Uncrystallised Contractual Rights Not Part Of Corporate Debtor's Assets Protected By Moratorium: NCLT Mumbai

The National Company Law Tribunal (NCLT) at Mumbai has recently held that uncrystallised contractual rights do not form part of a corporate debtor's “assets” protected during moratorium. The tribunal made the ruling as it dismissed Fabtech Sugar Limited's plea seeking restoration of its cancelled grid connectivity, that that had never been operationalised.

The tribunal found that Maharashtra State Electricity Transmission Company Limited's (MSETCL) termination of grid connectivity under the Energy Purchase Agreement (EPA) during moratorium was a contractual issue unrelated to insolvency and therefore outside the scope of the Insolvency Code.

A bench of Judicial Member Mohan Prasad Tiwari and Technical Member Charanjeet Singh Gulati, in an order on 3 December, held that the EPA only granted Fabtech permission to sell surplus power and did not amount to an asset protected under moratorium.

“Mere expectant contingent or un-crystalized contractual rights do not constitute “Assets” within the meaning of the Code. Further, not every executory or conditional contract amounts to an asset. The EPA as such is nothing but a contractual permission for evacuation of surplus power generated and as in the facts of the present case the EPA was not put into use or was put in force owing to the factors of non-completion of related grid connectivity infrastructure it at best gave an un-crystalized contractual rights in favour of the Corporate Debtor and could therefore, not fall within the definition of “assets” of the Corporate Debtor", it said.

Fabtech had proposed its co-generation plant in 2015 and completed its portion of the transmission line in 2018. MSETCL's parallel line, delayed due to right-of-way issues, was completed in March 2021. Fabtech was then required to apply for final grid connectivity under the EPA.

According to MSETCL, Fabtech failed to respond to a notice issued on February 23, 2022 calling upon it to do so, resulting in cancellation. The company entered CIRP on 13 May 2021, and the CoC approved a resolution plan on 8 April 2022.

Fabtech argued that the cancellation issued a day before CoC approval violated the moratorium and undermined the resolution plan, which envisaged revenue from the sale of surplus power under the EPA. It contended that the agreement created a contractual right to sell electricity, which amounted to an “asset” protected during moratorium.

MSETCL refuted this, stating that the cancellation stemmed solely from Fabtech's non-compliance in failing to apply for final connectivity, and that the dispute was purely contractual and unrelated to insolvency. Such matters, it argued, lay outside the tribunal's adjudicatory jurisdiction.

Accepting MSETCL's position, the tribunal held that the EPA was never operationalised due to Fabtech's failure to perform its part of the contract, and therefore could not be considered part of its insolvency estate. It added that since the cancellation was not triggered by insolvency, the moratorium argument did not arise.

“Once, it is arrived that this Authority does not have jurisdiction over the issue raised in the Application, the other contention regarding violation of Moratorium under section 14 becomes academic in nature,” the tribunal noted.

The tribunal further recorded that Fabtech had been granted fresh grid connectivity on 1 August 2024 on an application filed by the Resolution Professional, observing that the company's substantive grievance over connectivity had been addressed.

The application was accordingly dismissed.