The National Company Law Appellate Tribunal (“NCLAT”), in the case of Tata Consultancy Services Limited v. Vishal Ghisulal Jain (decided on June 24, 2020) has decided that a contract termination notice issued by Tata Consultancy Services Limited (“Appellant”) to S.K Wheels Private Limited (“Corporate Debtor”), a company undergoing Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”) should be stayed.

Facts

The Appellant and the Corporate Debtor entered into an agreement on December 01, 2016 (“Facilities Agreement”) to avail services from the Corporate Debtor to enable conduct of examinations deploying National Technology Infrastructure for the Appellant’s clients. By order dated March 29, 2019, the National Company Law Tribunal, Mumbai (“NCLT”) initiated CIRP proceedings against the Corporate Debtor.

Subsequently, since the Corporate Debtor failed to remedy alleged breaches to the Facilities Agreement, the Appellant terminated the same by termination notice dated June 10, 2019. Pursuant to the same, the Corporate Debtor filed proceedings before the NCLT seeking, inter alia, stay of the termination notice issued by the Appellant.

The NCLT by an order dated December 18, 2019 granted an interim stay of the termination notice issued by the Appellant, in order to enable the Corporate Debtor to remain a going concern.

The Appellant was aggrieved by the same on the grounds that the NCLT failed to appreciate the arbitration agreement contained in Clause 12(d) of the Facilities Agreement, and failed to appreciate that a valid notice of termination was issued by the Appellant, which were, in the Appellant’s view not in contravention to Section 14 of the IBC.

Issue

Whether the termination of the Facilities Agreement is valid pursuant to Section 14 of the IBC.

Arguments

The Appellant stated that the NCLT had failed to appreciate that a valid notice of termination was issued by theAppellant and that the notice of termination was not in contravention of Section 14 of the IBC.

The Corporate Debtor stated that as per the Facilities Agreement, the Corporate Debtor was under the obligation to, inter alia, fit the premises with the materials as per specification mentioned in the agreement and provide certain facilities. Previously, when there was a situation pertaining to non-compliance with the terms of the Facilities Agreement, the parties had discussed the same and mutually resolved the same.

Further, it was stated that all the deficiencies were cured at the cost of the Corporate Debtor. Furthermore, meetings were held in April and May, 2019, whereby, the Interim Resolution Professional intimated the Appellant that no prejudice would be caused to the Appellant and all the services and facilities would be provided as contained in the Facilities Agreement. The learned counsel for the Corporate Debtor further submitted that the Appellant issued termination notice as per the Clause 11(b) of the Facilities Agreement, however, the same was not in accordance with the said clause. As per the abovementioned Clause 11(b), a 30 days’ notice needs to be given in the event of any material breach by either party. However, no notice was received in this case by the Corporate Debtor.

The Appellant stated that the Appellant noticed the material breaches of obligations by the Corporate Debtor including deployment of personal lacking requisite level of scale, non-adherence of design guidelines, nonreplacement of furniture and air conditioners, etc., pursuant to which multiple notices were issued, however, the Corporate Debtor failed to remedy the contractual breaches which led to the serving of a termination notice. To this, it was stated by the Corporate Debtor they have cured all the deficiencies and the termination notice after the initiation of CIRP is against the main object of the IBC.

Observations of the NCLAT

The NCLAT observed that per the termination clause, it is mandatory to issue notice to the party in the event of a material breach and if the same is not cured, the aggrieved party was liable to terminate the agreement. It was observed that in view of Section 14 of the IBC, once a moratorium was imposed by the adjudicating authority and on appointment of Interim Resolution Professional, the Interim Resolution Professional will be at the helm of affairs of the company in view of the suspension of the board of directors of the Corporate Debtor.

Further, the IBC sets out the duty of Resolution Professional to preserve and protect the assets of the Corporate Debtor and lays down the functions he may perform in order to ensure the same.

It was observed that as per the IBC, post the initiation of the CIRP, the Corporate Debtor shall function and continue its business activities. It is the duty of the Interim Resolution Professional/ Resolution Professional, as the case may be, to keep the Corporate Debtor as a going concern.

Decision of the NCLAT

The appeal was disposed, and it was held that the NCLT rightly stayed the termination of notice and there is no illegality in the order passed by the NCLT.

Vaish Associates Advocates View
This judgement can have interesting and wide ramifications. Curiously, the NCLAT has not expanded or provided any reasoning for why and how the provisions of Section 14 are applicable in such cases. A purposive approach has been taken by the NCLAT by stating that the main aim of the IBC is to encourage sale of a corporate debtor on a going concern basis and not liquidation.

The NCLAT reasoned that in order to keep the corporate debtor viable, the termination of the contract should be stayed for the time being. The absence of any specific reasoning as to how the IBC empowers the NCLT/ NCLAT, as the case may be, to interfere in commercial agreements may result in the order being challenged on substantive grounds.

For more information please write to Mr. Bomi Daruwala at [email protected]

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