NCLAT does not have residuary jurisdiction to impose an ad-interim stay on the termination notice: SC

Appeal before the Supreme Court arises from a judgment dated 24 June 2020 of the National Company Law Appellate Tribunal. The NCLAT upheld the interim order dated 18 December 2019 of the National Company Law Tribunal which stayed the termination by the appellant of its Facilities Agreement dated 1 December 2016 with SK Wheels Private Limited. 

Based on the appeal, two issues have arisen for consideration before this Court:

(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.

Facts

• The appellant and the Corporate Debtor entered into a Build Phase Agreement on 24 August 2015 followed by a Facilities Agreement on 1 December 2016. The Facilities Agreement obligated the Corporate Debtor to provide premises with certain specifications and facilities to the appellant for conducting examinations for educational institutions. 
• It was stated in Clause 11(b) of the Facilities Agreement 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.
• Appellant issued the termination notice to the Corporate Debtor on 10 June 2019 which came into effect immediately.
• Appellant stated the reason for termination of facilities agreement, that there were multiple lapses by the Corporate Debtor in fulfilling its contractual obligations, which it failed to remedy satisfactorily. The appellant notified the Corporate Debtor in its email dated 1 August 2018 that it intended to invoke the penalty clause of the Facilities Agreement for the alleged contractual breaches. Another email dated 17 September 2018 was sent to the Corporate Debtor regarding non-compliance with the agreement. 
• The Appellant also went to site visit. Thereafter, the appellant in its email dated 1 October 2018 directed the Corporate Debtor to take urgent steps to remedy the breaches. On 11 October 2018, the appellant put the 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 October 2018, the appellant sent an email to the Corporate Debtor regarding the insufficiency of housekeeping staff and their malpractices in respect of entering attendance. Eventually on 19 November 2018, the appellant said to the Corporate Debtor that it will deploy its housekeeping staff and deduct the costs from the invoice. 
• On 3 February 2019, the appellant wrote an email to the Corporate Debtor raising issues of power supply and shortage of housekeeping staff, among other deficiencies. 
• On 29th March 2019, the Corporate Insolvency Resolution Process4 was initiated against the Corporate Debtor. The appellant has stated that it came into his knowledge about the CIRP against the Corporate Debtor when the Electricity Board disconnected the supply of electricity to the Corporate Debtor on 24 April 2019. 
• On 29 May 2019, the 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 May 2019, the appellant stated that there were no amounts due to the Corporate Debtor and payments was made by his side for periods before March 2019. 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. 
• The appellant claims that the material breaches by the 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. 
• The Corporate Debtor instituted a miscellaneous application before the NCLT under Section 60(5)(c) of the IBC for quashing of the termination notice. The NCLT passed an order dated 18 December 2019 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. 
• Aggrieved by the order, the appellant preferred an appeal before the NCLAT. The NCLAT by its order dated 24 June 2020 upheld the order of the NCLT observing that it had correctly stayed the operation of the termination notice since the main objective of the IBC is to ensure that the Corporate Debtor remains a going concern. 

Findings

Clause 12 (d) of the Facilities Agreement provides that the disputes between the parties shall be a subject matter of arbitration. 

Section 238 provides that the IBC overrides other laws, including any instrument having effect by virtue of law. 

In the Gujarat Urja case, a two judge Bench of Supreme Court, 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 the IBC over any instrument having effect by law, it was held that the NCLT had jurisdiction over the dispute which arose in the context of insolvency proceedings. 

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 Debtor. 

Judgement

Supreme Court held that 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. 

Also, issued 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. 

This Court, accordingly set aside the judgment of the NCLAT dated 24 June 2020. The proceedings initiated against the appellant shall stand dismissed for absence of jurisdiction.