Adjudicating Contractual Disputes under IBC makes no Jurisdictional Sense

[By Yash Sinha

The author is an Advocate based out of Delhi. 

The Insolvency and Bankruptcy Code, 2016 (‘IBC’) contains a residuary jurisdiction clause under Sec. 60(5)(c). The Supreme Court has attempted to put in words the inferable scope of the same twice in 2021: once in Gujarat Urja Vikas v. Amit Gupta(‘Amit Gupta’), followed by the very recent judgment in the case of TATA Consultancy Services Limited v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Private Limited(‘TATA’). More interestingly, these judgments deal with the boundaries of IBC’s residuary jurisdiction to adjudicate contractual disputes.

This article attempts to confirm the validity of these judgments by viewing their rationale through a completely different prism: the limited territorial jurisdiction conferred by the IBC upon the NCLT. The author proposes that Sec. 60(5)(c) dissuades the inclusion of contractual disputes within its purview due to this singular reason. Consequently, given the differences in valid yet separate territorial jurisdictions for contractual and insolvency disputes, the judgment in TATA rightly reads Sec. 60(5)(c) as extremely restrictive.

Section I of this article summarises the holdings and the underlying premises of the Supreme Court (‘the Court’) in Amit Gupta and TATA. Therein, the singular focus will be the scope of the residuary jurisdiction clause qua contractual disputes determined by both the decisions. Section II argues and confirms that contractual disputes are best left outside of the NCLT’s ambit, given the jurisdictional scheme of the IBC. It argues that any contrary interpretation leads to disturbing the territorial jurisdiction of the IBC. Therefore, any extra-territorial jurisdiction to the NCLT through Sec. 60(5)(c) is demonstrated as barred by both jurisprudence and rules of interpretation.

  1. Supreme Court’s phased analyses

A.    The restriction is seeded: Amit Gupta

Amit Gupta witnessed one of the contracting parties failing to service its debt to a certain financier, the third party to the contract. Furthermore, the same party failed to discharge its other performative obligations to the second party. The second party claimed this to be a default for the purposes of Sec. 10 of the IBC.

The third-party financier intervened by way of an application under the residuary jurisdiction clause. It prayed for an injunction to preclude any termination of the agreement, which was granted by the NCLT.  Consequently, the Supreme Court was approached and posed with determining the validity of the NCLT’s admission of the application filed under Sec. 60(5)(c). The Court upheld the final order of the NCLT, thereby, holding in favour of the financier by advancing two reasons.

Firstly, the Court stated that contractual termination was not covered by Sec. 14. That is, the moratorium clause of the IBC does not put a hold on such disputes being raised in spite of an IBC proceeding already underway. This was inferred as denoting the probable application of Sec. 60(5)(c). Secondly, Sec. 238 was read by the Court as re-asserting the IBC as lex specialis, which overrides general legislation. These two factors were collectively taken to interpret the phrase “questions of law or fact arising from or in relation to the insolvency resolution proceedings” occurring in Sec. 60(5)(c), liberally. However, this was disclaimed as a holding specific to the facts of Amit Gupta. Regardless, it was categorically stated that irrespective of the facts of any case in the future, NCLT, while exercising its jurisdiction under IBC, cannot adjudicate upon disputes which are completely unrelated to the insolvency proceedings.

Succinctly put, the termination of the contract may have had some implication on the financier’s rights as a creditor. This alone justified the utilisation of the residuary jurisdiction clause. It is this holding that has come to be affirmed verbatim in TATA. However, this time the Court detailed the underlying premise for its position.

B.Better exposition of the restriction: TATA

To begin with, TATA saw one contracting party attempting to terminate an agreement for the other’s lapses. The lapse pertained to executing an agreed-upon construction within the stipulated time.

The party in breach, however, was undergoing insolvency resolution proceedings from before. Notably, the contract in question was entered into before the initiation of the insolvency proceedings. The contract being a source of future income, the breaching party challenged the attempted termination so that its insolvency resolution was not adversely affected. Failing this, it claimed that the termination would have a direct and adverse impact on the latter. Consequently, it approached the NCLT under the residuary jurisdiction clause challenging the same as well as sought an ad-interim stay. The NCLT and NCLAT having upheld the application, the Court was again asked to verify if Amit Gupta applied.

The Court answered the question in the negative and held the corporate debtor’s application to be lacking in the jurisdiction. While the principles of Amit Gupta were re-iterated, the Court went a step further to delineate the boundaries of the residuary jurisdiction clause. It stated that the clause does not cure the patent lack of jurisdiction of IBC courts. This infirmity exists when the subject of such applications is wholly unrelated to the insolvency proceedings. The notices alleging lapses, which preceded the termination notice, had no bearing upon the insolvency proceedings which were underway. Succinctly put, a contracting party may be a corporate debtor to some unrelated insolvency proceedings. However, the Court states, this contractual relationship per se ought not to guarantee the interference of the IBC.

  1. Territorial jurisdiction as a bar on an entertaining contractual dispute

There exists no categorical assertion by the Court on one aspect of Sec. 60(5)(c): its extra-territorial application. That is, whether it can be applied to override Sec. 60(1) of the IBC to allow any contractual party to initiate/join insolvency proceedings when no registered offices of the corporate debtor exist.

The territorial jurisdiction for a court of law in case of a contractual dispute is governed by principles laid down in the case of A.B.C. Laminart Private Limited v. A. P Agencies, Salem read with those in Bhagwandas Goverdhandas Kedia v. M/S. Girdharilal Parshottamdas. Summed up collectively, these precedents state that the place of formation of the contract or the residence of one of the parties need not be a pre-requisite to satisfy Sec. 20 of the CPC. Hence, the territorial jurisdiction for raising legally sustainable contractual disputes is relatively wider.

Given this position, Sec. 60(1) of the IBC comes across as deeply restrictive: it confines the jurisdiction of the NCLT to the corporate debtor’s registered offices situated in limits coextensive with its local jurisdiction.

The author argues that interpreting residuary jurisdiction in the IBC so as to confer extra-territorial jurisdiction over independent contracts would have been absurd.

Amit Gupta and Tata do not address this exclusively procedural conflict, all the while dealing with the substantive boundaries of the residuary jurisdiction clause. However, there exist sufficient precedents which state that the residuary jurisdiction clause is not a source of extra-territorial jurisdiction.

NCLAT, for instance, initiated the discussion in its decision Spectrum Voyages. Therein, it was stated that Sec. 60(1) talks about territorial jurisdiction over the place of registered offices of the debtor and personal guarantors, not that of the creditors. In other words, no other factor may supply territorial jurisdiction to the NCLT in this regard.

NCLT, Allahabad read the legislative intent of Sec. 60(5) as clubbing any disputes in relations to/arising out of the pending ones.[i] However, it was clarified that this cannot circumvent the requirements of Sec. 60(1). NCLT Mumbai has been more specific in this assertion.[ii]

Furthermore, it is also submitted that given the IBC’s text, it granting jurisdiction to contractual disputes which may not fall in the jurisdiction of Sec. 60(1) would be invalid. As submitted previously, there exists a wider territorial jurisdiction with respect to contractual disputes given the prevailing interpretation of Sec. 20 of the CPC. The residuary jurisdiction clause permits and confines proceedings to the location of the corporate debtor’s offices. Therefore, Sec. 60(1) clearly is in conflict with Sec. 20 of the CPC.  If Sec. 238 of the IBC is to be factored in, it will override the provisions of the CPC, if and when IBC provisions come in conflict with those. In any case, lex specialis takes precedence over a general law. Hence, reading jurisdiction for contractual disputes as covered by the residuary jurisdiction clause is extremely untenable.

Conclusion

The prevailing approach towards the residuary jurisdiction clause is clearly restrictive. The Supreme Court reads it to state that the clause is meant to curb adverse implications on an ongoing insolvency proceeding. Hence, it should be read as an enabling clause that brings into fold the disputes under other laws that may have an impact on the proceedings under the IBC, which include those arising from contractual obligations.

The unexplored aspect of this is the extra-territorial jurisdiction this may confer on the courts exercising jurisdiction under the IBC. Including but not limited to contractual disputes, any dispute otherwise giving a civil court jurisdiction under Sec. 20 of the CPC gets overlooked.

This subversion may lead parties to forum-shop by choosing to bypass courts with civil jurisdiction. It is proposed that the strict requirement for entertaining contractual disputes is in line with the IBC framework. The territorial jurisdiction clause sees an exception in the residuary jurisdiction clause. The interpretation proffered by Amit Gupta and purposively narrowed down in TATA is correct in making the latter contingent to an ‘implication based’ test. Unless and until there is any impact on the resolution proceeding and the creditors therein, the intervention by way of this clause to disrobe jurisdiction of another court must be avoided. This shall be in line in keeping the IBC as an exclusive and independent remedy.

[i]Kanpur Plastipack Limited v. H.L. Tech Fabrics Limited, 2017 SCC OnLine NCLT 1675 (All).

[ii]In the matter of: Abhay N Manudhane and Anr., 2019 SCC OnLine NCLT 8686 (Mumbai).

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