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Not all disputes are amenable to the jurisdiction of the Electricity Commission – PPAs cannot be terminated during a Moratorium

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Electricity Board

The Hon’ble Supreme Court in its order dated 08.03.2021 in the matter titled Gujarat Vikas Nigam Limited vs. Mr. Amit Gupta & Ors., while upholding the order of the National Company Law Appellate Tribunal (NCLAT) held that National Company Law Tribunal (NCLT) has jurisdiction to adjudicate contractual disputes which arise solely from or which relate to corporate debtor’s insolvency. In the Instant Matter, the Hon’ble Court has dealt with the role/power of NCLT to determine the party’s right to terminate the Power Purchase Agreement (PPA) owing to the initiation of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016, and the intersection of a party’s right to terminate such agreement and its regulation under IBC.

The present case analysis is an attempt to study the case and highlight various facets, the issues involved, and the final judgment. The article ends with a final conclusion and the author’s opinion on the judgment.

Brief Facts

  1. The peculiar facts of this case arise from a PPA entered between Gujarat Urja Vikas Nigam Ltd. (GUVNL), and Astonfield Solar Gujarat Pvt. – A solar power developer (Corporate Debtor/CD). The PPA was entered on 30th April 2010, in accordance with which GUVNL was to purchase all the power generated by the solar power plant (Plant) of the Corporate Debtor for the term of the PPA i.e., for 25 years.
  2. Due to persistent default by the Corporate Debtor in fulfilling its contractual obligations arising out of financial documents, on 4th May 2018, the Lenders declared Corporate Debtor to be a Non-Performing Asset (NPA). Post declaration of NPA, Corporate Debtor filed a petition before the NCLT under Section-10 of IBC to initiate the Corporate Insolvency Resolution Procedure (CIRP). The said petition was admitted on 20th November 2018 and the Resolution Professional (RP) was appointed by the NCLT in February 2019.
  3. GUVL issued Notices for Default on 1st May 2019 (Default Notice) to Corporate Debtor on the following two grounds:
    1. Corporate Debtor undergoing CIRP under the Insolvency and Bankruptcy Code, 2016 amounts to an event of default under PPA.
    2. There was a default in the operation and maintenance of the plant.
  4. The default Notice specifically stated that the PPA will be terminated if the Corporate Debtor does not cure the defaults mentioned in the Default Notice. This led RP to file an application under Section 60 (5) of the IBC before the NCLT praying issuance of an injunction restraining GUVNL from terminating the PPA. In the meanwhile, GUVNL issued the termination notice after the stipulated period of 30 days. The termination notice was stayed by the NCLT by its order dated 29th August 2019 whereby it issued the following directions:
    1. Restrained GUVNL from terminating the PPA.
    2. Held that the clauses of the PPA cannot be placed on a higher pedestal than the provisions of the IBC. PPA is an instrument within the meaning of Section 238 of IBC and in the present case, the clauses of the PPA are inconsistent with the provisions of IBC.
  5. GUVNL filed an appeal against the said order before NCLAT. However, NCLAT vide its judgment dated 15th October 2019 dismissed the appeal and held that:
    1. GUVNL attempted to terminate the PPA on the sole ground that the CIRP has been initiated against the Corporate Debtor.
    2. It was observed that during the CIRP, the RP has to maintain the Corporate Debtor as a going concern, and termination of the PPA would render the Corporate Debtor defunct.
  6. Aggrieved by the NCLAT Judgment, GUVNL approached the Hon’ble Supreme Court mainly on two grounds:
    1. NCLT and NCLAT do not possess the requisite jurisdiction under IBC to adjudicate on a contractual dispute between GUVNL and Corporate Debtor.
    2. The Termination of the PPA was validly made under Article 9.2.1 (e) and Article 9.3.1 of the PPA.

What issues did the Supreme Court dwell on?

Supreme Court

Jurisdiction of the NCLT/NCLAT over contractual disputes

The Apex Court observed that the IBC contemplated the establishment of a single forum in order to deal with the matters of insolvency, which were distributed earlier across multiple fora. The Apex Court placing reliance on Arcelor Mittal (India) (Private) Limited vs. Satish Kumar Gupta (2019) 2 SCC 1, observed that the NCLT alone has jurisdiction when it comes to applications and proceedings by or against a corporate debtor covered by the Code, 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 Instant Matter, PPA was threatened to be terminated solely on the ground of insolvency. In the absence of the insolvency of the Corporate Debtor, there is no other ground to terminate the PPA. It is to be noted that other ground namely O&M Default was cured by the Corporate Debtor and this issue was also not pressed by the Corporate Debtor before NCLT and NCLAT. Therefore, the present dispute solely arises out of and relates to the insolvency of the Corporate Debtor as is contemplated under Section 60 (5) (c) of the IBC.

Jurisdiction of NCLT and Gujarat Electricity Commission

The Hon’ble Court recognized that Section 86 (1) (f) of the Electricity Act empowers GERC to adjudicate the dispute between generating company and the distribution licensee, however, NCLT will have the power to adjudicate the present dispute under Section 60(5)(c) of the IBC because the sole default attributed by GUVNL to the Corporate Debtor was that it was undergoing an insolvency resolution process.

The Hon’ble Court further held that Section 238 of the IBC stipulates that IBC would override other laws, including an instrument having effect by virtue of any such law.

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

The Hon’ble Court also relied on residuary power vested in NCLT by virtue of Section 60 (5) (c) of IBC to hold that Section 60 (5) (c) of IBC provides NCLT a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings. However, the Hon’ble Court cautioned NCLT that a fine line has to be drawn between ensuring that a residuary jurisdiction is not rendered otiose due to an excessively restrictive interpretation, as well as, guarding against the usurpation of power by a court or a tribunal not vested in it.

Validity of Ipso Facto Clauses

The Hon’ble Court, in order to determine the validity of the Ipso Facto clauses, carried out a detailed discussion and analysis of the laws of various other national jurisdictions. However, it refrained to resolve the question of the validity/invalidity of the ipso facto clause in the present case as this is a matter which raises complex issues of legal policy and balancing between distinct and conflicting values. Rather, it appealed to the legislature to provide concrete guidance on this issue.

GUVNL’s right to terminate the PPA in the present case

The Hon’ble Court, after analyzing the PPA and the impugned orders of NCLT & NCLAT, observed that but for the subsistence of the PPA, the Corporate Debtor would no longer remain as a ‘going concern’. GUVNL is the sheet-anchor of the Corporate Debtor’s business and consequently of the CIRP, therefore continuation of the PPA assumes enormous significance for the successful completion of the CIRP. The termination of the PPA will render the CIRP inconsequential.

The Hon’ble Court held that NCLT was empowered to restrain GUVNL from terminating the PPA and clarified that the decision is premised upon a recognition of the fact that PPA was central in the present case for the success of the CIRP since it was the sole contract for the sale of electricity which was entered into by the Corporate Debtor.

Analysis of the Case

NCLT

This case will be a guiding factor for future disputes. This precedent will have to be weighed by the other tribunals (other than NCLT/NCLAT) while determining its jurisdiction over matters having the flavor of insolvency. In the present case, NCLT restrained GUVNL from exercising its rights available under the PPA. Hon’ble Court specifically observed that IBC, being a special law, enacted after the Electricity Act will prevail upon the Electricity Act for questions of fact and law relating to the insolvency process. Hon’ble Court rightly recognized the importance of the PPA for the corporate debtor because PPA was the sole reason for Corporate Debtor’s existence and subsistence.

This Judgment will give a positive message to the power sector. Because similar clauses of the Events of Default are present in all PPAs and this was always a concern of the developers/lenders/investors that if the company goes under insolvency proceedings, this clause will make life tougher for the generator. If this dispute would have been adjudicated by Electricity Commissions, they would not have had any option except to recognize the right given under the PPA and it would have disastrous consequences and would defeat the objectives of the enactment of the IBC.

However, the Hon’ble Court has also rightly cautioned the NCLT and NCLAT to ensure that they do not usurp the legitimate jurisdiction of other courts, tribunals, and fora when the dispute is one, which does not arise solely from or relating to the insolvency of the corporate debtor.