NCLT proper forum for power purchase agreement insolvency

By Abhishek Tripathi and Vedant Kumar, Sarthak Advocates & Solicitors

The Supreme Court has ruled that the National Company Law Tribunal (NCLT) has jurisdiction under the Insolvency and Bankruptcy Code, 2016 (IBC) in disputes involving Power Purchase Agreements (PPA). Gujarat Urja Vikas Nigam Limited (GUVNL), as permitted in the agreement, terminated a PPA on the commencement of insolvency proceedings against Astonfield Solar (Gujarat) Private Limited, the corporate debtor. After the NCLT stayed the termination of the PPA by GUVNL, and its decision was upheld by the National Companies Law Appellate Tribunal (NCLAT), GUVNL appealed to the Supreme Court.

Abhishek Nath Tripathi,Sarthak Advocates & Solicitors
Abhishek Nath Tripathi
Managing partner
Sarthak Advocates & Solicitors

The court analysed the residuary jurisdiction of the NCLT under section 60(5)(c) of the IBC and held that the NCLT and the NCLAT had made no specific findings on whether the NCLT could exercise its jurisdiction under that section in a dispute arising from the termination of the PPA. The court observed that section 60(5)(c) gives the NCLT residuary jurisdiction and a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings. As the PPA was terminated solely because corporate insolvency proceedings had been initiated against the corporate debtor, the NCLT could exercise jurisdiction.

The Supreme Court recognised the fundamental tension between contractual autonomy and the need to maintain the corporate debtor as a going concern during insolvency proceedings. This is particularly so where clauses trigger termination of contracts on the initiation of insolvency proceedings (ipso facto clauses). The court noted that such clauses have been prohibited by the legislatures of many countries, including the USA, Singapore, Australia, Canada and Germany. The UK prohibits such clauses in supplier contracts, but few nations uphold the validity of these clauses unconditionally. The court held that there is no clear provision in the IBC invalidating such clauses. However, the intent of section 14 of the IBC is to invalidate the clause in “government licenses, permits, registrations, quotas, concessions, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force”, and in contracts where the counterparty supplies the debtor with essential or critical goods and services.

The Court addressed the limitation on its power to deal with the principles behind these clauses in the absence of clear provisions in the IBC. It accepted the principle of separation of powers and the primacy of the legislature, and said that it was for the legislature to amend the IBC to settle the question of validity.

Vedant Kumar, Associate, Sarthak Advocates & Solicitors
Vedant Kumar
Sarthak Advocates & Solicitors

The court examined section 14 of the IBC, the report of the Insolvency Law Committee of February 2020 and the explanations of section 14(1) and section 14(2A) to hold that the IBC had been amended by parliament to ensure that the going concern status of the debtor was not jeopardized during insolvency proceedings. The Supreme Court further emphasised that the objective of the IBC, in view of sections 20(2)(e), 25(1) and the definition of resolution plans, is to maintain the corporate debtor as a going concern.

The court acknowledged that the continuation of the PPA was essential for the successful completion of the corporate insolvency resolution process. Without it, the corporate debtor would no longer remain a going concern. As the PPA was terminated solely on the ground of insolvency, the NCLT had jurisdiction under section 60(5)(c) to adjudicate the matter and invalidate the termination of the PPA. The Supreme Court upheld the decision of the NCLT to preserve the corporate debtor as a going concern. However the court cautioned that the NCLT did not derive its powers from the spirit or object of the IBC. The wide powers in section 60(5)(c) are only available to the NCLT when it deals or disposes of questions of fact or law arising out of, or in relation to the insolvency resolution process.

The Supreme Court stated that only a legislative amendment can clarify whether the NCLT can exercise unfettered powers to restrain the termination of contracts, including PPAs, during insolvency proceedings.

Abhishek Tripathi is the managing partner and Vedant Kumar is an associate at Sarthak Advocates & Solicitors

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