Under IBC, NCLT has jurisdiction to adjudicate disputes arising solely on ground of insolvency: Supreme Court

Supreme Court: The bench of Dr. DY Chandrachud* and MR Shah, JJ has held that under Insolvency and Bankruptcy Code, 2016 (IBC), NCLT has jurisdiction to adjudicate disputes which arise solely from or which relate to the insolvency of the Corporate Debtor. The Court, however, issued a note of caution to the NCLT and NCLAT to ensure that “they do not usurp the legitimate jurisdiction of other courts, tribunals and fora when the dispute is one which does not arise solely from or relate to the insolvency of the Corporate Debtor. The nexus with the insolvency of the Corporate Debtor must exist.”

Jurisdiction of the NCLT/NCLAT over contractual disputes

“NCLT owes its existence to statute. The powers and functions which it exercises are those which are conferred upon it by law, in this case, the IBC.”

The NCLT has been constituted under Section 408 of the Companies Act, 2013 ―to exercise and discharge such powers and functions as are, or may be, conferred on it by or under this Act or any other law for the time being in force.

Sub-section (1) of Section 60 provides the NCLT with territorial jurisdiction over the place where the registered office of the corporate person is located. NCLT shall be the adjudicating authority ―in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors.

The institutional framework under the IBC contemplated the establishment of a single forum to deal with matters of insolvency, which were distributed earlier across multiple fora. In the absence of a court exercising exclusive jurisdiction over matters relating to insolvency, the corporate debtor would have to file and/or defend multiple proceedings in different fora. These proceedings may cause undue delay in the insolvency resolution process due to multiple proceedings in trial courts and courts of appeal.

“A delay in completion of the insolvency proceedings would diminish the value of the debtor‘s assets and hamper the prospects of a successful reorganization or liquidation. For the success of an insolvency regime, it is necessary that insolvency proceedings are dealt with in a timely, effective and efficient manner.”

Residuary jurisdiction of the NCLT under section 60(5)(c)

The residuary jurisdiction conferred by statute may extend to matters which are not specifically enumerated under a legislation. While a residuary jurisdiction of a court confers it wide powers, its jurisdiction cannot be in contravention of the provisions of the concerned statute.

The residuary jurisdiction of the NCLT under Section 60(5)(c) of the IBC provides it a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings.

“If the jurisdiction of the NCLT were to be confined to actions prohibited by Section 14 of the IBC, there would have been no requirement for the legislature to enact Section 60(5)(c) of the IBC. Section 60(5)(c) would be rendered otiose if Section 14 is held to be the exhaustive of the grounds of judicial intervention contemplated under the IBC in matters of preserving the value of the corporate debtor and its status as a ‘going concern’. “

Ruling on facts 

In the present case, NCLT stayed the termination by the Gujarat Urja Vikas Nigam Limited of its Power Purchase Agreement (PPA) with Astonfield Solar (Gujarat) Private Limited on the ground of insolvency. The order of the NCLT was passed in applications moved by the Resolution Professional of the Corporate Debtor and Exim Bank under Section 60(5) of the Insolvency and Bankruptcy Code, 2016. On 15 October 2019, the NCLAT dismissed the appeal by Gujarat Urja Vikas Nigam Limited under Section 61 of the IBC.

The PPA was terminated solely on the ground of insolvency, since the event of default contemplated under Article 9.2.1(e) was the commencement of insolvency proceedings against the Corporate Debtor. Hence, the NCLT was empowered to restrain the appellant from terminating the PPA. In the absence of the insolvency of the Corporate Debtor, there would be no ground to terminate the PPA. The termination is not on a ground independent of the insolvency. The present dispute solely arises out of and relates to the insolvency of the Corporate Debtor.

“The PPA has been terminated solely on the ground of insolvency, which gives the NCLT jurisdiction under Section 60(5)(c) to adjudicate this matter and invalidate the termination of the PPA as it is the forum vested with the responsibility of ensuring the continuation of the insolvency resolution process, which requires preservation of the Corporate Debtor as a going concern. In view of the centrality of the PPA to the CIRP in the unique factual matrix of this case, this Court must adopt an interpretation of the NCLT‘s residuary jurisdiction which comports with the broader goals of the IBC.”

The Court further explained that the adjudication of disputes that arise dehors the insolvency of the Corporate Debtor, the RP must approach the relevant competent authority. For instance, if the dispute in the present matter related to the non-supply of electricity, the RP would not have been entitled to invoke the jurisdiction of the NCLT under the IBC. However, since the dispute in the present case has arisen solely on the ground of the insolvency of the Corporate Debtor, NCLT is empowered to adjudicate this dispute under Section 60(5)(c) of the IBC.

The Court took further care to clarify that,

“Judicial intervention should not create a fertile ground for the revival of the regime under section 22 of SICA which provided for suspension of wide-ranging contracts. Section 22 of the SICA cannot be brought in through the back door. The basis of our intervention in this case arises from the fact that if we allow the termination of the PPA which is the sole contract of the Corporate Debtor, governing the supply of electricity which it generates, it will pull the rug out from under the CIRP, making the corporate death of the Corporate Debtor a foregone conclusion.”

Conclusion

“NCLT‘s jurisdiction shall always be circumscribed by the supervisory role envisaged for it under the IBC, which sought to make the process driven by trained resolution professionals.”

The jurisdiction of the NCLT under Section 60(5)(c) of the IBC cannot be invoked in matters where a termination may take place on grounds unrelated to the insolvency of the corporate debtor. Even more crucially, it cannot even be invoked in the event of a legitimate termination of a contract based on an ipso facto clause, if such termination will not have the effect of making certain the death of the corporate debtor. As such, in all future cases, NCLT would have to be wary of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor‘s sole contract.

Section 60(5)(c) of the IBC vests the NCLT with wide powers since it can entertain and dispose of any question of fact or law arising out or in relation to the insolvency resolution process. However,

“NCLT‘s residuary jurisdiction, though wide, is nonetheless defined by the text of the IBC. Specifically, the NCLT cannot do what the IBC consciously did not provide it the power to do.”

The Court, however, made it clear that it’s finding on the validity of the exercise of residuary power by the NCLT is premised on the facts of the case at hand and that it was not laying down a general principle on the contours of the exercise of residuary power by the NCLT. However, it is pertinent to mention that the NCLT cannot exercise its jurisdiction over matters dehors the insolvency proceedings since such matters would fall outside the realm of IBC.

[Gujarat Urja Vikas Nigam Limited v. Amit Gupta,  2021 SCC OnLine SC 194, decided on 08.03.2021]


*Judgment by: Justice Dr. DY Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

Appearances before the Court by”

For appellant: Senior Advocate Shyam Diwan and Advocate Ranjitha Ramachandran

For Respondent: Senior Advocate C U Singh and Nakul Dewan

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