Corporate Debtor Not Being A Going Concern, Termination Of Essential Raw Material Supply Doesn’t Erode Value Of Assets: NCLT Ahmedabad

Background Facts

On 14.02.2015, ONGC awarded tender in favour of JBF Petrochemicals Limited (“Corporate Debtor”) for supplying Paraxylene to the latter and accordingly an Agreement was executed on 12.04.2016.

On 28.01.2022 the Corporate Debtor was admitted into Corporate Insolvency Resolution Process (“CIRP”).Subsequently, ONGC terminated the Agreement on 14.06.2022 on the ground that the Corporate Debtor has defaulted in lifting Paraxylene as per the terms of the Agreement.

In the meanwhile, the Resolution plan for Corporate Debtor stood approved by the Committee of Creditors (“CoC”) and is pending approval before the Adjudicating Authority.

The Resolution Professional filed an application before the Adjudicating Authority seeking setting aside of the Termination Notice and a direction to ONGC to supply Paraxylene as and when the Plant is ready and commissioned.

ONGC opposed the application and submitting that the Agreement was eligible for termination much prior to initiation of CIRP. There is no breach of moratorium declared under Section 14 of IBC. Further, Section 60(5) (C) of IBC cannot be pressed into service to compel third party to perform its part of the contract, which was eligible for termination much prior to initiation of CIRP, due to default committed by the Corporate Debtor itself.

NCLT Verdict

The Bench observed that the Corporate Debtor was established much prior to 2012, however, it could not commence its business activities before or even after initiation of CIRP. The default in the form of failure to purchase requisite quantities of Paraxylene was committed prior to commencement of CIRP and ONGC had exercised its right to terminate the Agreement.

Though Paraxylene is an essential raw material for functioning of a Petrochemical Industry, but the Corporate Debtor has never been functional. Further, under Section 14 of IBC a moratorium is imposed to protect the status of the Corporate Debtor as a going concern, ‘if’ the Corporate Debtor is a running unit.

The residuary jurisdiction of Adjudicating Authority under Section 60(5)(C) of the IBC is limited and cannot be invoked to interpret terms of third-party contract.

“Under Section 60(5) (C) of the IBC, 2016 this Adjudicating Authority has been conferred with the jurisdiction to entertain and dispose of any question of law or facts “arising out of or in relation to the Insolvency resolution or liquidation process of Corporate Debtor”. Now in this case the Corporate Debtor was never a running unit. It cannot be said that by the termination of the agreement by the Respondent, the Corporate Debtor suffered any erosion of assets during the CIRP.”

The Bench observed that the termination of agreement by ONGC did not erode the value of Corporate Debtor’s assets. The application was rejected on ground that the dispute between the Parties is dehors the insolvency proceeding.

Case Title: Sundaresh Bhat v Mangalore Refinery and Petrochemicals Limited

Case No.: CP(IB) No. 232 of 2018

Counsel For the Applicant: Mr. Rashesh Sanjanwala, Sr. Advocate & Mr. Saurabh Soparkar, Sr. Advocate a/w. Mr. Monaal Davawala, Advocate

Counsel For the Respondent: Mr. Navin Pahwa, Sr. Advocate s/w. Mr. Rohan Lavkumar, Advocate & Ms. Anushree Soni, Advocate For the SRA(GAIL) : Mr. Kamal Trivedi, Sr. Advocate General a/w. Mr. Akshat Khare, Mr. Viraj Bairagi, Mr. Samiron Chakroborty, Ms. Kritika Angirish, Advocates

Counsel For the CoC: Mr. Tushar Mehta, Sr. Advocate Solicitor General of India a/w Ms. Saloni Kapadia Advocate

Counsel For the Income Tax: Advocate Ms. Pankti Shah on behlaf of Advocate Ms. Maithli Mehta.

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