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NCLT has jurisdiction to adjudicate contractual disputes; solely from Corporate Debtor's insolvency

Gujarat Urja Vikas Nigam Limited v. Mr. Amit Gupta & Ors.

Civil Appeal No. 9241 of 2019

Decided on March 8, 2021.

Counsel for the appellant: Ms. Ranjitha Ramanchandra, Mr. Shyam Diwan

Counsel for respondents: Mr. C U Singh, Mr. Nakul Dewan, Mr. V Giri

A division bench of the Supreme Court consisting of Justice D.Y. Chandrachud and Justice M.R. Shah reviewed the judgment delivered by the National Company Law Tribunal (NCLT) on 29 August 2019.

On 1st August 2009, the Government of Gujarat allocated a 25-megawatt capacity to the Corporate Debtor (first Respondent) for developing and setting up a solar photovoltaic based power project in the State of Gujarat. After the process of public hearings and consultations, a Tariff Order dated 29 January 2010 was issued by the State Commission for procurement of power by the appellant from power producers, under Section 86(1)(a) of Electricity Act. It was envisaged that the Power Purchase Agreement (PPA) will be for 25 years, with higher tariffs in the first 12-15 years, and a scaled-down tariff for the remaining years.

The Corporate Debtor started falling behind on its production of electricity owing to the floods in the State in 2015 and 2017. On 15 February 2018, in accordance with Article 8.1 of the PPA, the Corporate Debtor intimated the appellant regarding the impact of the rainfall and floods on the Plant, and the measures adopted by it in this regard. However, it was considered a Non Performing Asset by the appellant as it was ineligible to meet its commitments. It resolved to restructuring under the Insolvency and Bankruptcy Code, 2016 (IBC) upon which the appellant wanted to terminate the Power Purchase Agreement (PPA). NCLT stayed the termination of the PPA by the appellent with Astonfield Solar (Gujrat) Private Limited. The order of the NCLT was passed in applications moved by the first respondent, the resolution professional of the corporate debtor and the Second respondent, Exim Bank under Section 60(5) of the IBC. On 15th October 2019, the NCLAT dismissed the appeal by the appellant under Section 61 of the IBC and the same is called into question before the Supreme Court.

The Court crystallized the issue before it: The following two issues arise for determination: (i)Whether the NCLT/NCLAT can exercise jurisdiction under the IBC over disputes arising from contracts such as the PPA; and

(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. (Para 41)

Ms. Ranjitha Ramachandra, learned Counsel for appellant and Senior Counsel Mr. Shyam Diwan submitted that the respondent has to employ judicial, quasi judicial or arbitration proceedings and cannot directly appeal to the NCLT, and that any issue in relation to the PPA must be raised before the State Commission under Section 86 (1)(f) of the Electricity Act. The learned Counsels also stated that the respondents had relied on various judgments along with the provisions of Section 60 (5) of the IBC to establish jurisdiction of the NCLT but they were not equivalent substitutes of Sections 18 and 25(2)(b) of the IBC.

They argued that the duty of the RP to preserve the Corporate Debtor as a going concern and the definition of resolution plan do not bind third parties to act in favour of the Corporate Debtor. They submitted that the inconsistency of PPA provisions with the IBC provisions does not allow termination of the PPA and stated that statutory agreements and provisions of the PPA override the provisions of the IBC. Finally, they contended that the NCLAT’s decision was flawed.

Mr C U Singh, Counsel for Respondent, urged the Court that there is a dichotomy between the provisions of the PPA and the IBC. It was contended that in view of the non-obstante clause in Section 238, the provisions of the IBC would override those of the PPA. The Counsel submitted that the intent of Section 14 of IBC suggests that an ipso facto clause allowing a party to terminate the contract if the counter-party enters into some form of insolvency resolution process must be declared void or suitably read down, and that the NCLAT was right it restraining such an action.

Mr. Nakul Dewan submitted that the Corporate Debtor was put into financial difficulty on account of the force majeure events, however the PPA ensures continuity in the commercial viability of the corporate debtor, the revival plan includes the compromises by the creditors to ensure the corporate debtor is restructured. He argued that the invocation of Article 9.2.1(e) on the ground that proceedings under Section 10 of the IBC had commenced was both erroneous and premature.

On behalf of the Second Respondent, it was stated that both the Electricity Act and the IBC are special legislations, and that the non-obstante clause under Section 174 of the Electricity Act would be overridden by Section 238 of IBC in case of a conflict of jurisdiction to resolve a dispute. It was contended that the Respondents believed that the appellant terminated the PPA not due to the default per se but due to a commercial decision to negotiate and reduce the purchase price of electricity under tariff.

The Court heard the Counsels appearing for both sides.

The Court stated that since the dispute has arisen solely on the ground of the insolvency of the Corporate Debtor, NCLT is empowered to adjudicate this dispute under Section 60(5)(c) of the IBC:

The residuary jurisdiction of the NCLT under Section 60(5)(c) of the IBC provides it a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings. If the jurisdiction of the NCLT were to be confined to actions prohibited by Section14 of the IBC, there would have been no requirement for the legislature to enact Section 60(5)(c) of the IBC. Section 60(5)(c) would be rendered otiose if Section14 is 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’. (Para 87)

In this case, the PPA has been terminated solely on the ground of insolvency, which gives the NCLT jurisdiction under Section 60(5)(c) to adjudicate this matter and invalidate the termination of the PPA as it is the forum vested with the responsibility of ensuring the continuation of the insolvency resolution process, which requires preservation of the Corporate Debtor as a going concern. In view of the centrality of the PPA to the CIRP in the unique factual matrix of this case, this Court must adopt an interpretation of the NCLT‘s residuary jurisdiction which comports with the broader goals of the IBC. (Para 164)

The jurisdiction of the NCLT under Section 60(5)(c) of the IBC cannot be invoked in matters where a termination may take place on grounds unrelated to the insolvency of the corporate debtor. Even more crucially, it cannot even be invoked in the event of a legitimate termination of a contract based on an ipso facto clause like Article 9.2.1(e) herein, if such termination will not have the effect of making certain the death of the corporate debtor. As such, in all future cases, NCLT would have to be wary of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor’s sole contract(as was the case in this matter‘s unique factual matrix). (Para 165)

The Court held:

Consequently, we hold that question of the validity/invalidity of ipso facto clauses is one which the court ought not to resolve exhaustively in the present case. Rather, what we can do is appeal in earnest to the legislature to provide concrete guidance on this issue, since the lack of a legislative voice on the issue will lead to confusion and reduced commercial clarity. (Para 147)

The Court dismissed the appeal.

Shreya Shetty



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