtor” shall function and continue its business activities. It is the duty of the resolution professional to keep corporate debtor as a going concern. It is the main objective of the Code to keep corporate debtor as a going concern. The adjudicating authority rightly stayed the termination of notice and there is no illegality in the order passed by the adjudicating authority dated 18-12-2019 2019 SCC OnLine NCLT 28273.”
The judgment 2020 SCC OnLine NCLAT 484 of Nclat has given rise to the present appeal.
Submissions of the counsel
13. Ms Fereshte D. Sethna, learned counsel appearing on behalf of the appellant, has made the following submissions:
13.1. NCLT has misread the provisions of Section 14 IBC which relate to the provision of goods and services to corporate debtor once the moratorium is imposed. In the present case, the appellant is availing of the services of corporate debtor, to which Section 14 has no application.
13.2. As a result of the impugned order 2020 SCC OnLine NCLAT 484, the facilities agreement, which is a determinable contract has become a non-terminable contract, overlooking the mandate of Section 14 of the Specific Relief Act, 1963.
13.3. The termination notice was not issued to corporate debtor because it was undergoing CIRP but was on account of the material breaches of the agreement. Multiple opportunities were given to corporate debtor to remedy the breaches before the termination notice was issued.
13.4. The facilities agreement is not the sole contract of corporate debtor, termination of which would lead to its corporate death. Corporate debtor is in the business of automotive parts, which is evident from the main objects of its memorandum of association.
13.5. NCLT under Section 60(5)(c) IBC cannot invoke its residuary powers where there is a patent lack of jurisdiction. IBC does not permit a statutory override of all contracts entered with corporate debtor. A third party has a contractual right of termination.
13.6. The duty of RP under Section 25 IBC is not determinative of the jurisdiction of NCLT. Such a duty cannot be stretched to convert a determinable commercial contract into a non-terminable contract, forcing a contracting party to pay for deficient services that it is unwilling to avail.
13.7. In Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (2021) 7 SCC 209, this Court had injuncted a third party from terminating its contract with corporate debtor because there were concurrent findings of NCLT 2019 SCC OnLine NCLT 7878 and Nclat 2019 SCC OnLine NCLAT 1157 holding that the contract in question was the sole contract of corporate debtor, and the termination of the contract by the third party was merely on the ground of initiation of CIRP without there being any contractual default on the part of corporate debtor.
14. Ms Udhita Singh, the learned counsel appearing on behalf of RP, has urged that:
14.1. NCLT is vested with the jurisdiction under Section 60(5)(c) IBC to adjudicate issues relating to fact or law in respect of a company undergoing CIRP.
14.2. The appellant's argument that the contractual dispute can be decided only through arbitration and the provisions of the Contract Act, 1872 and the Specific Relief Act, 1963 are attracted is incorrect. Section 238 IBC has an overriding effect over other laws. This Court in Ashoka Mktg. Ltd. v. Punjab National Bank (1990) 4 SCC 406 has held that two special laws containing non obstante clauses must be interpreted harmoniously by looking at the purpose of the laws. Further, this Court has observed that a special law enacted at a later date prevails over the earlier special law. Thus, the provisions of IBC would apply to the present dispute.
14.3. In Gujarat Urja (2021) 7 SCC 209, this Court has held that the residuary jurisdiction of NCLT under Section 60(5)(c) IBC provides it a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings. It was further held that Section 14 IBC is not exhaustive of the grounds of judicial intervention contemplated under IBC otherwise Section 60(5)(c) would be rendered otiose. One such ground of intervention is when the status of corporate debtor as a going concern is in jeopardy. Thus, NCLT has the power to exercise its jurisdiction under Section 60(5)(c) IBC to ensure that corporate debtor survives as a going concern.
14.4. Corporate debtor was not given a thirty days' notice to cure the breach in terms of Clause 11(b) of the facilities agreement. The termination notice refers to a notice dated 3-10-2018, which has not been placed on record. While a letter dated 11-10-2018 was received by corporate debtor alleging deficiencies, those were cured by the end of October 2018. This is evinced by the fact that after October 2018, no communication, except those dated 19-11-2018 and 3-2-2019, were received by corporate debtor. Corporate debtor had rectified any minor deficiencies that were brought to its notice by the appellant promptly. Thus, the allegation that there were material breaches of the agreement by corporate debtor is incorrect.
14.5. The appellant became aware that CIRP has been initiated against corporate debtor and had immediately terminated the agreement thereafter.
14.6. Corporate debtor had two main sources of income—a dealership of Maruti and the agreement with the appellant. The dealership was terminated before the initiation of CIRP, thus the only existing source of income as of the date of initiation of CIRP was the facilities agreement, for which corporate debtor has incurred a substantial capital expenditure of Rs 8.35 crores. The termination of the agreement would adversely affect corporate debtor. In Gujarat Urja (2021) 7 SCC 209, this Court has held that the termination of an agreement which is the main source of revenue generation of corporate debtor is against the objective of IBC which envisages that corporate debtor should be preserved as a going concern.
Analysis
15. The rival contentions will now be considered.
16. Based on the appeal, two issues have arisen for consideration before this Court:
16.1. (i) Whether NCLT can exercise its residuary jurisdiction under Section 60(5)(c) IBC to adjudicate upon the contractual dispute between the parties.
16.2. (ii) Whether in the exercise of such a residuary jurisdiction, it can impose an ad interim stay on the termination of the facilities agreement.
17. Clause 12(d) of the facilities agreement provides that the disputes between the parties shall be a subject-matter of arbitration. The clause reads thus:
“12. Miscellaneous
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(d) Governing Law, Dispute Resolution and Jurisdiction.—This Agreement shall be governed and interpreted in accordance with laws of India.
In case of disputes or differences between the Parties hereof, shall be subject-matter of arbitration under the Arbitration and Conciliation Act, 1996 and any subsequent related amendments thereto, unless settled amicably between the Parties hereto, be referred to arbitration and such arbitration shall be conducted in accordance with the rules of arbitration of the Bombay Chamber of Commerce and Industry (“BCCI”), which rules as modified from time to time, are deemed to be incorporated by reference into this clause (“the Arbitration Rules”) by an arbitration panel comprised of a sole arbitrator.
The arbitration panel as referred to above shall be appointed by the BCCI. The arbitration panel shall deliver the award in the arbitration proceedings within three (3) months from reference of any dispute to arbitration. The venue of arbitration shall be Mumbai, India.
The Parties agree that the award passed by the arbitration panel shall be final and binding upon the Parties, and that the Parties shall not be entitled to commence or maintain any action in any court of law in respect of any matter in dispute arising from or in relation to the Agreement, except for the enforcement of an arbitral award passed by an arbitration panel pursuant to this clause.”
18. Section 238 provides that IBC overrides other laws, including any instrument having effect by virtue of law. The text of Section 238 stipulates thus:
“238. Provisions of this Code to override other laws.—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.”
19. In Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund (2021) 6 SCC 436, a three-Judge Bench of this Court, of which one of us was a part (A.S. Bopanna, J.), held that Section 238 IBC overrides all other laws. This Court was 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 NCLT to examine an application filed under Section 7 IBC. This Court observed thus :
“27. As noted, the issue which is posed for our consideration is arising in a petition filed under Section 7 of IB Code, before it is admitted and therefore not yet an action in rem. In such application, the course to be adopted by the adjudicating authority if an application under Section 8 of the 1996 Act is filed seeking reference to arbitration is what requires consideration. The position of law that the IB Code shall override all other laws as provided under Section 238 of the IB Code needs no elaboration. In that view, notwithstanding the fact that the alleged corporate debtor filed an application under Section 8 of the 1996 Act, the independent consideration of the same dehors the application filed under Section 7 of IB Code and materials produced therewith will not arise. The adjudicating authority is duty-bound to advert to the material available before him as made available along with the application under Section 7 of IB Code by the financial creditor to indicate default along with the version of corporate debtor. This is for the reason that, keeping in perspective the scope of the proceedings under the IB Code and there being a timeline for the consideration to be made by the adjudicating authority, the process cannot be defeated by a corporate debtor by raising moonshine defence only to delay the process. In that view, 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. While doing so the contention put forth by corporate debtor shall also be noted to determine as to whether there is substance in the defence and to arrive at the conclusion whether there is default. 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.”
(emphasis supplied)
20. In Gujarat Urja (2021) 7 SCC 209, a two-Judge Bench of this Court, of which one of us was a part (D.Y. Chandrachud, J.), held that a power purchase agreement, which is a bilateral commercial contract, is an “instrument” under Section 238. Notably, the power purchase agreement provided that the disputes between the parties relating to the agreement would be entertained by Gujarat Electricity Regulatory Commission. But since Section 238 provides an overriding effect to the provisions of IBC over any instrument having effect by law, it was held that NCLT had jurisdiction over the dispute which arose in the context of insolvency proceedings. The relevant extract of the judgment is set out below :
“82. It has been urged on behalf of the appellant that Section 238 does not apply to a bilateral commercial contract between a corporate debtor and a third party and only applies to statutory contracts or instruments entered into by operation of law. The basis of this submission is that the word “instrument” should be given a meaning ejusdem generis to the provision “contained in any other law”. We do not find force in this argument. Section 238 does not state that the “instrument” must be entered into by operation of law; rather it states that the instrument has effect by virtue of any such law. In other words, the instrument need not be a creation of a statute; it becomes enforceable by virtue of a law. Therefore, we are inclined to agree with the view 2019 SCC OnLine NCLT 7878 taken by NCLT. Section 238 is prefaced by a non obstante clause. NCLT's jurisdiction could be invoked in the present case because the termination of PPA was sought solely on the ground that corporate debtor had become subject to an insolvency resolution process under IBC.”
(emphasis in original and supplied)
21. Section 60(5)(c) grants residuary jurisdiction to NCLT to adjudicate any question of law or fact, arising out of or in relation to the insolvency resolution of corporate debtor. Section 60(5)(c) provides thus:
“60. Adjudicating authority for corporate persons.—
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(5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of—
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(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of corporate debtor or corporate person under this Code.”
22. 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 IBC can be overridden by the provisions of IBC. 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 NCLT to exercise its residuary powers under Section 60(5)(c) to adjudicate disputes relating to the insolvency of corporate debtor.
23. The appellant has contested the reliance of Nclat on Section 25 IBC to hold that RP can invoke the jurisdiction of NCLT to stay the termination of the facilities agreement in pursuance of its duty to preserve corporate debtor as a going concern. The learned counsel has submitted that the jurisdiction of NCLT cannot be determined based on the duties of RP. Reliance was placed on the judgment of this Court in Embassy Property Developments (P) Ltd. v. State of Karnataka (2020) 13 SCC 308, wherein this Court held that the duties of RP are entirely different from the jurisdiction and powers of NCLT. While the duty of RP and the jurisdiction of NCLT cannot be conflated, in Gujarat Urja (2021) 7 SCC 209, this Court has clarified that RP can approach NCLT for adjudication of disputes which relate to the insolvency resolution process. But when the dispute arises dehors the insolvency of corporate debtor, RP must approach the relevant competent authority (para 72). We have discussed whether there is a nexus between the termination notice and the insolvency resolution proceedings in the subsequent paragraphs.
24. It was also urged on behalf of the appellant that NCLT and Nclat have rewritten 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. It is a settled position of law that IBC is a complete code and Section 238 overrides all other laws. 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 (2021) 7 SCC 209. In any event, the intervention by NCLT and Nclat cannot be characterised as the re-writing of the contract between the parties. NCLT and Nclat are vested with the responsibility of preserving corporate debtor's survival and can intervene if an action by a third party can cut the legs out from under CIRP.
25. On behalf of the appellant, it has been further submitted that Nclat misread Section 14 IBC, which has no application to the present case. Section 14 IBC provides thus:
“14. Moratorium.—(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the adjudicating authority shall by order declare moratorium for prohibiting all of the following, namely—
(a) the institution of suits or continuation of pending suits or proceedings against corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
(b) transferring, encumbering, alienating or disposing of by corporate debtor any of its assets or any legal right or beneficial interest therein;
(c) any action to foreclose, recover or enforce any security interest created by corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of corporate debtor.
Explanation.— For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a licence, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period;
(2) The supply of essential goods or services to corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.
(2-A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.
(3) The provisions of sub-section (1) shall not apply to—
(a) such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;
(b) a surety in a contract of guarantee to a corporate debtor.
(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:
Provided that where at any time during the corporate insolvency resolution process period, if the adjudicating authority approves the resolution plan under sub-section (1) of Section 31 or passes an order for liquidation of corporate debtor under Section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.”
(emphasis supplied)
26. Admittedly, the appellant is neither supplying any goods or services to corporate debtor in terms of Section 14(2) nor is it recovering any property that is in possession or occupation of corporate debtor as the owner or lessor of such property as envisioned under Section 14(1)(d). It is availing of the services of corporate debtor and is using the property that has been leased to it by corporate debtor. Thus, Section 14 is indeed not applicable to the present case. However, in Gujarat Urja (2021) 7 SCC 209 it was held that NCLT's jurisdiction is not limited by Section 14 in terms of the grounds of judicial intervention envisaged under 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. This Court observed :
“91. The residuary jurisdiction of NCLT under Section 60(5)(c) of 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 NCLT were to be confined to actions prohibited by Section 14 of IBC, there would have been no requirement for the legislature to enact Section 60(5)(c) of IBC. Section 60(5)(c) would be rendered otiose if Section 14 is held to be exhaustive of the grounds of judicial intervention contemplated under IBC in matters of preserving the value of 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 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 NCLT. However, it is pertinent to mention that 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 (2020) 8 SCC 531.”
27. Before the initiation of CIRP, the appellant had on multiple instances communicated to corporate debtor that there were deficiencies in its services. 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 1-8-2018, 17-9-2018, 1-10-2018 and 11-10-2018. In its email dated 13-10-2018 the appellant specifically noted that the housekeeping staff being provided by corporate debtor was inadequate. The appellant was apparently constrained to deploy its own staff for housekeeping, evinced from its email dated 19-11-2018. Corporate debtor has admitted that the appellant was using its own housekeeping staff and deducting the costs from the invoice. The appellant again intimated corporate debtor to change faulty batteries of the UPS and provide cleaning products in its email dated 3-2-2019. The termination notice dated 10-6-2019 also clearly lays down the deficiencies in the services of corporate debtor. The termination notice enumerated the following deficiencies:
“1. Not maintaining the minimum level of skillset of personnel on exam and non-exam days which is non-compliance as per Annexure B, Table C, and also a process violation.
2. Furnishing and Designing guidelines (Annexure B, Table D) not being adhered to
(a) Furniture in broken condition
(b) Temperature and ventilation in labs, server room and UPS rooms not being maintained
(c) Deploying housing staff
(d) Cleanliness and upkeeping of the centre.
3. Branding and navigation not in synchronisation with Annexure F of facility agreement.”
28. In Gujarat Urja (2021) 7 SCC 209, the contract in question was terminated by a third party based on an ipso facto clause i.e. the fact of insolvency itself constituted an event of default. It was in that context, this Court held that the contractual dispute between the parties arose in relation to the insolvency of corporate debtor and it was amenable to the jurisdiction of NCLT under Section 60(5)(c). This Court observed that :
“69. … NCLT has jurisdiction to adjudicate disputes, which arise solely from or which relate to the insolvency of corporate debtor… The nexus with the insolvency of corporate debtor must exist.”
(emphasis supplied)
Thus, the residuary jurisdiction of NCLT cannot be invoked if the termination of a contract is based on grounds unrelated to the insolvency of corporate debtor.
29. It is evident that the appellant had time and again informed 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 corporate debtor. The trajectory of events makes it clear that the alleged breaches noted in the termination notice dated 10-6-2019 were not a smokescreen to terminate the agreement because of the insolvency of corporate debtor. Thus, we are of the view that NCLT does not have any residuary jurisdiction to entertain the present contractual dispute which has arisen dehors the insolvency of corporate debtor. In the absence of jurisdiction over the dispute, NCLT could not have imposed an ad interim stay on the termination notice. Nclat has incorrectly upheld 2020 SCC OnLine NCLAT 484 the interim order 2019 SCC OnLine NCLT 28273 of NCLT.
30. 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 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 CIRP. Crucially, the termination of the contract should result in the corporate death of corporate debtor. In Gujarat Urja (2021) 7 SCC 209, this Court held thus :
“176. Given that the terms used in Section 60(5)(c) are of wide import, as recognised in a consistent line of authority, we hold that NCLT was empowered to restrain the appellant from terminating PPA. However, our decision is premised upon a recognition of the centrality of PPA in the present case to the success of CIRP, in the factual matrix of this case, since it is the sole contract for the sale of electricity which was entered into by corporate debtor. In doing so, we reiterate that NCLT would have been empowered to set aside the termination of PPA in this case because the termination took place solely on the ground of insolvency. The jurisdiction of NCLT under Section 60(5)(c) of IBC cannot be invoked in matters where a termination may take place on grounds unrelated to the insolvency of corporate debtor. Even more crucially, it cannot even be invoked in the event of a legitimate termination of a contract based on an ipso facto clause like Article 9.2.1(e) herein, if such termination will not have the effect of making certain the death of corporate debtor. As such, in all future cases, NCLT would have to be wary of setting aside valid contractual terminations which would merely dilute the value of corporate debtor, and not push it to its corporate death by virtue of it being corporate debtor's sole contract (as was the case in this matter's unique factual matrix).
177. The terms of our intervention in the present case are limited. Judicial intervention should not create a fertile ground for the revival of the regime under Section 22 of SICA which provided for suspension of wide-ranging contracts. Section 22 of the SICA cannot be brought in through the back door. The basis of our intervention in this case arises from the fact that if we allow the termination of PPA which is the sole contract of corporate debtor, governing the supply of electricity which it generates, it will pull the rug out from under CIRP, making the corporate death of corporate debtor a foregone conclusion.”
(emphasis supplied)
31. The narrow exception crafted by this Court in Gujarat Urja (2021) 7 SCC 209 must be borne in mind by NCLT and Nclat even while examining prayers for interim relief. The order of NCLT dated 18-12-2019 2019 SCC OnLine NCLT 28273 does not indicate that NCLT has applied its mind to the centrality of the facilities agreement to the success of CIRP and corporate debtor's survival as a going concern. NCLT has merely relied upon the procedural infirmity on the part of the appellant in the issuance of the termination notice i.e. it did not give thirty days' notice period to corporate debtor to cure the deficiency in service. Nclat, in its impugned judgment 2020 SCC OnLine NCLAT 484, has averred that the decision of NCLT preserves the “going concern” status of corporate debtor but there is no factual analysis on how the termination of the facilities agreement would put the survival of corporate debtor in jeopardy.
32. Admittedly, this Court has clarified the law on the present subject-matter in Gujarat Urja (2021) 7 SCC 209 after the pronouncements of NCLT and Nclat. Going forward, the exercise of NCLT's residuary powers should be governed by the above decision.
33. We accordingly set aside the judgment of Nclat dated 24-6-2020 2020 SCC OnLine NCLAT 484. The proceedings initiated against the appellant shall stand dismissed for absence of jurisdiction. The appeal is disposed of in the above terms with no order as to costs.
34. Pending applications, if any, are disposed of.
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