Termination Of Contract For Persistent Defaults Not Hit By IBC Moratorium; Section 14 Protects Insolvency, Not Poor Performance

Termination Of Contract For Persistent Defaults Not Hit By IBC Moratorium; Section 14 Protects Insolvency, Not Poor Performance

Introduction

The National Company Law Appellate Tribunal (NCLAT), New Delhi, has held that termination of a contract on account of prolonged non-performance and contractual breaches does not fall within the protection of Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).

A Bench comprising Justice Ashok Bhushan (Chairperson) and Arun Baroka (Technical Member) dismissed the appeal filed by Mr. Pradeep Upadhyay, Liquidator of M/s Dugal Associates Pvt. Ltd., against Bhadohi Industrial Development Authority (BIDA). The Tribunal upheld the NCLT, New Delhi’s order dated June 6, 2025, ruling that the moratorium does not shield a corporate debtor from termination for pre-existing contractual defaults.

Factual Background

M/s Dugal Associates Pvt. Ltd. was awarded a civil construction contract by Bhadohi Industrial Development Authority (BIDA) for execution of certain building works. The project, however, suffered persistent delays and performance lapses despite multiple extensions granted by BIDA. Subsequently, the Corporate Insolvency Resolution Process (CIRP) was initiated against the corporate debtor. During the moratorium period, BIDA terminated the contract, blacklisted the company, and forfeited its earnest and retention money. The Liquidator challenged the termination, claiming it violated the moratorium imposed under Section 14 of the IBC.

Procedural Background

The Liquidator approached the NCLT, contending that BIDA’s actions directly resulted from the insolvency and therefore violated the moratorium. The NCLT, however, dismissed the plea, observing that the termination stemmed from long-standing non-performance rather than insolvency. Aggrieved by this, the Liquidator appealed before the NCLAT, arguing that the termination hindered the CIRP process and diminished the chances of revival.

Issues

1. Whether the termination of a contract during the moratorium period violates Section 14 of the IBC.

2. Whether the contract between BIDA and the corporate debtor was “essential” to the continuation of the CIRP, warranting judicial interference under the principles of Gujarat Urja Vikas Nigam Ltd.

Contentions of the Parties

Appellant (Liquidator): The termination and blacklisting were direct consequences of the insolvency, violating the moratorium under Section 14 of the IBC. The District Collector had formed a committee to assess the delay; BIDA’s termination before receiving the report was arbitrary. The contract was critical to the revival of the corporate debtor; thus, its termination affected the CIRP’s success. The appellant cited Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta to argue that the NCLT could stay termination of contracts essential to the CIRP.

Respondent (Bhadohi Industrial Development Authority): The termination resulted from chronic contractual defaults, not insolvency. Multiple show-cause notices and extensions were issued to the corporate debtor before termination. Blacklisting and forfeiture were contractual consequences, not recovery actions, and therefore outside the scope of Section 14. The contract was not essential to the CIRP, as no ongoing supply or financial arrangement existed at the time of termination.

Reasoning and Analysis

The Tribunal found that the termination stemmed from persistent performance deficiencies and not the initiation of insolvency proceedings. “The corporate debtor was providing construction services to the Respondent and not availing any goods or supplies. The project was repeatedly delayed despite extensions, giving the Respondent legitimate grounds to terminate the contract independent of insolvency.” The NCLAT relied on Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain, reiterating that the moratorium under Section 14 does not protect contracts terminated for performance-related breaches.

The Court stated that, “The NCLT does not possess overarching jurisdiction to adjudicate contractual disputes arising independently of insolvency. Section 14 cannot be stretched to cover all terminations merely because CIRP is ongoing.” The Bench also held that the Gujarat Urja exception—protecting contracts essential to the success of CIRP—did not apply since the construction contract was not central to the corporate debtor’s business continuity.

Implications

This ruling clarifies that the moratorium under Section 14 of the IBC is not an umbrella protection for all contractual relationships involving the corporate debtor. Termination arising from non-performance or breach will not be restrained merely due to pending insolvency proceedings. The decision reinforces that the NCLT’s jurisdiction is confined to ensuring compliance with the IBC and does not extend to rewriting or adjudicating commercial contracts unrelated to insolvency resolution.

In this case the appellant was represented by Mr. Sanjeev Panda, Mr. Sumit Shukla, Advocates with Mr. Pradeep Upadhyay, Liquidator. Meanwhile the respondent was represented by Mr. Shivam Kumar, Ms. Upasana Singh, Advocates.