2021 (3) TMI 340 - SC - Insolvency and Bankruptcy

NCLT/NCLAT's Jurisdiction on Insolvency Disputes Upheld, PPA Stay Maintained

Gujarat Urja Vikas Nigam Limited Versus Mr. Amit Gupta And Ors.

The NCLT/NCLAT has jurisdiction under Section 60(5)(c) of the IBC to adjudicate disputes related to insolvency resolution processes. The court upheld the ... Termination by the appellant of its Power Purchase Agreement (PPA) with Astonfield Solar (Gujarat) Private Limited “third respondent” or “Corporate Debtor” - Section 60(5) of the Insolvency and Bankruptcy Code, 2016 - Power of NCLT/NCLAT over disputes arising from contracts such as the PPA - 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. Whether the NCLT/NCLAT can exercise jurisdiction under the IBC over disputes arising from contracts such as the PPA? - HELD THAT:- In the present case, the PPA was terminated solely on the ground of insolvency, since the event of default contemplated under Article 9.2.1(e) was the commencement of insolvency proceedings against the Corporate Debtor. In the absence of the insolvency of the Corporate Debtor, there would be no ground to terminate the PPA. The termination is not on a ground independent of the insolvency. The present dispute solely arises out of and relates to the insolvency of the Corporate Debtor - the RP can approach the NCLT for adjudication of disputes that are related to the insolvency resolution process. However, for adjudication of disputes that arise dehors the insolvency of the Corporate Debtor, the RP must approach the relevant competent authority. For instance, if the dispute in the present matter related to the non-supply of electricity, the RP would not have been entitled to invoke the jurisdiction of the NCLT under the IBC. However, since the dispute in the present case 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 Section 14 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 Section 14 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‘. The 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. 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? - HELD THAT:- In accordance with Article 9.3.1, the appellant, on the occurrence of an Event of Default under Article 9.2.1, can issue a Default Notice which shall specify in reasonable detail the Event of Default giving rise to the default notice, and call upon the Corporate Debtor to remedy it. At the expiry of 30 days from such notice, unless otherwise agreed, if the default has not been remedied, the appellant can terminate the PPA. Further, the Corporate Debtor shall have the liability to make payments towards compensation to the appellant which is equivalent to three years‘ billing based on the first-year tariff considered on normative PLF while determining the tariff by GERC, within 30 days from the termination notice. In accordance with Article 10.4, when differences or disputes between the parties are not settled through mutual negotiation within 60 days of the dispute arising, it shall be adjudicated by the State Commission, in accordance with Law - In accordance with Article 12.9, assignment of the Corporate Debtor‘s rights under the PPA is permissible, with the prior written consent of the other party. The proviso to this Article makes it clear that any assignee shall expressly assume the Corporate Debtor's obligations thereafter arising under the PPA, on the furnishing of satisfactory documentation. By virtue of the PPA with the appellant being the sheet-anchor of the Corporate Debtor‘s business and consequently of the CIRP, its continuation assumes enormous significance for the successful completion of the CIRP. The termination of the PPA will have the consequence of cutting the legs out from under the CIRP. Validity of the termination of PPA - HELD THAT:- The question of the validity/invalidity of ipso facto clauses has been discussed in a variety of documents over the years, such as: (a) UNCITRAL Guide of 2004; (b) J.J. Irani Committee Report of 2005; (c) Vidhi‘s Report of 2018 critiquing the IBC; and (d) IBBI‘s Report of 2020, which acknowledges the issue of ipso facto clauses in relation to government grants. All these materials were available to the members of the various committees which discussed the IBC. Further, suspension of contracts during insolvency was specifically allowed under Section 22(3) of SICA, which was the erstwhile statutory regime - Although various provisions of the IBC indicate that the objective of the statute is to ensure that the corporate debtor remains a ‘going concern‘, there must be a specific textual hook for the NCLT to exercise its jurisdiction. The NCLT cannot derive its powers from the ‘spirit‘ or ‘object‘ of the IBC. Section 60(5)(c) of the IBC vests the NCLT with wide powers since it can entertain and dispose of any question of fact or law arising out or in relation to the insolvency resolution process. 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. The terms of our intervention in the present case are limited. Judicial intervention should not create a fertile ground for the revival of the regime under section 22 of SICA which provided for suspension of wide-ranging contracts. Section 22 of the SICA cannot be brought in through the back door. The basis of our intervention in this case arises from the fact that if we allow the termination of the PPA which is the sole contract of the Corporate Debtor, governing the supply of electricity which it generates, it will pull the rug out from under the CIRP, making the corporate death of the Corporate Debtor a foregone conclusion. Thus, it is concluded that: (i) The NCLT/NCLAT could have exercised jurisdiction under section 60(5)(c) of the IBC to stay the termination of the PPA by the appellant, since the appellant sought to terminate the PPA under Article 9.2.1(e) only on account of the CIRP being initiated against the Corporate Debtor; (ii) The NCLT/NCLAT correctly stayed the termination of the PPA by the appellant, since allowing it to terminate the PPA would certainly result in the corporate death of the Corporate Debtor due to the PPA being its sole contract; and (iii) We leave open the broader question of the validity/invalidity of ipso facto clauses in contracts for legislative intervention. Issues Involved:1. Jurisdiction of the NCLT/NCLAT over contractual disputes.2. Validity of ipso facto clauses.3. Appellant's right to terminate the PPA.4. NCLAT's decision on the issue of liquidation.5. Appellant's liability to pay for the electricity injected by the Corporate Debtor.Detailed Analysis:Jurisdiction of the NCLT/NCLAT over Contractual Disputes:The primary issue was whether the NCLT/NCLAT can exercise jurisdiction under the IBC over disputes arising from contracts such as the PPA. Section 60(5)(c) of the IBC provides the NCLT with jurisdiction to entertain or dispose of any application or proceeding by or against the corporate debtor or corporate person, any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India, and any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under the Code.The Court held that the NCLT has jurisdiction to adjudicate disputes that are related to the insolvency resolution process. The NCLT/NCLAT's jurisdiction under Section 60(5)(c) is broad and can include contractual disputes if they arise solely from or relate to the insolvency of the Corporate Debtor. The NCLT was empowered to restrain the appellant from terminating the PPA as the termination was solely on the ground of insolvency.Validity of Ipso Facto Clauses:Ipso facto clauses allow a party to terminate a contract due to the occurrence of an 'event of default,' including insolvency. The Court noted that globally, there is a trend towards invalidating such clauses to ensure the debtor remains a 'going concern.' The UNCITRAL Guide and the World Bank recommend overriding such clauses, subject to limited exceptions.In India, the IBC does not explicitly invalidate ipso facto clauses except in specific contexts like government licenses and essential goods/services. The Court acknowledged the complexity of the issue and the need for legislative intervention to address the broader validity of ipso facto clauses.Appellant's Right to Terminate the PPA:The Court analyzed the PPA and noted that the termination of the PPA based on the initiation of insolvency proceedings would lead to the corporate death of the Corporate Debtor, as the PPA was its sole contract. The NCLT/NCLAT correctly stayed the termination of the PPA to preserve the Corporate Debtor as a 'going concern.' The Court emphasized that the NCLT's jurisdiction under Section 60(5)(c) was appropriately invoked as the termination was solely due to insolvency.NCLAT's Decision on the Issue of Liquidation:The NCLAT had exceeded its jurisdiction by considering the issue of liquidation, which was not raised by any party. The NCLT had upheld the appellant's right to terminate the PPA in case of liquidation, but the NCLAT set aside this observation without it being a subject matter of the appeal. The Court held that the NCLAT could not have considered this issue and that it was academic in nature.Appellant's Liability to Pay for the Electricity Injected by the Corporate Debtor:The appellant contended that it should not be liable to pay for electricity procured after the termination notice due to erroneous injunctions by the NCLT/NCLAT. The Court held that since the termination of the PPA was set aside, the appellant is liable to pay for the electricity procured after 7 June 2019. The appellant's claim for compensation under Article 9.3.1 of the PPA was rendered otiose.Conclusion:1. The NCLT/NCLAT could exercise jurisdiction under Section 60(5)(c) of the IBC to stay the termination of the PPA since it was based solely on the initiation of CIRP.2. The NCLT/NCLAT correctly stayed the termination of the PPA to prevent the corporate death of the Corporate Debtor.3. The broader question of the validity/invalidity of ipso facto clauses is left open for legislative intervention.The appeal was dismissed, and pending applications were disposed of.