To keep the Corporate Debtor as a going concern, the Power Purchase Agreement cannot be terminated

The Insolvency and Bankruptcy Code, 2016 (IBC) is widely regarded as a significant overhaul of India's debt recovery and business regulations. The IBC is more than just a debt collection statute. The IBC's main goal is to help business debtors get back on their feet. This is accomplished by delivering a timely resolution while balancing the interests of both the debtor and the creditor by operating the corporate debtor as a going concern and maximizing the value of the corporate debtor's assets. The NCLT's authority is restricted under the IBC and the Companies Act, 2013, to establishing default and verifying that the whole CIRP and liquidation comply with the IBC. However, since the commencement of the IBC, there have been many legal concerns surrounding the scope of the NCLT in adjudicating ancillary to the CIRP disputes and the NCLT's authority in areas of legal questions. In the case of Gujarat Urja Vikas Nigam v. Amit Kumar and Others, one such scenario emerged.

“A Power Purchase Agreement (PPA) cannot be terminated during the moratorium period under the Insolvency and Bankruptcy Code”, the Supreme Court has held. A Power Purchase Agreement, or electricity power agreement, is a contract between two parties, one which generates electricity and one which is looking to purchase electricity.

A Division Bench of the Supreme Court led by Justice Dr. Dhananjaya Y. Chandrachud and Justice M.R. Shah held that a buyer cannot terminate a Power Purchase Agreement even if it has a clause that allows termination if a power supplier is declared bankrupt. As a result, the insolvency tribunal rightly delayed the termination because any alternative action might have resulted in the company's corporate death, according to the apex court. The lawsuit stems from a 25-year agreement between Gujarat Urja Vikas Nigam Ltd., a state entity, and Astonfield Solar Gujarat Pvt., a power generator, for the procurement of solar electricity. Natural calamities caused financial problems for Astonfield, prompting lenders to declare it a non-performing asset in 2015.

In February 2019, the National Company Law Tribunal approved the company's insolvency resolution procedure, prompting GVNL to send a notice of termination of the PPA. The resolution specialist objected to the move. The NCLT stayed the notice, and an appeal against it was dismissed by the Appellate Tribunal (NCLAT), prompting the power purchaser to file a petition with the Supreme Court.

BACKGROUND

The Gujarat government allocated a 25-megawatt capacity project for building and establishing a solar photovoltaic based power plant for a term of 25 years on 1 August 2009. On 30 April 2010, the Gujarat Urja Vikas Nigam Limited (GUVNL) and Astonfield Solar (Gujarat) Pvt. Ltd. (ASGPL) signed a Power Purchase Agreement. Two Supplementary Agreements, dated 7 August 2010 and 13 April 2011, were added to the PPA. The project was completed with 1.296 MW capacities on 11 December 2012, and 10.212 MW capacities on 20 December 2012, with a PPA term of December 2037.

The first big issue emerged between July and December 2015. Heavy rains and floods hit Gujarat at this time, forcing the plant to shut down for two months. Due to the floods, the plant was badly damaged, and power production was briefly halted. Normalcy in power output has been restored by December 2015, and the Plant was producing electricity at 70% of its overall generating capacity. Gujarat was once again flooded in June and July 2017 as a result of severe rains. The floods caused significant damage to the plant. As a result, it could only run at around 10% of its former capability. ASGPL was unable to fully service its debt to the Financing Parties, namely the Export-Import Bank of India (Exim Bank) and Power Finance Corporation, due to the financial stress caused by the disruptions and damage for which insurance claims were still pending. As a result, the Financing Parties proposed to declare the ASGPL a non-performing asset (NPA). The ASGPL informed the appellant on the impact of the rain and floods on the Plant, as well as the steps it had taken, on 15 February 2018, in line with Article 8.1 of the PPA.

ASGPL asked the appellant to accept the letter as an official notification detailing the cause of the Corporate Debtor's failure to execute its duties under the PPA and to certify that this occurrence qualifies as a Force Majeure Event under Article 8.1. The Exim bank, on the other hand, designated it a nonperforming asset (NPA).

ANALYSIS

The purpose of this case analysis is to examine the case and emphasize numerous aspects, issues, and the ultimate verdict.

The NCLT accepted a petition brought by the ASGPL itself under Section 10 of the IBC on 20 November 2018. The NCLT began the Corporate Insolvency Resolution Process in respect of ASGPL, imposed a moratorium, and nominated Amit Gupta as the Insolvency Resolution Professional (IRP), who was eventually confirmed as the Resolution Professional (RP) by the NCLT. GUVNL submitted a notice of default, claiming that the ASGPL's CIRP under the IBC constitutes an event of "default" under Article 9.2.1(e) of the PPA. GUVNL demanded that ASGPL correct this default within 30 days of receiving the notice, failing which GUVNL said that the PPA will be terminated by issuing a termination notice.

In May 2019, the IRP/RP and Exim bank filed applications with the NCLT under Section 60(5) of the IBC with the Notices issued by the GUVPL to ASGPL, seeking an injunction preventing the appellant from terminating the PPA. On 29 August 2019, the NCLT issued its final order and allowed the IRP/applications; RP's preventing the GUVPL from terminating the PPA. However, NCLT made it plain in paragraph 35 of the decision that if liquidation proceedings are brought against the Corporate Debtor.

Para 35 states that:

“It is, however; made clear that if due to any reason, the Corporate Debtor goes into liquidation, the Respondent Company will be at liberty to terminate the Power Purchase Agreement.”

PROCEEDINGS BEFORE THE NCLT

The NCLT issued the order in response to petitions filed by the ASGPL's Resolution Professional and Exim Bank under Section 60(5) of the Insolvency and Bankruptcy Code of 2016. The NCLAT dismissed the appellant's appeal under Section 61 of the IBC on 15 October 2019, holding that GUVPL could not terminate the PPA merely because the ASGPL, which was supplying electricity to the appellant during the CIRP, had initiated a CIRP. Furthermore, it barred the appellant from terminating the PPA even if the Corporate Debtor was liquidated, thus overturning the NCLT's remarks in paragraph 35 of the judgement.

The decision by the NCLAT is challenged and therefore this appeal. So, now the issues before the Supreme Court were:

• whether the NCLT/NCLAT can exercise jurisdiction under the IBC over disputes arising from contracts such as the PPA?

• Whether the appellant‘s right to terminate the PPA in terms of Article 9.2.1(e) read with 9.3.1 is regulated by the IBC?

PROCEEDINGS BEFORE THE SUPREME COURT

The court noted that the PPA sought to be terminated exclusively based on insolvency because the event of default anticipated under Article 9.2.1(e) was the ASGPL's insolvency proceedings. There would be no need to terminate the PPA if ASGPL were not insolvent; therefore the planned termination is not based on anything other than insolvency. The current issue is exclusively based on and related to ASGPL's insolvency. The court pointed out that the decision to terminate the PPA was made by contracting parties in connection with the start of insolvency proceedings against ASGPL following the agreement's provisions, not by any governmental or statutory entity performing its public law responsibilities. The only claim of default made against ASGPL was that it was undergoing CIRP, triggering the NCLT's jurisdiction under section 60(5)(c) of the IBC.

The Supreme Court observed that Section 60(5) of IBC provides the NCLT jurisdiction to “deal with any question of priorities or any question of law or facts arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under the Code.”

The IBC envisaged the creation of a single forum to deal with insolvency problems, which had previously been dispersed over various fora. In the case of Arcelor Mittal vs. Satish Kumar Gupta, it was also established that the NCLT is the exclusive authority in the IBC when it comes to considering or disposing of applications against corporate debtors. Furthermore, the Supreme Court stated in this case that the NCLT's 'Residuary Jurisdiction' is to be read in conjunction with the entire IBC and that a combined reading of both would reveal that the NCLT is empowered under the IBC to adjudicate questions of law or fact arising from or with insolvency resolution proceedings.

The Supreme Court clarified the application of these rules, ruling that when contractual disputes arising out of or with insolvency resolution or liquidation processes, the NCLT is competent to judge them. The previous clause that the NCLT is constrained by the IBC's restrictions remained in place, however. The Supreme Court decided that the NCLT has broad authority to decide legal and factual issues arising out of or in connection with insolvency resolution procedures.

As per paragraph 75,

“Reliance has also been placed on the judgement of this Court in Embassy Property (supra), where this Court held that the NCLT and NCLAT did not have jurisdiction over a dispute arising under the Mines and Minerals (Development and Regulation) Act, 1957, in relation to the refusal of the State of Karnataka to extend a mining lease. The primary consideration which weighed with this Court while coming to its decision was that NCLT cannot have jurisdiction on matters of public law.”

The paragraph further states, “37….Clause (c) of Sub-section (5) of Section 60 is very broad in its sweep, in that it speaks about any question of law or fact, arising out of or in relation to insolvency resolution. But a decision taken by the government or a statutory authority in relation to a matter which is in the realm of public law, cannot, by any stretch of imagination, be brought within the fold of the phrase “arising out of or in relation to the insolvency resolution” appearing in Clause (c) of Sub-section (5)…” This is what was held by the court.

In this situation, no governmental or statutory entity acting within the scope of its public law responsibilities has decided to terminate the PPA. The judgement was made exclusively based on the start of insolvency proceedings against the Corporate Debtor following an agreement between the parties.” The court supported the NCLT's position on Section 238 of the IBC, which states that the IBC would take precedence over other laws, including a document that has effect as a result of any such legislation.

The court referred to Section 238 in Para 77, which states that:

“Section 238 of the IBC stipulates that IBC would override other laws, including an instrument having effect by virtue of any such law. The NCLT in its decision dated 29 August 2019 gave detailed findings on the issue of whether the PPA is an instrument within the meaning of section 238 of the IBC.

Section 238 of the IBC provides: Section 238 – Provisions of this Code to override other laws the provisions of this Code shall have an effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

The GERC was given authority to resolve disputes between the Generating Company and the distributing Licensee under Section 86(1)(f) of the Electricity Act. In this case, however, the Corporate Debtor was undergoing CIRP, and the disagreement was related to the CIRP. The Supreme Court stated that the NCLT will have jurisdiction over the current situation. Furthermore, Section 238 of the IBC states that the IBC takes precedence over other laws to the extent that they are inconsistent.

The NCLT determined that a plain reading of Section 238 shows that the aforementioned Section also applies to an ‘instrument.' However, we can't locate any definitions for the term "instrument" in IBC 2016. To determine whether the Power Purchase Agreement (PPA) is an "instrument," the NCLT looked into Section 3(37) of the Code, which says that: Terms and expressions used but not defined in this Code but defined in the Indian Contract Act, 1872, the Indian Partnership Act, 1932, the Securities Contract (Regulation) Act, 1956, the Securities Exchange Board of India Act, 1992, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Limited Liability Partnership Act, 2008, and the Companies Act, 2013, shall have the meanings respectively assigned to them in those Acts.

However, the Tribunal couldn't locate a definition of the term "instrument" in the defining clauses of any of these statutes or the General Clause Act of 1897. They felt it would be prudent to investigate how the Legislature has defined the term "instrument" in previous enactments to understand the term "instrument." They had used Section 2(14) of the Indian Stamp Act, 1899, to determine that the PPA was performed on Stamp Paper: “Section 2(14): “Instrument” - “instrument” includes any document by which any right or obligation is, or appears to be, established, transferred, limited, extended, cancelled, or recorded.”

In dealing with the constitutionality of the planned termination of PPA, the court briefly discussed ipso factoprovisions and concluded that it is more of a policy judgement that should be left to legislative procedure.

As per Para 153, we can see that the larger topic of the legality of ipso facto provisions has been the subject of continuous legislative action in many countries, as noted in Section J.3 of this judgement. This is a difficult policy decision since it involves several concerns about how to strike the right balance between contractual freedom and corporate rescue on one hand. The court recognizes that any regulation we enact, no matter how modest, might result in a cascade of unforeseen second-order consequences, such as opening the floodgates for NCLT involvement that could limit the terminating party's contractual flexibility.

Section J.3 of the judgement says that before we assess the degree to which the lessons of other countries should be applied to India, it is necessary to refer to the discussion on the invalidation of ipso facto provisions in India.

In light of the NCLT's interpretation of an "instrument" under Section 238 of the IBC in Astonfield Solar (Gujarat) Private Ltd. v. Gujarat Urja Vikas Nigam Limited, as well as the NCLAT's judgement, which was affirmed by the Apex Court, keeping in mind the basic objective of the IBC, which is to maximize the value of the corporate debtor's assets, and the fact that the corporate debtor's sole business was to supply power to the Appellant, the Appellant's termination of the PPA during insolvency proceedings would have rendered the CIRP redundant.

The primary objective of the corporate debtor, according to the Supreme Court, was to deliver power to GUVNL under the PPA. If the PPA were to be terminated by the PPA due to stipulations in the PPA that allow GUVNL to do so in the event of CIRP. The Supreme Court, however, determined that such a right would have devastating repercussions because the corporate Debtor would no longer be able to operate as a going concern, undermining the fundamental purpose of the IBC. In addition, the Supreme Court affirmed the NCLT's jurisdiction to prevent GUVNL from terminating the PPA, stating that the PPA was required for CIRP and to keep the corporate debtor operating as a going concern. Furthermore, the IBC's provisions have precedence over the PPA, and the NCLT was acting to enforce the IBC's requirements.

As a result, the Appellant's termination of the PPA was not granted, although the issue was outside the NCLT's jurisdiction. However, the Supreme Court, in interpreting Section 60(5) of the IBC, including any transactions that are linked to or the subject of insolvency proceedings. The Supreme Court appears to have reinforced its approach to insolvency cases by favouring the option of retaining the corporate debtor as a continuing concern while using a purposive reading of sections 60(5) and 238 of the IBC.

CONCLUSION

The current decision will serve as a wonderful guide for future issues involving the confluence of the IBC and other legislation. The ruling specifies that the IBC will take precedence over other laws to the extent that they are inconsistent. Furthermore, the priority of IBC in matters relating to the CIRP of businesses involved in the production/distribution of electricity and related sectors would be important in the revival of enterprises if the entire revival might be interrupted by terminating the PPA.

The Supreme Court correctly emphasized that the NCLT and NCLAT do not usurp the lawful authority of other courts, tribunals, and fora where the issue does not arise exclusively from or relate to the corporate debtor's insolvency. Overall, this ruling clarifies another essential aspect of the IBC, opening the way for better execution of the IBC, ensuring that the corporate debtor continues to operate as a going concern and is revived promptly.