India – NCLT Cannot Stay Termination Of Contract Based On Grounds Unrelated To Corporate Debtor’s Insolvency.

Order dated: 23 November 2021

Summary:

In the present case, a facilities agreement executed between TATA Consultancy Services Ltd. (TCS) and SK Wheels Pvt. Ltd. (SK Wheels) was terminated by TCS for repeated deficient services by SK Wheels. The issue in the present case arose as the termination notice dated 10 June 2019 (Termination Notice) was issued by TCS after the NCLT had initiated insolvency proceedings against SK Wheels in March 2019. The NCLT’s order staying the Termination Notice and directing TCS to comply with the terms of the facilities agreement was upheld by NCLAT. This judgment of the NCLAT was challenged before the SC.

The issue under consideration before the SC was whether the NCLT can adjudicate contractual dispute between the corporate debtor and a third party, where termination of contract is based on grounds unrelated to corporate debtor’s insolvency. The SC held that a party to a contract with a corporate debtor has a right to terminate the same unless:

(a) The contractual dispute arises in relation to the insolvency of the corporate debtor; and

(b) The contract is central to the success of the insolvency proceedings of the corporate debtor and its termination will result in the corporate death of the corporate debtor.

For our detailed analysis of the SC’s judgment, click here.

For further information, please contact:  

Souvik Ganguly, Partner, Acuity Law