NCLT Jurisdiction over Contractual Disputes

In the “Gujarat Urja Vikas Nigam Limited v Amit Gupta”, the Supreme Court on 08 March 2021, determined “Whether NCLT can exercise jurisdiction over the disputes arising out of the termination of an agreement”. In this regard, the Supreme Court ascertains the contours of the jurisdiction to adjudication contractual disputes. The Court exclusively enumerated insolvency arising from or with relation to Corporate Debtor.

Background

A Power purchased Agreement was signed by the Gujarat Urja Vikas Nigam Limited for the purchase of power generated. On 20 November 2018, the NCLT acknowledged an appeal for the initiation of the Corporate Insolvency Resolution Process under Section 10 of the IBC, 2016. On 1 May 2019, Gujarat Urja Vikas Nigam emanated two notices for termination of Power purchase Agreement (PPA). The first notice issued under Article 9.2.1 (e) of the PPA, because CIRP was commenced against the Corporate Debtor, which aggregated as an ‘event of default’. The second notice was given under Article 9.2.1 (a) of the PPA, there was failure in the operation & maintenance of the Power plant.

The Nigam wanted to terminate the PPA under Articles 9.2.1 (a) & (e) of PPA for the reason that the Corporate Debtor is underwent into CIRP. Subsequently, the Corporate Debtor filed a petition with respect to the Notice and to endeavour an injunction, which could constraint Nigam from putting an end to the Agreement. The congruent appeal was filed under Section 60 (5) of the IBC, 2016. Further, NCLT passed an order, which impede Nigam from cancelling the Agreement.

The ultimate question arose was- whether the NCLT can exercise jurisdiction over the dispute arising from contracts?

Submissions by Appellant

  • The appellant contended that the NCLT has no inherent power to exercise jurisdiction on contractual agreement that relates to the corporate debtor. The jurisdiction can only be arbitrate disputes if the matter emerging out of the insolvency of the corporate debtor. Therefore, NCLT has no inherent power, and the only exercise of jurisdiction is circumscribed by the IBC.

  • Further, it was contended that NCLT hold competent jurisdiction to determine the discourse, which relates to the Corporate Debtor insolvency matter.

Submission by Respondent

  • The respondent contended that NCLT has vested power to address the questions of law of facts “arising out of” or “in relation to” disputes arising out of contractual agreement of the Corporate Debtor.

Section 60(5) (c): ‘arising out of’ and ‘in relation to’

NCLT’s jurisdiction circumscribed by the supervisory role envisaged under IBC. The court enumerated that Section 60(5) (c) has broad jurisdiction to decide the question of law or fact emerging from or with relation to insolvency resolution proceedings. The court in the ‘Renusagar Power Co. Ltd. v. General Electric Company’ [1] elucidated expressions ‘relating to’ and ‘arising out of’ is equivalent to the articulation ‘concerning with’ and ‘pertaining to’ the different section. It was germane with the aim to avoid the multiplicity of fora, litigation costs and speedy disposal of the insolvency matters.

Essentially, the court held that “Insolvency & Bankruptcy Code” was established to scrutinize the insolvency- related matters, which were previously disseminated to multiple forums. The sole idea for instituting the IBC was to form the single forum, where all the insolvency matters can congregate at one place. With the exclusion of jurisdiction over the insolvency matters takes the corporate debtor to defend himself in multiple fora. This invariably vanish the sole purpose of establishing IBC and also makes intensely excruciating for the corporate debtor. Simultaneously, such multiple proceedings cause excessive hindrance in the insolvency resolution process, which can significantly reduce the value of the debtor’s assets and expectation of a successful reorganization or liquidation.

In the “Innoventive industries v ICICI Bank”,[2] the court perceived that the main aim of the IBC is to congregate all kinds of insolvency matters into a single unified umbrella, so as to resolve the matters in a timely, efficient and effective manner. The same principle was reiterated in “Arcelor Mittal India Private Limited v Satish Kumar Gupta”,[3] the court observed that “the non-obstante Clause in Section 60(5) of IBC was layout to corroborate that NCLT has sole jurisdiction to entertain the applications of insolvency proceedings against a corporate debtor. Further, Section 60(5) (c) of the IBC was also interpreted in the same line and NCLT can solely exercise jurisdiction to adjudicate the corporate debtor’s insolvency matters. However, it is important to ensure that NCLT/NCLAT do not take over the legitimate jurisdiction of other courts, tribunals and fora, when the matter is not in relation to corporate debtor insolvency. In ‘Embassy Property Developments Pvt Ltd v State of Karnataka’ [4] the court observed that an argument cannot be sustained for the simple reason that RP duties are different from the NCLT’s jurisdiction and power.

With the adherence to the process and equivalent applicable law, the adjudicating authority authorizes the Resolution Professional to adjudicate the matters emerging out of the contractual agreements. However, for the resolution of corporate debtor’s insolvency disputes in judicial, quasi-judicial or arbitration proceedings, RP is required to take congruous steps to approach the competent authority. Under Section 18(f) (vi) and Section 25(2) (b) of the IBC, Resolution Professional manages and control of the corporate debtor’s assets and records the balance sheet, information utility and other securities depository. Therefore, RP can approach NCLT for insolvency related matters, but RP is not permitted to adjudicate the disputes that arise dehors the CD insolvency. For example- the RP would not be authorized to invoke the jurisdiction, if the matter relating to non-supply of electricity. However, in the present case, the dispute arose in connection with insolvency of the corporate debtor and thereby, NCLT is authorize to arbitrate this dispute under Section 60 (5) (c) of the IBC, 2016.

NCLT’s residuary jurisdiction under Section 60(5) (c)

Moreover, the Court relied upon “Committee of Essar Steel India v Satish Kumar Gupta”[5] decision for determining NCLT’s residuary jurisdiction under Section 60(5)(c) of the IBC, which provides wide circumspection to examine the ‘question of law’ emerging from or in the context of insolvency resolution proceedings. The residuary jurisdiction may also expand its matters, which are not particularly mentioned under the legislation. In “A. Deivendran v State of T.N”,[6] the court determined, “If the jurisdiction of NCLT will be restricted to particular actions and Section-14 of the IBC is comprehensively constructed on the rationale of judicial intervention with significance to preserve the corporate debtor value and its status as “going concern”. Then it will not be coherent to validate Section 60 (5) (c) of the IBC, as that would serve no practical purpose. Therefore, NCLT can exercise its residuary jurisdiction over the insolvency proceedings, which falls within the scope of the domain of IBC”.

Validity of ipso facto clauses

It is crucial to analyze the contractual provision, which authorize parties to terminate the contract in the manifestation of ‘event of default’. The EU Directives notes of the issues, where corporate debtor was undergoing into restructuring and subsequently, the creditors terminated the contracts based on ipse facto clauses. Thereafter, the European Directives ensured that suppliers are not allowed to terminate the contract based on ipso facto clauses, when CD is gone into restructuring.

The court observed that, even where ipso facto clauses are not valid, it does not give rights to the parties to terminate the contract based on the ‘event of default’. The report of Vidhi Center for legal policy[7] notes that the IBC do not allow to terminate the contractual agreement at the operation of ipso facto clauses during insolvency proceedings.

The court determined that the Power Purchase Agreement was brought to end, exclusively on the rationale of insolvency. Further, it was scrutinized that there was no event of default examined under Articles 9.2.1 (a) & (e) of PPA, which could lead the termination of PPA. Moreover, there are no grounds left out to terminate the PPA in the non-existence of the insolvency with relation to Corporate Debtor. Overall, the present dispute concerned about the insolvency arising with relation to Corporate Debtor.

Conclusion

Ultimately, after dismissing the appeal, the Court concluded that,

Section 60(5) (c) constructed to avoid the multiplicity of fora and timely resolution of the insolvency process.

  • The NCLT/NCLAT empowered to exercise jurisdiction for adjudicating the matter arising from the contractual agreement under Section 60 (5) (c) of the IBC, since the appellant wanted to terminate the PPA under Article 9.2.1 (e) on the ground that CIRP was commenced against the Corporate Debtor


  • NCLT/NCLAT correctly restrain the appellant from terminating the PPA, otherwise, it would have resulted in the corporate death of the corporate debtor, as PPA is an exclusive agreement.


References

  1. (1984) 4 SCC 679

  2. (2018) 1 SCC 407

  3. (2019) 2 SCC 1

  4. (2020) 13 SCC 308

  5. (2020) 8 SCC 531

  6. (1997) 11 SCC 720

  7. Pages 34-35, available at https://vidhilegalpolicy.in/wpcontent/uploads/2019/05/IBC_Thejourneysofarandtheroadahead_Dec18.pdf accessed on 18 February 2021.

Authors -

Priya Dutt, NALSAR, University of Law, Hyderabad

Rishi Dutt, Bharati vidyapeeth, New Law College, Pune





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