1. INTRODUCTION

1.1. The Hon'ble Supreme Court of India ("Supreme Court"), on March 8, 2021, in the matter of Gujarat Urja Vikas Nigam Limited Vs. Mr. Amit Gupta & Ors1 ("GUVNL Case"), stayed termination of a Power Purchase Agreement ("PPA") executed between a corporate debtor i.e., Astonfield Solar (Gujarat) Private Limited ("ASGPL") and Gujarat Urja Vikas Nigam Limited ("GUVNL"), for which Corporate Insolvency Resolution Process ("CIRP") had been initiated.

1.2. The instant appeal before the Supreme Court was a result of the judgment dated October 15, 2019 passed by the National Company Law Appellate Tribunal ("NCLAT") whereby the judgment dated August 29, 2019, passed by the National Company Law Tribunal ("NCLT") was upheld. The NCLT's judgement was passed pursuant to an application under Section 60(5)2 by Resolution Professional ("RP") of the Insolvency Bankruptcy Code, 2016 ("IBC/Code"). In its landmark ruling, the Supreme Court held that the NCLT has jurisdiction to adjudicate disputes, which arise solely from or which relate to the insolvency of the corporate debtor.

1.3. The GUVNL Case and its findings are elaborately discussed below:

2. FACTUAL BACKGROUND OF THE GUVNL CASE

2.1. The facts of the matter stems from a PPA which was entered between ASGPL and GUVNL on April 30, 2010 and as per the terms of the PPA, GUVNL was required to purchase all the power that was generated by ASGPL.

2.2. During the period of July, 2015 to December 2015, issues were faced by ASGPL due to heavy rainfalls and floods in the state of Gujarat which resulted in the solar power plant being damaged. Subsequently, during June, 2017 and July 2017, the solar power plant was again severely damaged due to floods which resulted in the plant operating at only 10-15% of its capacity. As a result of the aforesaid damage, for which insurance claims were pending, ASGPL was unable to fully service its debt to the financial parties.

2.3. On February 15, 2018, in accordance with Article 8.1 of the PPA, GUVNL was informed by ASGPL of the impact of the rainfall and flood on the solar power plant through a letter which requested GUVNL to consider the letter as a formal communication to treat the situation as a 'Force Majeure Event' as per the provisions of the PPA.

2.4. On May 4, 2018, ASGPL was declared a Non-Performing Asset and subsequently on November 20, 2018, a petition was filed by ASGPL under Section 103 of the IBC which was admitted by the NCLT and accordingly, CIRP was commenced in respect of ASGPL.

2.5. After the commencement of CIRP, notices of default were issued to ASGPL by GUVNL on May 1, 2019 through which GUVNL tried to terminate the PPA by relying on an ipso facto clause which permitted GUVNL to terminate the PPA on the ground of insolvency. The aforesaid action on the part of GUVNL was challenged before the NCLT and an application by the RP of ASGPL was subsequently filed under Section 60(5) of the IBC. The aforesaid application was allowed by the NCLT and GUVNL was restrained from terminating the PPA.

2.6. The decision of the NCLT was appealed by GUVNL before the NCLAT; however, the appeal was dismissed by the NCLAT. The NCLAT observed that the RP was required to maintain the corporate debtor as a 'going concern' and termination of the PPA solely on the ground of initiation of CIRP of ASGPL, which was supplying power to GUVNL during CIRP, would end up making the corporate debtor defunct. Aggrieved by the decision of the NCLAT, an appeal was subsequently filed before the Supreme Court by GUVNL.

3. ISSUES AND FINDINGS OF THE SUPREME COURT

3.1. In its 138 pages judgement, the Supreme Court elaborately discussed key aspects to the scope of NCLT's jurisdiction under Section 60(5) of the IBC in respect of disputes arising from contracts such as the PPA and contractual rights of a party vis-a-vis a company undergoing CIRP under the IBC, as discussed below:

3.1.1. Whether the NCLT/NCLAT can exercise jurisdiction under the IBC over disputes arising from contracts such as the PPA?

The Supreme Court, considering the text of Section 60(5)(c) of the IBC and the interpretation of similar provisions in other insolvency related statutes, held that:

  1. NCLT has jurisdiction to adjudicate disputes, which arose solely from, or which relate to, the insolvency of the corporate debtor, the only condition being that nexus with the insolvency of the corporate debtor must exist.
  2. RP is permitted to approach the NCLT for settlement of disputes that are related to the CIRP, however, for adjudication of disputes that arise dehors the insolvency of the corporate debtor, the RP must approach the relevant competent authority.
  3. NCLT and the NCLAT must ensure that they do not overstep the legitimate jurisdiction of other courts, tribunals, and forums when the dispute is one which does not arise solely from or is related to the insolvency of the corporate debtor.
  4. The residuary jurisdiction of the NCLT under Section 60(5)(c) of the IBC provides it with a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings and if Section 144 was held to be the exhaustive of the grounds of judicial intervention contemplated under the IBC in matters of preserving the value of the corporate debtor and its status as a 'going concern', then section 60(5)(c) would be rendered empty.
  5. As per Section 2385 of the IBC, other laws would be overridden by the IBC including an instrument having effect by virtue of any such law and upheld the NCLT's view of a PPA being covered within the ambit of the term 'instrument' within the meaning of Section 238 of the IBC.

Therefore, the Supreme Court held that since the dispute in the present case had arisen solely on the ground of the insolvency of the ASGPL, the NCLT was empowered to adjudicate this dispute under Section 60(5)(c) of the IBC. In the absence of the insolvency of ASGPL, there would be no ground to terminate the PPA and the termination was not on a ground independent of the insolvency.

3.1.2. Whether the GUVNL's right to terminate the PPA was regulated by the IBC?

In relation to the aforesaid issue, the Supreme Court stated that the PPA with GUVNL was the lifeline of ASGPL's business and that the continuation of the PPA was essential for the successful completion of the CIRP since without the PPA, ASGPL would no longer have remained a 'going concern'. In determining the question whether the PPA was validly terminated by GUVNL, the Supreme Court observed that while it may be argued that there is no general embargo on the operation of ipso facto clauses if they are part of a valid contract, it was faced with a novel situation where the 'going concern' status of a corporate debtor will be negated by a termination of its sole contract, on the basis of an ipso facto clause.

The Supreme Court stated that:

  1. In this matter, since the sole ground for terminating the PPA was the insolvency of ASGPL, the NCLT was conferred with the jurisdiction under Section 60(5)(c) of the IBC to adjudicate the matter and annul the termination of the PPA since it was the forum entrusted with the duty of guaranteeing the continuation of the CIRP which required protection of ASGPL.
  2. Recognising the centrality of the PPA to the CIRP in the uniqueness of this matter, the Supreme Court considered it necessary to adopt an interpretation of the NCLT's residuary jurisdiction under the IBC.
  3. It held that the NCLT was empowered to restrain GUVNL from terminating the PPA since such termination on the part of the GUVNL was solely based on the fact that CIRP was initiated against GUVNL and allowing such a termination of the PPA on the part of GUVNL would have resulted in the corporate death of ASGPL. The Court further clarified that in cases where a termination takes place on grounds unrelated to the insolvency of a corporate debtor or where a contract is legitimately terminated based on an ipso facto clause (and if such termination will not have the effect of making certain the death of the corporate debtor) then in such cases the jurisdiction of the NCLT under Section 60(5)(c) of the IBC cannot be invoked.

In view of the abovementioned findings, the appeal filed by GUVNL was dismissed and GUVNL was directed to pay for the electricity procured.

4. INDUSLAW VIEW

The Supreme Court's verdict is likely to have decisive impact on the energy sector as distribution companies will now not be in a position to terminate a PPA solely on the fact that insolvency proceedings have been initiated against a power generation company, a practise which was commonly resorted to earlier. Further, the judgment has also provided clarity on the jurisdiction of NCLT/NCLAT with regard to matters relating to insolvency along with also clarifying how jurisdiction of competent authorities cannot be taken over by NCLT/NCLAT in matters other than insolvency proceedings. We understand that the GUVNL Case will bring relief to the lenders of the power generation companies which are undergoing CIRP since the same will help in value maximisation along with also safeguarding that a corporate debtor has a stable source of income and that it continues to function as a 'going concern' during the CIRP.

Footnotes

1. Gujarat Urja Vikas Nigam Limited Vs. Mr. Amit Gupta & Ors, Civil Appeal No. 9241 of 2019

2. Section 60(5), IBC: "Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of— (a) any application or proceeding by or against the corporate debtor or corporate person; (b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and (c) 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 this Code."

3. Initiation of corporate insolvency resolution process by corporate applicant.

4. Moratorium under IBC.

5. Section 238, IBC: "The provisions of this Code shall have 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".

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