When can NCLT exercise residuary jurisdiction under Section 60(5)(c) IBC to adjudicate contractual dispute? Supreme Court answers

The Supreme Court has reiterated that the National Company Law Tribunal (NCLT) can exercise its residuary jurisdiction under Section 60(5)(c) of the Insolvency and Bankruptcy Code (IBC) to adjudicate contractual disputes between parties. provided such dispute has arisen in relation to the insolvency of the corporate debtor (TATA Consultancy Services Limited v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Private Limited). .In a judgment delivered on Tuesday, a Bench of Justices DY Chandrachud and AS Bopanna placed reliance on the Supreme Court judgment in Gujarat Urja Vikas v. Amit Gupta to hold that the NCLT’s jurisdiction is not limited by Section 14 in terms of the grounds of judicial intervention envisaged under the IBC.“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,” the Court held..However, the Bench emphasised that the residuary power cannot be used to adjudicate a contractual dispute which has arisen dehors (other than or outside the scope of) the insolvency of the corporate debtor.“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 said..The Court was hearing an appeal filed by Tata Consultancy Services Limited (appellant) against a judgment dated June 24, 2020 of the National Company Law Appellate Tribunal (NCLAT).The NCLAT had upheld an interim order dated December 18, 2019 of the NCLT which stayed the termination by the appellant of its Facilities Agreement dated December 1, 2016 with SK Wheels Private Limited (corporate debtor).By way of background, the appellant and the corporate debtor had entered into a Build-Phase Agreement on August 24, 2015 followed by a Facilities Agreement on December 1, 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.Clause 11(b) of the Facilities Agreement stated that either party could 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.Meanwhile, a corporate insolvency resolution process (CIRP) was initiated against the corporate debtor on March 29, 2019. The appellant alleged that it came to know about the CIRP against the corporate debtor when the electricity board disconnected the supply of electricity to the corporate debtor on April 24, 2019..A termination notice was issued by the appellant to the corporate debtor on June 10, 2019 alleging multiple lapses by the corporate debtor in fulfilling its contractual obligations.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 December 18, 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.The NCLT observed that, prima facie, it appeared that the contract was terminated without serving the requisite notice of thirty days..On appeal, the NCLAT 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.This led to the present appeal before the Supreme Court.The Supreme Court framed the following questions for its consideration:- 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- Whether in the exercise of such a residuary jurisdiction, it can impose an ad-interim stay on the termination of the Facilities Agreement..In answering the first question, the Court adverted to its judgment in Gujarat Urja in which it was held that the NCLT’s jurisdiction is not limited by Section 14 in terms of the grounds of judicial intervention envisaged under the IBC.In that case, the top court had held that a power purchase agreement, which is a bilateral commercial contract, is an ‘instrument’ under Section 238 of the IBC. Notably, the power-purchase agreement provided that the disputes between the parties relating to the agreement would be entertained by the 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.In the instant case, the Court noted that 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 of the IBC can be overridden by the provisions of the IBC, the Court said.“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 the NCLT to exercise its residuary powers under Section 60(5)(c) to adjudicate disputes relating to the insolvency of the Corporate Debtor,” the judgment said..However, the Court noted that there is nothing to indicate that the termination of the Facilities Agreement was motivated by the insolvency of the Corporate Debtor."The trajectory of events makes it clear that the alleged breaches noted in the termination notice dated 10 June 2019 were not a smokescreen to terminate the agreement because of the insolvency of the Corporate Debtor,” the Court stated.Thus, it 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.Due to the above, the Court said that the second question formulated by it has no bearing in the present case.It, therefore, set aside the NCLAT verdict.The Bench also issued a note of caution to the NCLT and the National Company Law Appellate Tribunal (NCLAT) in this regard, even if the contractual dispute arises in relation to the insolvency.“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 Court said..[Read Judgment]