The Moratorium and Termination of Agreements

On 23 November 2021, the Supreme Court of India, in the case of TATA Consultancy Services Ltd. v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Pvt. Ltd. (TCS Case), clarified that the jurisdiction of the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016 (Code) cannot be invoked by the corporate debtor if the termination of a contract by a third party takes place on grounds unrelated to the insolvency of the corporate debtor.

Brief facts

In the present case, a Facilities Agreement dated 01 December 2016 (Facilities Agreement) was executed between TATA Consultancy Services Ltd. (TCS) and SK Wheels Pvt. Ltd. (SK Wheels). The Facilities Agreement obligated SK Wheels to provide certain services to TCS for conducting examinations for educational institutions. The Facilities Agreement provided that either party could terminate the agreement immediately by written notice to the other party, provided that a material breach committed by the defaulting party was not cured within thirty days of the receipt of the notice. Due to repeated deficient services, TCS eventually issued a Termination Notice dated 10 June 2019 (Termination Notice) terminating the Facilities Agreement, which was contested by SK Wheels. The issue in the present case arose as the Termination Notice was issued after the NCLT Mumbai Bench had initiated insolvency proceedings against SK Wheels in March 2019.

On an application filed by the Resolution Professional of SK Wheels, NCLT Mumbai Bench stayed the Termination Notice and directed TCS to comply with the terms of the Facilities Agreement. Aggrieved by the order, TCS preferred an appeal before the National Company Law Appellate Tribunal (NCLAT). The NCLAT upheld the order of NCLT observing that it had correctly stayed the operation of the Termination Notice since the main objective of the Code is to ensure that the corporate debtor remains a going concern. This judgment of the NCLAT was challenged before the Supreme Court of India.

Analysis by the Supreme Court

The main issue under consideration before the Supreme Court was whether the NCLT in its residuary jurisdiction is empowered to adjudicate upon contractual dispute between parties and to stay the termination of the Facilities Agreement. It was argued by SK Wheels that NCLT had wide powers to stay the termination of any agreement which is the main source of revenue generation of the corporate debtor, as such termination is against the objective of the Code which envisages that the corporate debtor should be preserved as a going concern. Reliance was placed on the Supreme Court’s judgment in the matter of Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (Gujarat Urja Case), where the Supreme Court had injuncted a third party from terminating its contract with the corporate debtor on the grounds that the contract in question relates to the insolvency resolution proceedings of the corporate debtor.

The Supreme Court distinguished the TCS Case from the Gujarat Urja Case on the following points of facts;

a.  In Gujarat Urja Case 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, without there being any contractual default on part of the corporate debtor. It was in that context that the Supreme 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 the Code. Whereas in TCS Case, even before the initiation of the insolvency proceedings before the NCLT, TCS had on multiple instances communicated to SK Wheels that there were deficiencies in its services and eventually the Facilities Agreement was terminated for deficiency in service; and

b.  In Gujarat Urja Case, the contract in question was the sole contract of the corporate debtor and was material to the survival of the corporate debtor. In the TCS Case, the Facilities Agreement was not the sole contract of SK Wheels and termination would not lead to SK Wheels’ civil death, as it was majorly involved in an alternative line of business.

Accordingly, the Supreme Court held that the termination of the Facilities Agreement was based on grounds completely unrelated to the insolvency of SK Wheels and hence the NCLT did not have any residuary jurisdiction to entertain the present contractual dispute. Therefore, the Supreme Court set aside of the judgments of the NCLT and NCLAT. The Supreme Court further clarified that even where the termination of a contract by a third party was in relation to the insolvency of the corporate debtor, the NCLT should restrain the third party from terminating the contract only if it is central to the success of the insolvency proceedings or to keep the corporate debtor as a going concern.

Conclusion

The judgment of the Supreme Court in the TCS Case draws a clear line in the sand regarding the jurisdiction of NCLT and NCLAT in determining the contractual right of a party to terminate a contract with the corporate debtor. The judgment has established a clear principle of law that a party to a contract with a corporate debtor has a right to terminate the same unless:

a.  The contractual dispute arises in relation to the insolvency of the corporate debtor; and

b.  The contract is central to the success of the insolvency proceedings of the corporate debtor and its termination will result in the corporate death of the corporate debtor.

By setting aside the NCLAT and NCLT judgements in the TCS Case, the Supreme Court has ensured that resolution professionals do not use the Code to prevent termination of any contract by third parties, without considering whether such contracts are crucial for the survival of the corporate debtor.

 Author: Altamash Qureshi

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