“Smokescreen” vs. Genuine Breach: NCLAT Upholds Contract Termination During Moratorium if Unrelated to Insolvency

The Hon’ble National Company Law Appellate Tribunal (NCLAT), in its judgment dated November 07, 2025, addressed the issue of whether a statutory authority can terminate a construction contract during the CIRP moratorium when the termination is the culmination of long-standing performance disputes.

The Corporate Debtor, M/s Dugal Associates Private Limited, was engaged by the Respondent (BIDA) in 2016 for a construction project. Due to delays, BIDA issued multiple show-cause notices between 2017 and 2019,. CIRP was initiated against the Corporate Debtor on November 11, 2019. Subsequently, on January 28, 2020—during the moratorium—BIDA terminated the agreement, blacklisted the Corporate Debtor, and forfeited the security deposit.

The Appellant (Liquidator) challenged this termination, arguing that it was triggered by the insolvency and violated the Section 14 moratorium. They sought the release of retention money and the removal of the blacklisting, contending that the termination prevented the Corporate Debtor from being sold as a going concern.

The Liquidator argued that the termination was a direct consequence of the insolvency proceedings. Conversely, BIDA contended that the project was delayed long before CIRP, with only partial completion despite multiple extensions. They argued the termination was a result of sustained contractual non-compliance, not the insolvency filing.

Dismissing the appeal, the Hon’ble NCLAT laid down the following key principles:

1. Distinction from Gujarat Urja: The NCLAT referred to the Supreme Court’s ruling in Gujarat Urja Vikas, noting that NCLT’s interference is permissible only when a contract is terminated solely on the ground of insolvency. In Gujarat Urja, the termination was based on an ipso facto clause (insolvency event of default). However, in the present case, the termination was based on performance deficiencies documented well before the CIRP.

2. No “Residuary Jurisdiction” for Independent Disputes: Citing Tata Consultancy Services v. Vishal Ghisulal Jain, the NCLAT held that the NCLT’s residuary jurisdiction under Section 60(5) cannot be invoked for contractual disputes arising independently of the insolvency. If the termination is not a “smokescreen” for an insolvency-related exit, the NCLT cannot intervene.

3. Moratorium is Not a Shield for Non-Performance: The NCLAT observed that BIDA was not recovering property or stopping supply of goods (which might violate Section 14(1)(d) or 14(2)); rather, it was availing services which the Corporate Debtor failed to provide. The Court found that the termination was the “culmination of protracted proceedings” regarding the Corporate Debtor’s failure to meet timelines.

4. Centrality to CIRP: The Court noted that for the NCLT to intervene, the contract must be central to the success of the CIRP, such that its termination would cause the “corporate death” of the debtor. The Appellant failed to establish that this specific contract was indispensable to the survival of the Corporate Debtor.

The judgment reinforces that the IBC moratorium is not an absolute bar against contract termination. It clarifies that where a termination is founded on legitimate contractual grounds—such as prolonged breach and non-performance—and is not motivated by the insolvency itself, the NCLT has no jurisdiction to stay such termination or adjudicate the underlying contractual dispute.