Extent Of NCLT’s Jurisdiction Over Contractual Disputes During CIRP

Section 60(5) of IBC grants residuary jurisdiction to NCLT to adjudicate any question of law or fact, arising out of or in relation to the insolvency resolution of a Corporate Debtor. Such applications are usually filed by the RP on behalf of the CD. For the ease of convenience, Section 60(5) is reproduced as under-

“60(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-

(a) any application or proceeding by or against the corporate debtor or corporate person;

(b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and

(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 the corporate debtor or corporate person under this Code.”

On various instances, the RP and the third party being contracting party has locked horns with respect to the maintainability of RP’s objection to imposition of penalty by the third party on the CD due to CD’s contractual default during the currency of CIRP. One such issue was dealt with by the Hon’ble Supreme Court of India in a very recent case of Tata Consultancy Services Ltd. v. SK Wheels (P) Ltd., through Resolution Professional, Vishal Ghisulal Jain [(2022) 2 SCC 583]. In the said case, the Appellant had entered into a Facilities Agreement with the CD Company before the initiation of the CIRP. During the course of the agreement, the Company declared itself insolvent and CIRP was initiated against it. During the currency of the CIRP, the Appellant terminated the agreement in view of the contractual breach committed by the CD. In consequence, the RP of the CD filed an Application under Section 60(5) IBC against the Appellant before the NCLT, stating that the termination is in violation of Section 14 of the IBC since the same has been done during the currency of CIRP. The Supreme Court took note that the Appellant had on multiple occasions communicated to the CD that there were deficiencies in its services and in consequence of its non-compliance, the Appellant invoked the Termination Clause. The issue raised was whether the NCLT/ NCLAT can exercise its residuary jurisdiction under Section 60 (5) (c) of IBC to adjudicate upon the contractual dispute between the parties or not. In view of such circumstances, the Hon’ble Supreme Court held that NCLT does not have any residuary jurisdiction to entertain the contractual dispute which has arisen dehors the insolvency of the Corporate Debtor, but merely due to pure contractual breach.

In realm of the applicability of Section 60(5) of IBC, the case of Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta [(2021) 7 SCC 209], is considered to be one of the celebrated judgments. In the said case, it was held that NCLT’s jurisdiction is not limited by Section 14 of IBC in terms of the grounds of judicial intervention envisaged under IBC. It can exercise its residuary jurisdiction under Section 60(5)(c) IBC to adjudicate on question of law and fact that relate to or arise during an insolvency resolution process. The Hon’ble Apex Court in Gujarat Urja (Supra) laid down following conditions with respect to applicability of Section 14 and jurisdiction of NCLT in respect of contracts of CD with a third party and when can the RP’s Application under Section 60(5) of IBC against such third party is maintainable. Such conditions are as follows:

• When the Contract is central to the success of CIRP; and
• CD would not be able to maintain itself as a “going concern” on its termination; and
• Action by the third party is in consequence of the CIRP initiated against the CD.

The Apex Court in Tata Consultancy (Supra), considering the facts of the case, observed that the conditions laid down in Gujarat Urja (Supra) has no applicability in its case since there was no nexus between the Contracting/third party’s action in terminating the agreement with the ongoing CIRP against the CD. Even in Gujarat Urja (Supra), the Apex Court has clearly held that NCLT cannot exercise its jurisdiction over matters dehors the insolvency proceedings since such matters would fall outside the realm of IBC.

In view of all the aforesaid, it is clear that a contractual action taken by a third party against the CD can be challenged under Section 14 IBC before the NCLT by RP under Section 60(5) IBC, only in the following circumstances:

• There has to be nexus between the insolvency proceedings and the third party; meaning thereby, where the termination of a contract or penalty imposed on CD by a third party was in consequence of the insolvency of the corporate debtor, the NCLT can restrain the third Party from taking such penalizing actions only if it is central to the success of the insolvency proceedings or to keep the corporate debtor as a going concern.
• There has been no contractual default by the CD;
• Such action taken by the third party shall result in corporate death of the CD.

Therefore, NCLT and NCLAT are vested with the responsibility of preserving CD’s survival and can intervene only when an action by a third party has the potential of cutting the legs out from CIRP. However, if there is no nexus between the third party’s action and the CIRP, and the said action has been done purely on CD’s contractual default, there shall be no violation to the provisions of Section 14 of IBC and the NCLT/ NCLAT will have no jurisdiction to interfere in such contractual actions.

The author is an Advocate and views are personal.