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Introduction
When a corporation collapses, the fate of contracts hangs in the balance, igniting a fierce legal battle for supremacy in commercial jurisprudence. At the precipice of ruin, the foundational sanctity of contractual obligations becomes the ultimate test, demanding a delicate and perilous equilibrium between rescuing the debtor and honoring the rights of the creditor. The courtroom becomes an arena where debtor revival clashes head-on with creditor rights, a high-stakes drama where the very essence of commercial law is measured by the inviolability of a promise. The law focused in this scenario is primarily the IBC1, specifically concerning the breadth of the moratorium under Section 14.
In the matter of Pradeep Upadhyay (Liquidator, M/s Dugal Associates Private Limited) v. Bhadohi Industrial Development Authority (BIDA), the NCLAT2 Principal Bench, New Delhi, in its judgment delivered by Arun Baroka, Member (Technical), primarily held that the termination of a contract initiated due to pre-existing, persistent breaches unrelated to the insolvency of the Corporate Debtor is not barred by the Section 14 moratorium. The core issue before the court was whether the termination and blacklisting of the Corporate Debtor by the Respondent after the commencement of the CIRP3 violated the moratorium provisions of the IBC.
The Corporate Debtor was engaged by the Respondent for a civil construction project under an agreement dated October 7, 2016, with a stipulated completion date of October 14, 2017. Despite multiple extensions and reminders by Respondent due to the Corporate Debtor’s failure to complete the work, the project remained unfinished. The CIRP against the Corporate Debtor was initiated on November 11, 2019. Despite the subsequent imposition of the moratorium under Section 14 of the IBC, Respondent citing continued non-compliance and delays stretching back to 2017/2018, terminated the agreement and blacklisted the Corporate Debtor on January 28, 2020.
The Battle Line: Applying the ‘Nexus with Insolvency’ Test
The Appellant (Liquidator) contended that the Respondent’s action of terminating the contract, blacklisting the Corporate Debtor, and forfeiting payments (Running Account, Retention Money, EMD, etc.) was triggered by the insolvency and the commencement of the CIRP, and was, therefore, an action against the Corporate Debtor’s assets prohibited by the Section 14 moratorium. The Appellant argued that the Adjudicating Authority, NCLT4 failed to exercise its residuary jurisdiction under Section 60(5)(c) of the IBC to protect the Corporate Debtor as a going concern and maximize value for stakeholders.
The Respondent argued that the termination was a culmination of protracted proceedings and persistent, long-standing breaches of contractual obligations by the Corporate Debtor, evidenced by numerous notices and extensions issued since 2017. It further contended that the non-performance and delays were unrelated to the insolvency and that it was merely exercising its contractual rights. It further submitted that the Corporate Debtor was providing a service to them, and Section 14 was not applicable as it was neither supplying goods/services nor recovering its property from the Corporate Debtor.
The NCLAT’s analysis heavily relied on the judgment of the Hon’ble Supreme Court in TATA Consultancy Services Limited v. Vishal Ghisulal Jain5.In this precedent, the Supreme Court clarified that the residuary jurisdiction of the NCLT/NCLAT under Section 60(5)(c) of the IBC cannot be invoked if the termination of a contract is based on grounds unrelated to the insolvency of the Corporate Debtor. The court observed that for the moratorium to apply to termination, the nexus with the insolvency must exist, meaning the termination must be motivated by the insolvency itself (an ‘ipso facto’ clause).
Furthermore, the Supreme Court in Gujarat Urja Vikas v. Amit Gupta & Ors6 cautioned against interfering with contractual rights, stating that even if a contractual dispute arises in relation to the insolvency, a party can only be restrained from terminating the contract if it is central to the success of the CIRP and would result in the corporate death of the Corporate Debtor. In the present case, the NCLAT found the facts to be similar to the TATA Consultancy Services (Supra) matter, noting the long trajectory of events (notices and extensions from 2017 to 2019) that preceded the termination.
The NCLAT resolved the apparent dichotomy between the moratorium and contractual rights by adopting the principle established in the Supreme Court’s judgment. The Tribunal held that the facts clearly belied the Appellant’s claim that the termination was triggered by the insolvency. The termination on January 28, 2020, was the culmination of protracted proceedings and was a legitimate exercise of contractual provisions due to persistent, pre-CIRP non-performance and delays by the Corporate Debtor. The NCLAT specifically noted that the Respondent was merely availing the services of the Corporate Debtor and was not supplying goods/services or recovering its property, thus making Section 14 non-applicable.
By finding that the termination was based on grounds unrelated to the insolvency, the NCLAT concluded that the NCLT lacked the residuary jurisdiction to interfere with the contract termination. The appeal was, therefore, disposed of, effectively upholding the NCLT’s decision to not set aside the termination and blacklisting.
Conclusion
The case of Pradeep Upadhyay v. BIDA (Supra), reaffirmed the critical principle that the IBC moratorium under Section 14 is not a blanket shield against all contractual terminations. It does not override legitimate contractual rights to terminate an agreement if the grounds for termination pre-existed and are unrelated to the insolvency of the Corporate Debtor.
This judgment further clarifies the judiciary’s stance that the IBC is a mechanism for insolvency resolution, not for enforcing or resurrecting contracts that were validly terminated due to chronic, pre-existing breaches. This ruling provides a necessary clarification for contracting parties that the initiation of CIRP does not nullify their rights to terminate a contract based on grounds of non-performance or default that occurred well before the insolvency. It creates a higher degree of certainty for government and private entities contracting with companies, reassuring them that their contractual safeguards remain enforceable unless the termination is specifically intended to thwart the CIRP or is based solely on an ipso facto insolvency clause.
This judgment naturally leads to several questions like How will courts precisely delineate between a termination ‘triggered by insolvency’ (prohibited) versus one that is the ‘culmination of protracted proceedings’ (permitted), especially in cases where the final termination notice is issued just after the moratorium begins? What level of pre-CIRP default communication is necessary for a termination to be considered ‘unrelated to insolvency’ and thus shielded from Section 14? If a contractor’s pre-CIRP breach was minor but then exacerbated by the moratorium’s restrictions, how will the courts weigh these factors?
Citations
Expositor(s): Adv. Shreya Mishra
