NCLT: Section 14 of IBC Seeks to Preserve the ‘Going Concern’ Status ‘If’ the Corporate Debtor is a Running Unit

NCLT: Section 14 of IBC Seeks to Preserve the ‘Going Concern’ Status ‘If’ the Corporate Debtor is a Running Unit

The National Company Law Tribunal (“NCLT”), Ahmedabad by its division member bench comprising of Dr. Madan B. Gosavi (Judicial Member) and Shri Ajai Das Mehrotra (Technical Member), observed that Adjudicating Authority has to declare moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) to protect and preserve the assets of the Corporate Debtor during the CIRP and also to protect the Corporate Debtor’s status as a going concern, if Corporate Debtor is a running unit.

The factual matrix of the case is that on 14 February, 2015, Mangalore Refinery and Petrochemicals Limited (earlier known as ONGC Mangalore Petrochemicals Limited)- respondent had awarded tender in favor of JBF Petrochemicals Limited (“Corporate Debtor”) for supplying Paraxylene to the latter and accordingly an Agreement was executed on 12 April, 2016.

On 28 January, 2022 the Corporate Debtor was admitted into Corporate Insolvency Resolution Process (CIRP). Subsequently, ONGC terminated the Agreement on 14 June, 2022 on the Corporate Debtor had committed default in buying Paraxylene and there has been no off –take continuously for three months, the agreement dated 12 April, 2016 stood terminated.

It was contended by the Applicant that the Respondent cannot terminate the Agreement to supply Paraxylene during the moratorium. Hence, the letter dated 14 June, 2022 under reference is “bad in law and void.” The Agreement between the Corporate Debtor and the Respondent to supply Paraxylene was still subsisting.

It was contended that the Corporate Debtor had committed default in not lifting the Paraxylene as per the terms of the Agreement. The Agreement was eligible for termination much prior to initiation of CIRP of the Corporate Debtor.

There was no breach of moratorium declared by this Adjudicating Authority. The provisions of Section 60(5) (C) of IBC, 2016 cannot be pressed into service to compel the third party to perform its part of the contract which has already been eligible for termination much prior to initiation of CIRP due to default committed by the Corporate Debtor itself. Thus, it was contended that this Application was not maintainable.

The Bench observed that the Corporate Debtor was established much prior to 2012, however, it could not commence its business activities before or even after initiation of CIRP. The default in the form of failure to purchase requisite quantities of Paraxylene was committed prior to commencement of CIRP and ONGC had exercised its right to terminate the Agreement. It was not a going concern even as on today, opined the bench.

The bench noted that in this case, the Corporate Debtor, being in Petrochemical Industry has never been functional at all. In this regard the NCLT observed, “Adjudicating Authority has to declare moratorium under Section 14 of the IBC, 2016 to protect and preserve the assets of the Corporate Debtor during the CIRP and also to protect the Corporate Debtor’s status as a going concern, if Corporate Debtor is a running unit.”

The bench further expressed that it has residuary jurisdiction under Section 60(5) (C) of the IBC, 2016 which is limited, hence they cannot give any finding on the issue whether the agreement in between two parties is still subsisting or not.

Further, the bench on perusal of Section 60(5)(c) of the IBC, 2016 observed, “Adjudicating Authority has been conferred with the jurisdiction to entertain and dispose of any question of law or facts arising out of or in relation to the Insolvency resolution or liquidation process of Corporate Debtor”.

However, in this case the Corporate Debtor was never a running unit. It cannot be said that by the termination of the agreement by the Respondent, the Corporate Debtor suffered any erosion of assets during the CIRP, the NCLT stated.

Considering the facts of the case and law applicable relating thereto, the NCLT held that the application was not maintainable as the dispute in question between the Corporate Debtor and Respondent is dehors the insolvency proceeding. The default in this case, in not purchasing Paraxylene was preceding the CIRP commencement and the Respondent had exercised its contractual right to terminate the agreement, while the Corporate Debtor was never a going concern.

Lastly, since the issue dehors the insolvency proceeding, NCLT rejected the application and disposed the same.