Moratorium Under IBC Does Not Prevent Contract Termination For Pre-Existing Defaults: NCLAT Rejects Liquidator’s Plea [Read Order]

The National Company Law Appellate Tribunal (NCLAT) has held that the moratorium under the Insolvency and Bankruptcy Code, 2016 does not prohibit the termination of a contract where the termination of the contract is based on the pre-existing defaults in the contract and is not based on insolvency. The Appellate Tribunal dismissed the appeal and refused to interfere with the termination of a construction contract during CIRP.

The appeal was filed by Pradeep Upadhyay, Liquidator of Dugal Associates Private Limited, against an order passed by the NCLT, which had refused to stay the termination of a construction contract by the Bhadohi Industrial Development Authority (BIDA).

The corporate debtor had signed a construction contract with BIDA in 2016 for the implementation of infrastructure work. However, due to continuous delays and default, BIDA had issued notices, extended timelines, and finally terminated the contract on 28 January 2020, blacklisting the contractor and forfeiting security deposits.

However, CIRP had been initiated against the corporate debtor in December 2019, before the termination of the contract. The Liquidator had moved the NCLT, claiming that the termination and its consequent actions were prohibited by the moratorium under Section 14 of the IBC.

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The Liquidator relied on the fact that as soon as the CIRP began, all proceedings related to the assets and contractual rights of the corporate debtor were stayed as a result of the moratorium. It was submitted that the termination of the contract during the CIRP frustrated the resolution process and diminished the value of the corporate debtor as a going concern. The Liquidator prayed for the revival of the contract, de-blacklisting, and the release of the withheld amount.

The BIDA further submitted that the termination was the culmination of long-standing contractual defaults and was not linked to insolvency. It was argued that the moratorium cannot be used to shield the corporate debtor from consequences of breaches committed much before initiation of CIRP.

The two-member bench comprising Justice AshokBhushan (Chairperson) and Mr. Arun Baroka (Technical Member) rejected the appeal and held that the moratorium applies only to actions triggered by insolvency and not to termination arising out of independent contractual breaches. The Tribunal relied on the Supreme Court’s rulings in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta and Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain, reiterating that courts can interfere with termination only where it is solely on account of insolvency and is central to the survival of the corporate debtor.

Acordingly,the Appellate Tribunal further held that Section 60(5) of the IBC cannot be invoked to adjudicate pure contractual disputes unrelated to insolvency.

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