The Apex Court has observed that the desirability of Parliament providing its legislative voice on the broader validity of ipso facto clauses. Lack of a legislative vision on the issue of validity of ipso facto clauses will lead to confusion and reduced commercial clarity.
The Supreme Court Division Bench comprising of Justices Dr. D. Y. Chandrachud and M. R. Shah observed in the case of Gujarat Urja Vikas Nigam Limited v. Amit Gupta and Others, that the lack of a legislative vision on the issue of validity of ipso facto clauses will lead to confusion and reduced commercial clarity. The Apex Court considered the validity of ipso facto clauses (contractual provisions which allow a party (terminating party) to terminate the contract with its counterparty (debtor) due to the occurrence of an 'event of default'. The Bench observed that NCLT has jurisdiction to adjudicate contractual disputes, which arise solely from or which relate to the insolvency of the Corporate Debtor.
The said contract being entered into between Gujarat Urja Vikas Nigam Limited and Astonfield Solar Gujarat Private Limited was with regard to the Power Purchase Agreement.
The Power Purchase Agreement in this case was being signed on 30th April, 2010. As per the contents of the agreement the nigam was obliged to purchase all the power furnished or supplied by the corporate debtor.
NCLT admitted the petition filed by the corporate debtor in this regard under section 10 of IBC on 20 November 2018 and the corporate insolvency resolution process commenced thereafter.
In May, 2019 Nigam the financial creditor issued notices of termination to the corporate debtor. Nigam stated that it is empowered to terminate contract with the corporate debtor as per article 9.2.1(e) , article 9.3.1 of Power Purchase Agreement.
The corporate debtor filed an insolvency application under section 60(5) of IBC r/w section 10 of IBC 2016 before the NCLT later on. In the said application, the applicant requested the tribunal for an injunction restraining the Nigam from terminating the PPA.
NCLT gave its final decision in the favour of the applicant. In the said order it restrained the applicant from terminating the said notices.
Supreme Court calls for clarity in legal provisions regarding the validity of Ipso Facto Contractual Clauses in relation to Insolvency law.
The Supreme court through the instant judgement ascertained that there are certain loopholes and ambiguity regarding the validity/ invalidity of ipso facto clauses under insolvency laws. The Bench upholded the order of the National Company Law Tribunal which in its order stayed the termination of notices issued by Gujarat Vikas Nigam Limited, the financial creditor.
The Apex Court also observed that the following situations under which ipso facto clauses are invalid - in the case of Government Licenses, Permits, Quotas, Concessions or registrations , clearances or a similar right granted by the central government or state government or any local authority under any other law for the time being in force in accordance with the Explanation to S. 14(1) of IBC, 2016.