NCLAT Upholds Contract Termination by BIDA Amidst Insolvency Proceedings

Tribunal Rules Moratorium Does Not Shield Against Legitimate Contractual Termination Unrelated to Insolvency

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has dismissed an appeal by Pradeep Upadhyay, the liquidator of Dugal Associates Private Limited, challenging the termination of a contract by the Bhadohi Industrial Development Authority (BIDA). The decision affirms that the protective ambit of the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), does not extend to contract terminations driven by legitimate and unrelated contractual grounds.

The appeal stemmed from an order by the National Company Law Tribunal (NCLT), which upheld BIDA's decision to terminate a civil construction contract with Dugal Associates amidst ongoing Corporate Insolvency Resolution Process (CIRP) proceedings. The appellant argued that the contract termination was influenced by the insolvency process and should be protected by the moratorium. However, BIDA maintained that the termination was due to persistent deficiencies in contract performance, unrelated to the insolvency proceedings.

The NCLAT bench, comprising Justice Ashok Bhushan and Arun Baroka, found that the termination was indeed based on legitimate contractual grounds. The tribunal noted that BIDA had repeatedly communicated concerns over project delays and non-compliance by Dugal Associates, long before the insolvency proceedings began. The ruling emphasized that the NCLT's jurisdiction under Section 60(5) of the IBC is not applicable for disputes that do not directly relate to the insolvency of the corporate debtor.

Drawing parallels to the Supreme Court's decision in Tata Consultancy Services Limited v. Vishal Ghisulal Jain, the NCLAT clarified that the termination of a contract, if not motivated by insolvency, cannot be shielded under the moratorium provisions. The tribunal highlighted that the trajectory of events leading to the contract's termination clearly indicated it was not a pretext to escape obligations due to the insolvency status.

The tribunal's judgment underscores the importance of distinguishing between contractual breaches and insolvency-triggered actions, reaffirming that the moratorium is not a blanket protection for all corporate actions during insolvency. This ruling serves as a precedent for future cases involving the intersection of contract law and insolvency proceedings.

Bottom Line:

Insolvency and Bankruptcy Code, 2016 - Termination of contract during Corporate Insolvency Resolution Process (CIRP) - Termination not motivated by insolvency of Corporate Debtor - Moratorium under Section 14 does not protect against termination based on legitimate contractual grounds unrelated to insolvency - NCLT lacks residuary jurisdiction under Section 60(5) to adjudicate contractual disputes independent of insolvency.

Statutory provision(s): Insolvency and Bankruptcy Code, 2016 - Sections 14, 60(5)

Pradeep Upadhyay v. Bhadohi Industrial Development Authority (BIDA), (NCLAT)(Principal Bench, New Delhi) : Law Finder Doc Id # 2806114