IBC: NCLT Cannot Adjudicate Contractual Dispute If Termination Of Contract Is Based On Grounds Unrelated To Corporate Debtor's Insolvency: Supreme Court

The Supreme Court observed that the residuary jurisdiction of the NCLT cannot be invoked to adjudicate contractual dispute if the termination of a contract is based on grounds unrelated to the insolvency of the Corporate Debtor. 

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 CIRP, the court added.

In this case, the Corporate Debtor instituted a miscellaneous application before the NCLT under Section 60(5)(c) of the IBC for quashing of a contract termination notice. The NCLT, while granting an ad-interim stay observed that prima facie it appeared that the contract was terminated without serving the requisite notice of thirty days. NCLAT dismissed the appeal filed against this order.

In appeal, these issues were raised: (i) 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; and (ii) Whether in the exercise of such a residuary jurisdiction, it can impose an ad-interim stay on the termination of the Facilities Agreement.

The bench comprising Justices DY Chandrachud and AS Bopanna noted that Section 60(5)(c) grants residuary jurisdiction to the NCLT to adjudicate any question of law or fact, arising out of or in relation to the insolvency resolution of the Corporate Debt.

Further, the court noted that in Gujarat Urja Vikas v. Amit Gupta & Ors. (2021) 7 SCC 209 :: LL 2021 SC 142, it had injuncted a third party from terminating its contract with the corporate debtor because there were concurrent findings of the NCLT and NCLAT holding that the contract in question was the sole contract of the 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 part of the corporate debtor. In this regard, the bench observed:

26. In Gujarat Urja (supra), 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 the corporate debtor and it was amenable to the jurisdiction of the NCLT under Section 60(5)(c). This Court observed that "….NCLT has jurisdiction to adjudicate disputes, which arise solely from or which relate to the insolvency of the corporate debtor… The nexus with the insolvency of the corporate debtor must 22 exist" (para 69). Thus, the residuary jurisdiction of the NCLT cannot be invoked if the termination of a contract is based on grounds unrelated to the insolvency of the Corporate Debtor

The court further noted that there is nothing to indicate that the termination of the Facilities Agreement was motivated by the insolvency of the Corporate Debtor.

"The NCLT does not have any residuary jurisdiction to entertain the present contractual dispute which has arisen dehors the insolvency of the Corporate Debtor. In the absence of jurisdiction over the dispute, the NCLT could not have imposed an ad-interim stay on the termination notice. The NCLAT has incorrectly upheld the interim order of the NCLT.", the bench said.

While allowing the appeal, the bench further said:

"28. 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 the 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 the CIRP. Crucially, the termination of the contract should result in the corporate death of the Corporate Debtor...The narrow exception crafted by this Court in Gujarat Urja (supra) must be borne in mind by the NCLT and NCLAT even while examining prayers for interim relief."

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