IBC decides the fate of PPAs in insolvency

By Abhirup Dasgupta and Bhawana Sharma, HSA Advocates

A power purchase agreement (PPA) is essential not only for the way a power project functions, but also for its very existence. There has, however, been significant uncertainty regarding the status of power generators undergoing insolvency proceedings, and their ability to continue as going concerns during the resolution process. In the case of Gujarat Urja Vikas Nigam Ltd v Amit Gupta & Ors, the Supreme Court addressed the key issues as to whether the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) had jurisdiction under the Insolvency and Bankruptcy Code, 2016 (IBC) in disputes involving PPAs, and whether the IBC regulated the right of GUVNL, which had contracted with the power generator, to terminate its PPA.

Abhirup Dasgupta, Partner, HSA Advocates
Abhirup Dasgupta
HSA Advocates

A clause in the PPA provided for the termination of the PPA in the event of insolvency. The NCLT held that the clauses of the PPA dealing with termination on insolvency were inconsistent with the provisions of the IBC and, in accordance with section 238 of the IBC, were of no effect. In the appeal by GUVNL to the NCLAT, the tribunal noted that the corporate debtor, the power generator, was to be maintained as a going concern in accordance with the objects of the IBC, and that termination of the PPA would render the corporate debtor defunct. Thus, GUVNL could not terminate the PPA solely on the ground of the initiation of corporate insolvency resolution proceedings (CIRP) involving the corporate debtor. GUVNL further appealed to the Supreme Court.

The Supreme Court considered the jurisdictions of the NCLT and NCLAT under the IBC in disputes arising from contracts such as the PPA. The court observed that, as the dispute had arisen solely on the ground of the insolvency of the corporate debtor the NCLT did have power to adjudicate this dispute under section 60(5)(c) of the IBC.

The court also held that the jurisdiction of the NCLT overrode the jurisdiction of the particular state electricity regulatory commission as to the application of the clauses of the PPA. The jurisdiction of the NCLT could be invoked because termination of the PPA rested solely on the ground that the corporate debtor had become subject to an insolvency resolution process under the IBC. The Supreme Court held that other regulatory bodies may have precedence over the IBC and the NCLT if the pathway to termination of any particular contract or agreement is for a reason other than insolvency.

The court found that the NCLT had residuary jurisdiction under section 60(5)(c) of the IBC. The NCLT had a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings. The court added a caveat that the NCLT, as a statutory body, can only do what IBC explicitly gives it the power to do.

Bhawana Sharma, Associate, HSA Advocates
Bhawana Sharma
HSA Advocates

The applicant had purported to terminate the PPA under a clause in the agreement allowing it to do so (a de facto clause). The Supreme Court considered the validity of such clauses, particularly with respect to their relationship with section 14 of the IBC. The court acknowledged that a reading of the IBC established no clear position in relation to such validity. The court bore in mind the principle of separation of powers and refrained from formulating any general principle of law. It said that it was a matter for the legislature to consider.

The court observed that, when a PPA was terminated a corporate debtor would no longer be a going concern. Thus, the continuation of the PPA assumes considerable significance if the CIRP is to be successfully completed. However, while arriving at this conclusion, the Supreme Court specifically indicated that in future cases, the NCLT would have to be wary of setting aside valid contractual terminations while simultaneously ensuring continuity of the going concern status.

This judgment, inasmuch as it ensures the continuity of PPAs, has been of considerable relief to the lenders of power generators that are undergoing insolvency proceedings, It helps to maximize the value of the corporate debtor in its insolvency resolution. Provided that the corporate debtor is able to fulfil its supply obligations, this decision will ensure that the corporate debtor has a steady source of income and will continue to function as a going concern during the resolution process.

Abhirup Dasgupta is a partner and Bhawana Sharma is an associate at HSA Advocates

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