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

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

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 ... Jurisdiction of the National Company Law Tribunal under Section 60(5)(c) of the Insolvency and Bankruptcy Code - residuary jurisdiction in matters arising out of or in relation to insolvency resolution proceedings - ipso facto clauses and their enforceability in insolvency - moratorium and protection of going concern under Section 14 of the IBC - instrument having effect by virtue of any law and Section 238 of the IBC - preservation of corporate debtor as a going concern and duties of the resolution professional - relation between sectoral/regulatory fora (GERC) and NCLT jurisdictionJurisdiction of the National Company Law Tribunal under Section 60(5)(c) of the Insolvency and Bankruptcy Code - residuary jurisdiction in matters arising out of or in relation to insolvency resolution proceedings - relation between sectoral/regulatory fora (GERC) and NCLT jurisdiction - Whether the NCLT/NCLAT could exercise jurisdiction under Section 60(5)(c) of the IBC over the dispute concerning termination of the PPA. - HELD THAT: - Section 60(5)(c) confers on the NCLT a wide, residuary jurisdiction to entertain any question of law or fact arising out of or in relation to insolvency resolution or liquidation under the Code. That jurisdiction must be read in the context and object of the IBC - to avoid multiplicity of fora and to ensure timely resolution and preservation of the corporate debtor as a going concern. Where a dispute arises solely from, or is directly connected to, the insolvency resolution process (for example, where termination of a contract is sought solely because CIRP has been commenced), it falls within Section 60(5)(c) and may be adjudicated by the NCLT. This does not mean NCLT has blanket jurisdiction over all contractual or public-law disputes; issues that do not arise from or relate to the insolvency of the corporate debtor remain for the appropriate fora (for example, the State Commission under the Electricity Act) and NCLT must not usurp jurisdiction in such matters. In the facts of this case the termination was predicated solely on the initiation of CIRP and thus had the necessary nexus with the insolvency proceeding to invoke NCLT jurisdiction. [Paras 67, 69, 72, 73, 173]NCLT/NCLAT had jurisdiction under Section 60(5)(c) to adjudicate the dispute because the termination of the PPA arose solely out of and in relation to the insolvency resolution of the corporate debtor.Ipso facto clauses and their enforceability in insolvency - moratorium and protection of going concern under Section 14 of the IBC - instrument having effect by virtue of any law and Section 238 of the IBC - Whether the appellant's termination of the PPA under Articles 9.2.1(e) and 9.3.1 could be set aside by the NCLT/NCLAT in the facts of this case. - HELD THAT: - The broader, general question of the legal validity of ipso facto clauses in India is complex and raises policy considerations appropriately addressed by Parliament; the Court declines to formulate an exhaustive rule and invites legislative clarification. On the facts, the PPA was the corporate debtor's sole contract and essential to its existence as a going concern. The termination notice relied solely on the initiation of CIRP (an ipso facto trigger). Given (a) the centrality of the PPA to the corporate debtor's ability to continue as a going concern and (b) the IBC's object to preserve value and maximise prospects of resolution, the adjudicating authority (NCLT) was empowered under Section 60(5)(c) to restrain the termination. The Court emphasised that such intervention is limited to cases where termination would effectively cause the corporate death of the debtor; it should not be used to set aside contractual terminations that merely diminish value but do not jeopardize the survival of the corporate debtor. [Paras 69, 153, 165, 166, 173]The NCLT/NCLAT correctly stayed the appellant's termination of the PPA because, in the facts of this case, termination (being solely on the ground of insolvency) would have rendered the corporate debtor defunct and thereby jeopardised the CIRP.Residuary jurisdiction in matters arising out of or in relation to insolvency resolution proceedings - Whether NCLAT could, in its appellate order, alter or delete the NCLT's observation permitting termination in the event of liquidation (paragraph 35 of NCLT order). - HELD THAT: - The NCLT had observed that termination could be permissible if liquidation proceedings were initiated. That observation was not challenged by the appellant in the pleadings before NCLAT and no pleadings or prayers were made on that specific point. NCLAT deleted paragraph 35 and held that termination would not be permitted even on liquidation. The Supreme Court held that NCLAT exceeded its jurisdiction in doing so because the issue of termination on liquidation was not before it; consideration of that hypothetical question in the absence of pleadings was beyond the scope of the appeal and would be academic. [Paras 171]NCLAT exceeded its jurisdiction by addressing and deleting the NCLT's paragraph 35 regarding termination on liquidation; that issue was not properly before NCLAT.Actus curiae neminem gravabit and liability for acts performed under court orders - Whether the appellant is liable to pay for electricity injected by the corporate debtor after the date it purported to terminate the PPA but during which interim injunctions prevented termination. - HELD THAT: - The appellant served a termination notice effective from 7 June 2019 but injunctions prevented exercise of the termination. The Court held that because the termination has been set aside and the PPA continues to operate, the appellant is liable to pay for electricity procured after 7 June 2019. The appellant's contention that it should be indemnified for actus curiae neminem gravabit was rejected because the termination could not lawfully be effected while the injunctions were in place and relief against payment therefore does not arise. Consequential claims for termination compensation do not arise while termination is restrained. [Paras 172]The appellant is liable to pay for electricity supplied after 7 June 2019; its claim to compensation for termination does not arise while termination is restrained.Ipso facto clauses and their enforceability in insolvency - Whether the Court should decide the broader legal question of the general validity or invalidity of ipso facto clauses in India. - HELD THAT: - The Court recognized that the doctrine engages complex policy choices and detailed exceptions that bear on separation of powers and commercial certainty. Comparative jurisprudence shows diverse approaches and many jurisdictions address the matter legislatively. Given the practical difficulties and the wide implications of any general rule, the Court declined to pronounce a definitive, general rule on ipso facto clauses. Instead it left the broader issue open for Parliament, while articulating the considerations relevant to legislative deliberation and limiting its own intervention to the present factual matrix. [Paras 140, 141, 173]The broader question of the validity or invalidity of ipso facto clauses is left open for legislative determination; the Court will not lay down an exhaustive rule in this case.Final Conclusion: The appeal is dismissed. The NCLT/NCLAT were within their jurisdiction under Section 60(5)(c) of the IBC to restrain termination of the PPA because the termination was predicated solely on the initiation of CIRP and, in the unique factual matrix where the PPA was the corporate debtor's sole contract, termination would have caused the corporate debtor's death and defeated the CIRP; the broader legal question on ipso facto clauses is left to the legislature; NCLAT exceeded jurisdiction in deleting the NCLT's observation on liquidation; and the appellant must pay for electricity supplied after 7 June 2019. 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.