The National Company Law Appellate Tribunal (NCLAT) in Gujarat Urja Vikas Nigam Ltd (GUVNL) v Yes Bank Limited recently confirmed a National Company Law Tribunal (NCLT) decision restraining GUVNL from terminating the power purchase agreement (PPA) with the corporate debtor.
The judgment confirms the trend of NCLT orders suspending contractual entitlements to aid the insolvency process and it may have far-reaching implications, particularly for the infrastructure sector.
GUVNL had relied on an often found provision in PPAs giving it a right to terminate the contract in the event of insolvency or bankruptcy proceedings. It also argued that under the PPA a contractual dispute under the PPA needs to be resolved by the electricity regulator and not the NCLT.
Yes Bank, which sought to exercise its rights under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, challenged the decision of GUVNL, among other grounds on the basis that, pending the liquidation proceedings the PPA cannot be terminated as it is essential to preserve the value of the asset. It also relied on another provision in the PPA recognizing the lender’s right to assign the project. Yes Bank contended that the project was a going concern and continued to fulfil its obligation to deliver power.
The NCLAT framed the following issues for itself: whether the moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), applies to the PPA as well as other movable and immovable properties of the corporate debtor, and whether the contracting parties can terminate the PPA because of the ongoing liquidation process.
Since the PPA provided a long-term revenue structure that in turn was the basis for repayment of the credit facilities extended to the corporate debtor, the NCLAT considered the PPA and the solar power plant to be a single integrated economic asset, which requires preservation during the process of corporate resolution and liquidation. The NCLAT relied on the objective of the IBC, as beneficial legislation, to provide an economically viable and legally robust resolution and restructuring framework for corporate debtors. With this reasoning the NCLAT upheld the order of the NCLT, but did not directly address the two issues framed by it.
The NCLT had in Astonfield Solar (Gujarat) Private Ltd v Gujarat Urja Vikas Nigam Limited, held that the PPA is an instrument under section 238 of the IBC, hence the IBC overrides the PPA. Since the default notice to terminate the PPA affected the timeline of the Corporate Insolvency Resolution Process (CIRP), the default notice was set aside. However, the NCLT observed that the PPA can be terminated once the corporate debtor goes into liquidation.
In an appeal filed as Gujarat Urja Vikas Nigam Ltd v Amit Gupta, the NCLAT in rejecting the appeal held that the PPA cannot be terminated solely on the ground that the CIRP has been initiated against the corporate debtor where the corporate debtor is still fulfilling its obligation under the PPA. The NCLAT disagreed with the observation of the NCLT regarding the right to terminate the PPA when the corporate debtor undergoes liquidation. The NCLAT held that during the liquidation process the corporate debtor should still be maintained as a going concern. The NCLAT had in GRIDCO Limited v Surya Kanta Satapathy, held that the termination of the PPA during the moratorium under section 14 of the IBC was invalid.
These cases share a common concern, that the underlying purpose of the IBC is to ensure that the corporate debtor remains a going concern. The NCLAT emphasized the practical aspect of considering a solar power plant and its PPA as a single unit to establish better value of the assets.
The NCLT and the NCLAT have restrained the termination of the PPA where there was no default by the corporate debtors and the default notices were served only based on the fact that either the CIRP or liquidation process had been initiated against them. This reasoning, however, has the effect of undoing all contractual provisions, which entitle a party to terminate a contract on the initiation of insolvency or bankruptcy proceedings.
Contracting parties may rely on other more minor contractual infractions to terminate contracts. This may take the matter out of the IBC’s domain and into the jurisdiction of other adjudicators such as the electricity regulator or to arbitration.
Abhishek Nath Tripathi is the managing partner and Vedant Kumar is an associate at Sarthak Advocates & Solicitors