Authority cannot terminate concession agreement during final resolution stages despite premium payment defaults

The NCLAT ruled on priority of payments under a concession agreement's waterfall mechanism. The Authority sought recovery of premium dues claiming priority over bank debt payments. The Tribunal held that premium payments, being additional concession fees, rank lower in priority than monthly debt service provisions under the escrow agreement's payment waterfall. The court emphasized that parties deliberately categorized premium in a separate clause below debt service provisions, indicating lower priority. Given the entity's resolution was in final stages under an approved framework, the Authority could not terminate the concession agreement. Application was allowed.

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Issues Involved:
1. Priority of payment of premium over debt service under the Concession Agreement and Escrow Agreement.
2. Entitlement of NHAI to terminate the Concession Agreement and appoint a third-party agency for toll collection.
3. Classification of premium payments as going concern expenses.
4. Status and impact of the Resolution Process on the Concession Agreement and toll collection.

Summary:

Issue 1: Priority of Payment of Premium Over Debt Service
The primary question was whether the payment of premium had priority over the payment of debts to the Bank under the Concession Agreement and Escrow Agreement. The Tribunal examined various clauses, including Clauses 25.4, 26.1, 26.2, and 31.3 of the Concession Agreement, and Clause 4.1.1 of the Escrow Agreement. It concluded that although the premium is treated as part of the Concession Fee, the Concession Fee and Premium are defined separately and listed under different clauses. The Tribunal held that the premium payment is in lower priority to the monthly proportionate provision of Debt Service due in an Accounting Year, as per Clause 4.1.1 of the Escrow Agreement.

Issue 2: Entitlement of NHAI to Terminate the Concession Agreement and Appoint a Third-Party Agency
The Tribunal noted that NHAI had issued notices demanding payment of premium dues and threatened to terminate the Concession Agreement. However, given that the resolution of Respondent No.2 (BKEL) was in its final stages as per the Resolution Framework approved by the Tribunal on 12.03.2020, the Tribunal found no occasion for NHAI to proceed with the termination of the Concession Agreement. The Tribunal emphasized that final resolution of Respondent No.2 should be achieved at an early date.

Issue 3: Classification of Premium Payments as Going Concern Expenses
The Tribunal addressed whether premium payments could be classified as going concern expenses. It was argued that going concern expenses are necessary for maintaining the business operations of the Corporate Debtor, and premium payments to NHAI do not relate to the operation and maintenance of the Project. The Tribunal found merit in the argument that premium payments are not going concern expenses and that the premium can be deferred, as it had been previously deferred from 2015 to 2025.

Issue 4: Status and Impact of the Resolution Process on the Concession Agreement and Toll Collection
The Tribunal observed that the resolution of Respondent No.2 was in its final stages and that any termination of the Concession Agreement by NHAI would complicate the resolution process. The Tribunal directed that the priority as given in Clause 4.1.1 of the Escrow Agreement should be followed and that appropriate measures should be taken for the final resolution of Respondent No.2.

Conclusion:
The Tribunal allowed the Application filed by the State Bank of India in terms of prayers (a), (b), (c), and (d), directing that NHAI should not recover any amount towards premium payment and other dues except in accordance with the waterfall mechanism prescribed under Clause 4.1.1 of the Escrow Agreement. The Tribunal also restrained NHAI from taking any actions that may jeopardize the resolution of Respondent No.2, including termination of the Concession Agreement and replacement of Respondent No.2 for toll collection.

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