Abstract
The Supreme Court has recently, vide order dated 8th March, 2021, in the matter ofGujarat Urja Vikas Nigam Ltd. vs. Mr. Amit Gupta & Ors., allowed the continuation of PPAs between the power generators and the buyers during the moratorium period since it is vital to keep the Corporate Debtor as a going concern during the CIRP proceedings. The Code aims to maximise the value of the Corporate Debtor, which ultimately would benefit not only the Creditors but also the Corporate Debtor for its smooth revival with much fewer hiccups. Further, the judgment has shed light upon the residuary jurisdiction of the Adjudicating Authority as well as the Appellate Authority under such disputes of contract.
Introduction
In India, the Power Purchase Agreement (‘PPA’) acts as the base document upon which a Power Project is pedestaled; specifically, it is a contract entered into by two parties, one being the generator of electricity and the other being the purchaser of the electricity so generated. These massive Power Projects are funded by Banks or Financial Institutions against collaterals ranging from corporate/personal guarantee to pledge of shares, mortgage of title deeds etc. It is very unfortunate that even after taking such strict security measures, the lenders have miserably failed to retrieve the funds, thereby creating a cloud of tension over the lending institutions. Hence, the Government of India infused theInsolvency and Bankruptcy Code, 2016 (‘IBC/Code’) into the Indian legal system as one of the most power-packed debt restructuring laws.
The primary aim of the Code is the revival of a financially-distressed Corporate Debtor in a time-bound manner, balancing the interest of both the Corporate Debtor as well as the Creditors. Though it has been five years since the introduction of the Code, it is still undergoing several teething problems. There have been issues pertaining to the scope of the Adjudicating Authority/National Company Law Tribunal (‘NCLT’) in adjudicating ancillary disputes. One such scenario arose in the matter of Gujarat Urja Vikas Nigam Ltd. vs. Mr. Amit Gupta & Ors., wherein the Division Bench of the Supreme Court constituted by Hon’ble Judge Dr. D.Y. Chandrachud and Judge M.R. Shah has thrown some light upon the jurisdictional issue of the Adjudicating Authority under the Code involving a dispute related to a PPA.
Facts in Brief
In the year 2009, Gujarat Government notified the Solar Power Policy for the development of Solar Power Projects in the state. Accordingly, in 2010, Gujarat Urja Vikas Nigam Ltd. (GUVNL/Appellant) and Astonfield Solar (Gujarat) Private Ltd., i.e., the Corporate Debtor, entered into a PPA. As per the PPA, the Appellant had to purchase the power generated by the Corporate Debtor for a period of 25 years.
The initial years of operationalisation of the PPA were relatively calm. It was only in 2015 when, for the first time, the Power Plant had to shut down for two whole months due to heavy rainfall and floods in the state. Thereafter, in 2017 Gujarat was again affected by floods which severely damaged the Plant. Resultantly, the Plant could only operate 10-15% of its original capacity.
Due to such disruptions and damages, the Corporate Debtor failed to fully service its debt to its Financing Parties. Thereupon, the Corporate Debtor requested GUVNL to treat the failure in performance of the Corporate Debtor’s obligation as a “Force Majeure Event” as per the terms and conditions so mentioned in the PPA. Nonetheless, the Corporate Debtor was declared as Non-Performing Asset (‘NPA’) by one of the lenders in 2018.
Thereafter, since the Corporate Debtor underwent financial stress, it filed aSection 10 Application under the Code, which the NCLT eventually admitted on 20th November, 2018. It is imperative for one to understand herein that as soon as the Application is admitted and theCorporate Insolvency Resolution Process (‘CIRP’) begins, a moratorium kicks in, wherein an Insolvency Professional is appointed to manage the affairs of the Corporate Debtor. Under the Code, a moratorium is not defined per se; however, it is generally known as the period wherein the ongoing judicial proceedings/initiation of judicial proceedings against the Corporate Debtor are stayed till the CIRP is over. In such circumstances, wherein no judicial proceedings can be started against the Corporate Debtor regarding the termination of an essential contract, a question arises as to what happens to such PPAs.
In 2019, post-admission of the Section 10 Application, the Appellant issued two notices to the Corporate Debtor on the following grounds:
1. That the Corporate Debtor undergoing CIRP under IBC amounts to an event of default under the PPA.
2. That there was a default in operation and maintenance of the solar plant.
Thereby, GUVNL terminated the PPA with the Corporate Debtor due to the ongoing proceedings under IBC.
Considering the termination of the PPA, the Resolution Professional filed an application before the NCLT seeking an injunction restraining the Appellant from terminating the PPA. On 29th August 2019, NCLT passed an order restraining the Appellant from terminating the PPA and set aside the first notice. The order of NCLT was a reasoned order premised on the following:
“(i) The clauses of PPA cannot be placed on a higher pedestal than the provisions of IBC, in the context of drawing a timeline for completion of the CIRP. The fact that the CIRP has not concluded within 30 days from the receipt of the notice of default cannot be construed as an event of default since the time limit for the CIRP under the IBC is 330 days; and
(ii) The PPA is an ‘instrument’ within the meaning of Section 238 of the IBC. The clauses of the PPA are inconsistent with the provisions of the IBC, and stand overridden.”
Aggrieved from the order of NCLT, GUVNL filed an appeal before the National Company Law Appellant Tribunal (‘NCLAT’), wherein the said Appellant Tribunal vide order dated 15th October, 2019 dismissed the Appeal against the NCLT’s order. The NCLAT observed that “during CIRP, the Resolution Professional has to maintain the Corporate Debtor as a going concern and termination of its sole PPA, under which it supplied electricity only to the Appellant, would render the Corporate Debtor defunct. Hence, it was held that the Appellant could not terminate the PPA solely on the ground of the initiation of CIRP of the Corporate Debtor, which was supplying power to the Appellant during the period of CIRP.”
Issues Raised
On receiving such divergent judgments from the Adjudicating Authority and the Appellant Authority, an appeal was filed by GUVNL before the Supreme Court. The two major issues that arose from the dispute which required the Apex Court’s determination were:
1. Whether NCLT/ NCLAT can exercise jurisdiction under the IBC over disputes arising from contracts such as PPA; and
2. Whether the Appellant’s right to terminate the PPA is regulated by the IBC.
The Verdict
The Supreme Court has answered each issue specifically.
a. Jurisdiction of the NCLT/NCLAT over contractual disputes:
To answer the first issue, the Apex Court had initially drawn attention towards Section 60(1) of the Code, clarifying that NCLT has territorial jurisdiction over the place where the registered office of the Corporate Person is situated. It is essential to understand herein that NCLT owes its existence to the statute. Therefore, reference has been drawn to Section 408 of the Companies Act, 2013, (‘Act, 2013’) under which the NCLT has been constituted and which states that “The Central Government shall, by notification, constitute, with effect from such date as may be specified therein, a Tribunal to be known as the National Company Law Tribunal consisting of a President and such number of Judicial and Technical members, as the Central Government may deem necessary, to be appointed by it by notification, to exercise and discharge such powers and functions as are, or maybe, conferred on it by or under this Act or any other law for the time being in force.” Thus, the powers and functions which the NCLT exercises are those which are bestowed upon it by the Code.
i) The Apex Court has enumerated the limits of the jurisdiction under Section 60(5)(c) of the Code:
– “Arising out of” and “relation to”:
A textual interpretation of Section 60(5) of the Code with Section 446(2) of the Companies Act, 1956 (‘Act, 1956’) reveal some similarities of expression. Section 60(5) confers jurisdiction on the NCLT to entertain/dispose of “any question of priorities or any question of laws or facts arising out of or in relation to insolvency resolution or liquidation proceedings of the Corporate Debtor or Corporate Person under the Code”, whereas, Section 446(2) of the Act, 1956 and Section 280(d) of Act, 2013 use the expression “any question of priorities or any other question whatsoever whether of law or fact.” Even though the Sections of the Act bear a resemblance to the Section under the Code, but textually similar language in different enactments must be construed in the context in which words are present.
It is noteworthy to state herein that Apex Court while considering Section 60(5) of the Code and the interpretation of similar provisions in insolvency-related statutes, observed that NCLT has jurisdiction to adjudicate disputes, which relate to the insolvency of the Corporate Debtor. Therefore, a nexus with the insolvency of the Corporate Debtor must exist. Accordingly, in the instant case, the PPA was terminated solely on the ground of insolvency, since the default occurred was due to the commencement of the insolvency proceedings against the Corporate Debtor; otherwise, in the absence of the Corporate Debtor’s insolvency, there would have been no ground for termination of PPA.
Thus, the Apex Court held in this context that the Resolution Professional could approach the NCLT for adjudication of disputes as part of the insolvency resolution process. However, for adjudication of disputes that arise dehors the insolvency of the Corporate Debtor, the Resolution Professional must approach the relevant competent authority. Thus, in disputes arising solely due to the insolvency of the Corporate Debtor, the NCLT is empowered to adjudicate under Section 60(5) of the Code.
– “Jurisdiction of NCLT and Gujarat Electricity Regulatory Commission (‘GERC’)”:
Section 86(1)(f) of the Electricity Act provides that GERC shall adjudicate the disputes between the licensees and generating companies and refer to any dispute for arbitration. This indicates that issues, if any, raised in relation to the PPA must be raised before the GERC and not NCLT.
It is to be well understood in the instant case that the sole default attributed by the Appellant to the Corporate Debtor was that it was undergoing an insolvency resolution process, which makes the present dispute amenable to the jurisdiction of NCLT under Section 60(5) of the Code. It is essential to note that Section 238 of the Code stipulates that IBC would override other laws, including an instrument having effect by virtue of any such law.
In the instant case, the Adjudicating Authority gave a detailed finding on whether the PPA is an instrument within the meaning of Section 238 of the Code and stated that a plain reading of Section 238 of the Code showcases that instant Section is applicable on instruments too and since the Code nowhere defines the word instrument, relevance was drawn to certain provisions of law prevailing in India. Accordingly, it was observed by the Adjudicating Authority that Section 238 of the Code does not state that “instrument” must be entered into by operation of law; rather, it states that the instrument has effect by virtue of any such law. Thus, the Apex Court agreed with the findings of Adjudicating Authority by emphasising that the instrument need not be a creation of a statute; it becomes enforceable by law and thereby NCLT’s jurisdiction would be invoked in such cases wherein the termination of PPA was sought solely on the ground that the Corporate Debtor had become subject to an insolvency resolution process.
Further, it is noteworthy to state that Section 63 of the Code provides that “no civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which NCLT or NCLAT has jurisdiction under the Code.”
– “Residuary jurisdiction of the NCLT under Section 60(5)(c) of the Code”:
After placing reliance on several precedents, especially onCommittee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, the Supreme Court held that the residuary jurisdiction of NCLT under the Section 60(5)(c) of the Code provides a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings. Further, if the jurisdiction of the NCLT were to be confined to actions prohibited by Section 14 of the Code, there would have been no requirement for the Legislature to enact such residuary Section. Therefore, Section 60(5)(c) would be rendered otiose if Section 14 of the Code is held to be exhaustive of the grounds of judicial intervention contemplated under IBC in matters of preserving the value of the Corporate Debtor and its status as a going concern.
It is vital to note that while stating the above principle, the Apex Court has made it very evident that they are not laying down a general principle on the contours of the exercise of residuary power of Adjudicating Authority, but has particularly mentioned that NCLT cannot exercise its jurisdiction over matter dehors the insolvency proceedings since such matters would fall outside the realm of IBC.
b. Appellant’s right to terminate the PPA under the Code:
i) Significance of PPA in the instant case:
It is imperative to state that to answer the instant issue, reliance is placed upon the specific terms of PPA, through which the Supreme Court in the instant case has identified a crystal-clear principle stating that if the PPA is to be terminated, then the Corporate Debtor would not remain as a going concern. Hence, the continuation of PPA is necessary for the completion of the CIRP, and the termination will result in the CIRP being infructuous.
With such observation, the Apex Court agreed with the view of the NCLAT to stay the termination of the PPA since terminating the PPA would certainly result in corporate death of the Corporate Debtor as the PPA is its sole contract. Further, the Supreme Court has also stated that Appellant has an enormous significance for the successful completion of the CIRP. Thus, terminating the PPA would sever the essential fuel of CIRP.
ii) Relevance of PPA in the context of IBC:
It is essential to understand herein the aim and object of the Code, which primarily focuses on “the Corporate Debtor remaining as a going concern”. It has been reiterated time and again by the Court that since the PPA has been terminated solely on the ground of insolvency, it gives an ultimate jurisdiction to the Adjudicating Authority to adjudicate such matters and further invalidate the termination of PPA as it is the forum vested with the responsibility of the continuation of resolution process smoothly ensuring the preservation and maximisation of assets of the Corporate Debtor. Therefore, to ensure that the Corporate Debtor remains as a going concern, it is essential in the instant case to save the sole contract which governs the supply of electricity generated by the Corporate Debtor from being terminated as termination of such contract would end the ongoing CIRP making the corporate death of the Corporate Debtor a foregone conclusion.
Analysis of the Verdict
In the instant case, there is no provision under the Code that specifically deals with the PPA; hence the judgment laid down by the Supreme Court acts as a guiding star for any future dispute which might arise in relation to a contract which is affected due to the ongoing CIRP of the Corporate Debtor as well as empowering the Adjudicating Authority as well as the Appellant Authority to consider such disputes and adjudicate upon them, accordingly. It is clarified by the Court that the jurisdiction of NCLT cannot be invoked under Section 60(5)(c) of the Code in matters where termination of the contract took place on grounds unrelated to the insolvency of the Corporate Debtor. Indeed, it cannot be invoked in the event of a legitimate termination of a contract based on ipso facto clauses.
Ultimately, it would not be wrong to state that with this judgment, the Apex Court has laid down another stone of clarity, paving the way for a better implementation of the Code by elucidating the jurisdiction of NCLT as well as NCLAT in such disputes and ensuring that the Corporate Debtor runs as a going concern and revives in a timely mechanism.
Recommendations made by the Supreme Court through the Verdict
The Apex Court, while adjudicating the instant case, has made several recommendations appealing to the Legislature to provide concrete guidance on the following issues:
i) The question pertaining to validity/invalidity of ipso facto clauses under the IBC.
Globally, ipso facto clauses arise in a variety of contracts, which allow a party to terminate the contract with its counterparty due to the occurrence of an event of default. Under insolvency law, in some of these ipso facto clauses, the event of default includes applying for insolvency, the commencement of insolvency proceedings, appointment of insolvency representative etc. Certainly, the Apex Court ought not to resolve this issue exhaustively since the lack of legislative voice would lead to confusion and reduced commercial clarity.
ii) The issue relating to NCLT exercising its jurisdiction under the Code, asSection 60(5)(c) of IBC vests NCLT with wide powers.
The Apex Court suggested a specific textual hook for NCLT to exercise its jurisdiction. Although residuary jurisdiction is wide enough, the same is not defined by the text of the Code. Hence, NCLT cannot do what the IBC consciously did not provide it by deriving its powers from ‘spirit’ or ‘object’ of the Code.
Thus, the Court has specifically stated that, when the Judiciary is presented with a new question on which the Legislature has not made its mind, it is not justified by the Court to leave it to the Legislature. Rather, in such situations, the Court can adopt an interpretation that would further broaden the goals of the concerned legislation, and leave it to the Legislature to create a comprehensive solution to the issue. Therefore, it is not within the province of the Judiciary to engraft into law its view as to what constitutes a good policy; it can merely aid the Legislature by culling out the relevant considerations at play, the law in other relevant jurisdictions and the drawbacks that may have to be avoided. It is through an inter-institutional dialogue that the doctrine of separation of powers can be operationalised in a new manner. Thereby, the Court can tread the middle path between abdication and usurpation.
About the Author
Adv. Rishika Kumar has completed her B.B.A L.L.B (Business Law Hons.) from KIIT School of Law, KIIT University, Bhubaneswar, Odisha in the year 2019. Thereafter, since 2019 she has been working in Hyderabad with some of the eminent law firms of the country. Her core expertise lies in Insolvency and Restructuring laws. She focuses her litigation practice on corporate restructuring and insolvency matters. She has been actively advising and representing Creditors, Corporate Debtors, Insolvency Professionals, investors, bidders in relation to the resolution and liquidation process under the Insolvency and Bankruptcy Code, 2016. She regularly appears before various judicial/quasi-judicial authorities including High Court, National Company Law Tribunal and Debt Recovery Tribunal. She is also adept in drafting petitions/pleadings and legal research pertaining to insolvency & restructuring matters.
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Preferred Method of Citation
Rishika Kumar, “The Ascendancy of IBC over Electricity Regulatory Commission – A Juridical View” (IJPIEL, 25 May 2022)
<https://ijpiel.com/index.php/2022/05/25/the-ascendancy-of-ibc-over-electricity-regulatory-commission-a-juridical-view/>
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