SC cautions NCLT & NCLAT on interference with party's contractual right to terminate contract

The Supreme Court Tuesday cautioned the NCLT and NCLAT on interference with a party's contractual right to terminate a contract and observed that the residuary jurisdiction of the tribunal cannot be invoked if the termination of a contract is based on a ground unrelated to the insolvency of the corporate debtor. The apex court said even if the contractual dispute arises concerning insolvency, a party can be restrained from terminating the contract only if it is central to the success of the Corporate Insolvency Resolution Procedure (CIRP).

"...we would like to issue a note of caution to the NCLT and NCLAT regarding interference with a party's contractual right to terminate a contract. Even if the contractual dispute arises in relation to the insolvency, a party can be restrained from terminating the contract only if it is central to the success of the CIRP," a bench of Justices D Y Chandrachud and A S Bopanna said.

"Crucially, the termination of the contract should result in the corporate death of the corporate debtor," the bench said in its 25-page verdict.


The top court delivered the judgement on a plea against the June 2020 order of the National Company Law Appellate Tribunal (NCLAT) which had upheld an interim order passed by the National Company Law Tribunal (NCLT) in a matter about the issuance of notice of termination of the contract between two parties.

The bench said in its verdict, "Thus, the residuary jurisdiction of the NCLT cannot be invoked if the termination of a contract is based on grounds unrelated to the insolvency of the corporate debtor."

Dealing with the facts of the matter, the top court said in the absence of jurisdiction over the dispute, the NCLT could not have imposed an ad-interim stay on the termination notice.

While setting aside the NCLAT order, the bench said the appellate tribunal had incorrectly upheld the interim order of the NCLT.