2025 (11) TMI 530 - AT - IBC

Appeal dismissed; contract termination and blacklisting upheld as performance-breach remedy; S.14 moratorium doesn't bar termination; S.60(5) inapplicable

Pradeep Upadhyay Liquidator M/s Dugal Associates Private Limited Under Liquidation) Versus Bhadohi Industrial Development Authority (BIDA), Bhadohi

NCLAT affirmed the NCLT's decision dismissing the challenge to contract termination and blacklisting, holding the termination arose from performance ... Direction to remove the blacklisting imposed on the Corporate Debtor - prayer for the release of retention money - the termination of the contract was triggered by the insolvency of the Corporate Debtor - protection against such termination by moratorium under Section 14 of the Insolvency and Bankruptcy Code. Whether the termination of the contract by the Respondent is occasioned by the insolvency of the Corporate Debtor and, as such, is barred by the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016? HELD THAT:- The present case is squarely covered by the judgement of the Hon’ble Supreme Court in TATA Consultancy Services Limited Vs. Vishal Ghisulal Jain [2021 (11) TMI 798 - SUPREME COURT]. Adjudicating authority has also noted that the CD was not getting any goods or supplies from the Respondent and rather it was providing service to Respondent in the form of construction work. Moreover, the construction work was not proceeding as per the stipulated time frame and therefore, the Respondent was within its rights to terminate the contract. It has nothing to do with the initiation of the CIRP proceedings. The situation described by the Hon’ble Supreme Court in above cited case 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” is very much similar to the present case. It is compelled to hold that the National Company Law Tribunal (NCLT) does not possess any residual or overarching jurisdiction under Section 60(5) to adjudicate contractual disputes arising independently of the insolvency of the Corporate Debtor. In the absence of such jurisdiction over the dispute in question, the protective ambit of Section 14 in the form of moratorium is inapplicable to the termination of a contract. Furthermore, it has not been established that the impugned termination is integral or indispensable to the efficacious conduct of the Corporate Insolvency Resolution Process. In this case it is not found that the termination of the contract was triggered by the insolvency of the Corporate Debtor, and therefore, the moratorium under Section 14 of the Insolvency and Bankruptcy Code should protect against such termination. It is concluded that the appeal is devoid of merit and, thus, does not warrant admission - there are no merit in the Appeal and the order of the Adjudicating Authority is not found to be having any infirmity - appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether termination of a contract by a counterparty during a pre-existing corporate insolvency resolution process is barred by the moratorium under Section 14 of the Insolvency and Bankruptcy Code when the termination is alleged to have been triggered by the insolvency. 2. Whether the Adjudicating Authority has residuary jurisdiction under Section 60(5)(c) of the Code to adjudicate and stay a contractual termination that is said to arise from or relate to the insolvency of the corporate debtor. 3. Whether facts in the record establish that the termination was motivated by insolvency (ipso facto) or by antecedent contractual breaches unconnected to the insolvency, and the legal consequences of that factual determination for reliefs such as setting aside termination, release of retention/holding amounts, and removal of blacklisting. 4. Whether the Tribunal should exercise equitable or discretionary powers to grant monetary and ancillary reliefs (release of retention money, final payments, lifting of blacklisting) where the contract has been re-awarded and liquidation has been ordered, rendering many remedies potentially infructuous. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Section 14 moratorium to contract termination Legal framework: Section 14 imposes a moratorium during CIRP prohibiting institution or continuation of proceedings against the corporate debtor, and Section 60(5)(c) confers residuary jurisdiction to the Adjudicating Authority over questions arising from or in relation to insolvency proceedings. Precedent treatment: The Tribunal relied on the principle articulated by the Supreme Court in the line of authority addressing ipso facto terminations and the scope of NCLT's jurisdiction to restrain contractual terminations where such termination is motivated solely by insolvency and is central to the success of CIRP. Interpretation and reasoning: The Tribunal examined the sequence of contractual notices, extensions, inspection reports, repeated communications of deficiency, show cause notices, committee inquiries and actions by the counterparty prior to and during CIRP. It found the termination to be the culmination of prolonged contractual non-performance and enforcement of express contractual remedies (forfeiture, termination, blacklisting) contemplated by the agreement rather than a step taken solely in response to the CIRP. The Tribunal emphasized that moratorium protection under Section 14 is inapplicable where termination is founded on legitimate antecedent defaults unconnected to insolvency. Ratio vs. Obiter: Ratio - moratorium under Section 14 does not bar a counterparty from terminating a contract for pre-existing, legitimate contractual breaches; termination is not protected by moratorium unless termination was occasioned solely by insolvency and its preservation is central to CIRP. Obiter - observations on the non-visit of the RP to the site and procedural correspondence are ancillary. Conclusion: The moratorium under Section 14 did not protect the corporate debtor from the termination in the facts of the case because the termination was grounded in antecedent contractual breaches and legitimate enforcement of contractual remedies, not triggered by insolvency alone. Issue 2 - Scope of Section 60(5)(c) residuary jurisdiction to intervene in contractual terminations Legal framework: Section 60(5)(c) gives the Adjudicating Authority power to adjudicate questions of law or fact arising from or in relation to insolvency resolution proceedings; judicial doctrine limits this jurisdiction to disputes having a nexus with the insolvency. Precedent treatment: The Tribunal applied the Supreme Court's delineation that NCLT/NCLAT may restrain terminations only where the dispute arises solely from or relates to insolvency and, crucially, where termination would jeopardize the CIRP by threatening the corporate debtor's survival as a going concern. Interpretation and reasoning: Applying the precedent, the Tribunal found absence of the requisite nexus: the contractual dispute arose from sustained non-performance, repeated notices, and documented deficiencies prior to CIRP, not from an ipso facto clause or reaction to insolvency. The Tribunal further held that the termination was not central to the success of CIRP (it did not amount to the corporate debtor's sole contract or render the corporate death inevitable), and hence Section 60(5)(c) could not be invoked to stay the termination. Ratio vs. Obiter: Ratio - Section 60(5)(c) cannot be used to restrain terminations that arise independently of the corporate debtor's insolvency or are not central to CIRP; only disputes with a genuine nexus to insolvency and capable of frustrating CIRP attract jurisdiction. Obiter - cautionary remarks on future exercise of residuary powers in light of precedent. Conclusion: The Adjudicating Authority lacked jurisdiction under Section 60(5)(c) to adjudicate or stay the termination because the dispute did not arise out of or relate to insolvency in the requisite sense and the termination was not central to CIRP. Issue 3 - Factual determination as to motivation for termination and legal consequences for reliefs claimed Legal framework: Determination of causation (whether termination was motivated by insolvency) is fact-driven; if termination is not ipso facto, moratorium and NCLT's residuary powers do not ordinarily protect the corporate debtor from enforcement of contractual remedies. Precedent treatment: The Tribunal applied the factual approach mandated by precedent requiring analysis of the trajectory of events leading to termination to determine whether insolvency was the motivating factor. Interpretation and reasoning: The Tribunal reviewed documentary evidence - correspondence, show cause notices, inspection reports, deadline extensions, Committee inquiries and failure to perform multiple work heads - and concluded the counterparty acted on contractual defaults evidenced before and independent of CIRP. The Tribunal noted the counterparty's documented financial loss, re-awarding of residual work, and measurement findings showing incomplete work. It also observed that the Resolution Professional did not complete measurements or visit the site in a timely manner, weakening the contention that the counterparty's action was unjustifiably motivated by insolvency. Ratio vs. Obiter: Ratio - where the factual record demonstrates legitimate pre-existing defaults and responsive contractual enforcement, the termination is not attributable to insolvency and cannot be set aside under moratorium principles. Obiter - comments on the RP's conduct are ancillary to the core finding. Conclusion: Factual matrix established termination on legitimate contractual grounds; thus protective remedies (setting aside termination, release of retention money, lifting blacklisting) were not warranted and became largely infructuous after re-award and liquidation. Issue 4 - Appropriateness of discretionary reliefs (release of monies, removal of blacklisting) after contract re-award and liquidation Legal framework: Reliefs ancillary to setting aside termination (monetary releases, lifting of blacklist) require both legal entitlement and practical utility; liquidation and re-award may render such reliefs nugatory or commercially impracticable. Precedent treatment: The Tribunal took heed of the principle that reliefs should not be granted where the underlying entitlement is not established or where the remedy would not serve CIRP objectives. Interpretation and reasoning: Given the Tribunal's factual conclusion that termination was lawful, and that the contract had been re-awarded and liquidation ordered, it found the monetary and ancillary claims to be either unsupported or rendered infructuous. The Tribunal declined to exercise equitable power to grant such reliefs where the legal basis to set aside termination was absent and the claimed reliefs would not materially assist revival or realization of value in liquidation. Ratio vs. Obiter: Ratio - ancillary monetary or administrative reliefs cannot be granted where the primary challenge to termination fails and where subsequent events (re-award, liquidation) render such reliefs ineffective. Obiter - observations on how such reliefs might aid stakeholders in a different factual matrix. Conclusion: Claims for release of retention money, final payments, and removal of blacklisting were refused as either unsupported by law on the facts or rendered infructuous by re-award and liquidation; the appeal was dismissed as devoid of merit.