Supreme Court upholds, PPA cannot be terminated during CIRP under section 14 of IBC

A Division Bench of the Hon’ble Supreme Court comprising of Justices Dr. Dhananjaya Y. Chandrachud and M.R. Shah in the matter titled Gujarat Urja Vikas Nigam Limited v. Amit Gupta and Others, REED 2021 SC 03533, while upholding the jurisdiction of National Company Law Tribunal (NCLT) over contractual disputes that arise solely out of or in relation to Corporate Debtor’s insolvency resolution, held that to keep the Corporate Debtor as a going concern, Power Purchase Agreement (PPA) cannot be terminated during its Corporate Insolvency Resolution Process (CIRP). 

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 the validity of ipso facto clauses will lead to confusion and reduced commercial clarity. The Supreme Court considered the validity of ipso facto clauses (contractual provisions which allow a party (terminating party) to terminate the contract with its counterparty (the 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

A brief background of this case, the issues involved and the judgment pronounced by the SC have been discussed below. 

BACKGROUND

The Appellant executed a PPA with the Corporate Debtor on 30 April 2010, in accordance with which the Appellant has to purchase all the power generated by the Corporate Debtor. The Corporate Debtor failed in discharging its debt obligations to its creditors which led to the Corporate Debtor’s account being declared as Non-Performing Asset (NPA) on 4 May 2018 by Respondent No 2. Thereafter, on 20 November 2018, the NCLT admitted a petition filed by the Corporate Debtor under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC), and Respondent No. 1 was appointed as the Resolution Professional (RP). The said order was also confirmed by National Company Law Appellate Tribunal (NCLAT) on 4 December 2018.

In pursuant to NCLAT’s order, the Appellant issued two notices of default to the Corporate Debtor on 1 May 2019 stating that as per the PPA, the Corporate Debtor undergoing CIRP under the IBC amounts to an event of default which empowers it to terminate PPA. Further, the Appellant mentioned a default in the operation and maintenance of the Solar Plant which was, however, later cured by the Corporate Debtor. In an application filed against these notices by Respondent No. 1 and Respondent No. 2, the NCLT vide judgment 29 dated August 2019 restrained the Appellant from terminating the PPA. Further, The NCLAT by its judgment dated 15 October 2019 dismissed the appeal against the NCLT’s order.

Hence, an appeal was preferred by the Appellant before SC assailing the NCLAT’s order dated 15 October 2019 broadly on two grounds: first, that the NCLT and NCLAT do not possess jurisdiction under the IBC to adjudicate on a contractual dispute between the Appellant and the Corporate Debtor; and second, in any event, the termination of the PPA was validly made in accordance with the terms contained therein.

ISSUES

The issues framed by the SC for its consideration are as under:

(i) Whether the NCLT/NCLAT can exercise jurisdiction under the IBC over disputes arising from contracts such as the PPA? 

 

(ii) 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?

ANALYSIS

To facilitate analysis, the ruling pronounced by the SC has been divided into the following parts:

Jurisdiction of the NCLT/NCLAT over contractual disputes

Based on the Report of the Bankruptcy Law Reforms Committee, 2015 (BLRC) and the judgment in Innoventive Industries Limited v. ICICI Bank and Another, REED 2017 SC 08563, the SC observed that the institutional framework under the IBC contemplated the establishment of a single forum to deal with matters of insolvency, which were distributed earlier across multiple fora. Further, in ArcelorMittal India Private Limited v. Satish Kumar Gupta and Others, REED 2018 SC 10541, the SC has held that the NCLT alone has jurisdiction when it comes to applications and proceedings by or against a corporate debtor covered by the IBC, and no other forum has jurisdiction to entertain or dispose of such applications or proceedings which arise solely from or which relate to the insolvency of the Corporate Debtor. In the present case, the PPA was terminated solely on the ground of the commencement of insolvency proceedings against the Corporate Debtor since the default in the operation and maintenance of the Solar Plant was promptly cured by the Corporate Debtor. Hence, as the present dispute solely arises out of and relates to the insolvency of the Corporate Debtor, NCLT is empowered to adjudicate it under Section 60(5)(c) of IBC.

Residuary jurisdiction of the NCLT under Section 60(5)(c) of IBC

The SC relying on the Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, REED 2019 SC 11505, observed that Section 60(5)(c) of the IBC is like residuary jurisdiction which provides NCLT a wide discretion to adjudicate questions of law or fact arising from or about the insolvency resolution proceedings. Further, Section 60(5)(c) would be rendered otiose if Section 14 is held to be 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. However, the SC cautioned that NCLT cannot exercise its jurisdiction over matters dehors the insolvency proceedings since such matters would fall outside the realm of IBC.

Validity of ipso facto clauses 

Ipso facto clauses are contractual provisions that allow a party to terminate the contract with its counterparty due to the occurrence of an event of default. In the context of IBC, in some of these ipso facto clauses, the event of default includes events such as applying for insolvency, the commencement of insolvency proceedings, or appointment of insolvency representative, etc. The Supreme Court after a detailed perusal of laws in different jurisdictions refrained to resolve the question of the validity/ invalidity of the ipso facto clause in the present case as it raises complex issues of legal policy and balancing between contractual freedom on the one hand and corporate rescue on the other. Rather, the SC urged the legislature to provide concrete guidance on this issue to solve the conundrum.

Appellant’s right to terminate the PPA 

The Supreme Court noted that the subsistence of the PPA is mandatory to keep the Corporate Debtor as a going concern. It added that the PPA with the Appellant is the sheet-anchor of the Corporate Debtor’s business and hence, its continuation assumed enormous significance for the successful completion of the CIRP. Moreover, the termination of the PPA would have the consequence of cutting the legs out from under the CIRP. Consequently, the court concluded that the NCLT/ NCLAT correctly stayed the termination of the PPA by the Appellant, since allowing it to terminate the PPA would certainly result in the corporate death of the Corporate Debtor due to the PPA being its sole contract.