Supreme Court on jurisdiction of the NCLT to determine Agreements related to Insolvency
– By Mr. Arunabh Rajan,
Student, 4th year Gujarat National Law University
Case: Gujarat Urja Vikas Nigam Limited Versus Mr. Amit Gupta & Ors.
Civil Appeal No. 9241 of 2019
Case Citation: (2021) ibclaw.in 44 SC
|Appellant :||Gujarat urja vikas nigam limited|
|Respondent:||1. Amit Gupta(IRP/RP)
2. Export import bank of india
|Corporate Debtor||Astonfield Solar (Gujarat) Pvt. Ltd.|
On 1 August 2009, the Government of Gujarat allocated a 25-megawatt capacity project for developing and setting up a solar photovoltaic based power project for the period of 25 years.
The Gujarat Urja Vikas Nigam Limited (hereinafter referred as ’GUVNL’) and the Astonfield Solar(Gujarat) Pvt Ltd.(hereinafter referred as ‘ASGPL’) entered into a Power Purchase Agreement on 30 April 2010. The PPA was amended by two Supplementary Agreements dated 7 August 2010 and 13 April 2011. The project was commissioned with 1.296 MW capacity on 11 December 2012 and 10.212 MW capacity on 20 December 2012 wherein the tenure of the PPA was until December 2037.
- The first major issue arose between July to December 2015. During this period, there was heavy rainfall and floods in the State of Gujarat, due to which the Plant was shut down for two months. The Plant was severely damaged due to the floods, and the generation of electricity was temporarily paused. By December 2015, normalcy was restored in the generation of electricity and the Plant was generating electricity at 70% of its total generating capacity.
- During June and July 2017, Gujarat was again affected by floods due to heavy rainfall. The Plant was severely damaged due to the floods. Resultantly, it was only able to operate at 10-15% of its original capacity.
- Due to the financial stress caused by the disruptions and damage, for which insurance claims remained pending, ASGPL was unable to fully service its debt to the Financing Parties i.e the Export Import Bank of India (hereinafter referred as ‘Exim Bank’) and Power Finance Corporation), who proposed to declare the ASGPL a nonperforming asset (NPA).
- On 15 February 2018, in accordance with Article 8.1 of the PPA, the ASGPL intimated the appellant regarding the impact of the rainfall and floods on the Plant, and the measures adopted by it in this regard. ASGPL requested the appellant to treat the letter as a formal communication regarding cause for failure in the performance of the Corporate Debtor’s obligations under the PPA, and to confirm that this event may be treated as a Force Majeure Event’ in accordance with Article 8.1. however, the Exim bank declared it to be an NPA.
How does the Dispute Arose?
On 20 November 2018, the NCLT admitted a petition filed by the ASGPL itself under Section 10 of the IBC. NCLT commenced the Corporate Insolvency Resolution Process in respect of ASGPL, issued an order of moratorium and Amit Gupta (Hereinafter Referred as ‘IRP/RP’) was appointed as the Interim Resolution Professional who was later confirmed as the Resolution Professional by the NCLT.
Notices By the Appellant
GUVNL issued notice of default stating that that under Article 9.2.1(e) of the PPA, the ASGPL undergoing CIRP under the IBC amounts to an event of ‘default’. GUVNL called upon ASGPL to remedy this default within 30 days from the date of receipt of the said notice, failing which the GUVNL stated that it shall terminate the PPA by issuing a termination notice.
Proceedings before the NCLT
In May 2019, the IRP/RP and Exim bank filed applications under Section 60(5) of the IBC before the NCLT in regard to the Notices issued by the GUVPL to ASGPL, and sought an injunction restraining the appellant from terminating the PPA, wherein On 29 August 2019, the NCLT issued its final order and allowed the applications filed by the IRP/RP, thereby restraining the GUVPL from terminating the PPA and setting aside the Notice of default.
However, NCLT vide para 35 of the order made it clear that in the event that liquidation proceedings are initiated against the Corporate Debtor.
Para 35 as quoted
“It is however, made clear that if due to any reason, the Corporate Debtor goes into liquidation, the Respondent Company will be at liberty to terminate the Power Purchase Agreement.”
Proceedings before NCLAT
The order of the NCLT was passed in applications moved by the Resolution Professional of the ASGPL and Exim Bank under Section 60(5) of the Insolvency and Bankruptcy Code, 2016. On 15 October 2019, the NCLAT dismissed the appeal by the appellant under Section 61 of the IBC observing that GUVPL could not terminate the PPA solely on the ground of the initiation of CIRP of the ASGPL, which was supplying power to the appellant during the period of the CIRP. Further, it restrained the appellant from terminating the PPA even in the event that the Corporate Debtor underwent liquidation, by setting aside the observations made by the NCLT in paragraph 35 of the order dated 29 August 2019.
The decision by the NCLAT is challenged and therefore this appeal
Proceedings in the Supreme Court
Issues before the Court
- Whether the NCLT/NCLAT can exercise jurisdiction under the IBC over disputes arising from contracts such as the PPA?
- 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?
The court observed that he PPA sought to be terminated is 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 ASGPL. In the absence of the insolvency of ASGPL, there would be no ground to terminate the PPA and therefore proposed termination is not on a ground independent of the insolvency. The present dispute solely arises out of and relates to the insolvency of ASGPL. The court observed that the decision of termination of PPA has been taken by a parties of contract in relation to the initiation of insolvency proceedings against ASGPL according to the agreement terms and not by any governmental or statutory authority undertaking its public law functions. The sole contention of default as attributed to ASGPL was that it was undergoing CIRP, therefore invoking the jurisdiction of the NCLT under section 60(5)(c) of the IBC.
Para 75 as Quoted
“Reliance has also been placed on the judgement of this Court in Embassy Property (supra), where this Court held that the NCLT and NCLAT did not have jurisdiction over a dispute arising under the Mines and Minerals (Development and Regulation) Act, 1957, in relation to the refusal of the State of Karnataka to extend a mining lease. The primary consideration which weighed with this Court while coming to its decision was that NCLT cannot have jurisdiction on matters of public law
This Court held:
37….Clause (c) of Sub-section (5) of Section 60 is very broad in its sweep, in that it speaks about any question of law or fact, arising out of or in relation to insolvency resolution. But a decision taken by the government or a statutory authority in relation to a matter which is in the realm of public law, cannot, by any stretch of imagination, be brought within the fold of the phrase “arising out of or in relation to the insolvency resolution” appearing in Clause (c) of Sub-section (5)…
In the present case the decision to terminate the PPA has not been taken by any governmental or statutory authority acting within the domain of its public law functions. The decision has been simply taken by a contracting party solely on account of the initiation of insolvency proceedings against the Corporate Debtor in terms of an agreement between the parties.”
The court upheld the view taken by the NCLT in relation to Section 238 of the IBC which stipulates that IBC would override other laws, including an instrument having effect by virtue of any such law.
Para 77 as Quoted
“Section 238 of the IBC stipulates that IBC would override other laws, including an instrument having effect by virtue of any such law. The NCLT in its decision dated 29 August 2019 gave detailed findings on the issue of whether the PPA is an instrument within the meaning of section 238 of the IBC. Section 238 of the IBC provides:
―Section 238 – Provisions of this Code to override other laws The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
The findings of the NCLT are extracted below:
19. That from the plain reading of Section 238, it is evident that the aforesaid Section is applicable to an ‘instrument’ too. However, we find that the term ‘instrument’ has not been defined anywhere under IBC 2016.
20. To know, whether the Power Purchase Agreement (PPA) is an ‘instrument’ or not, we referred to the provisions of Section 3 (37) of the Code, which is reproduced as below: “Section 3(37) : Words and expressions used but not defined in this Code but defined in the Indian Contract Act, 1872, the Indian Partnership Act, 1932, the Securities Contract (Regulation) Act, 1956, the Securities Exchange Board of India Act, 1992, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Limited Liability Partnership Act, 2008 and the Companies Act, 2013, shall have the meanings respectively assigned to them in those Acts.”
21. However, in the definition clauses of all these enactments and of General Clause Act 1897, we failed to find a definition of the term ‘instrument’.
22. For interpretation of the term ‘instrument’, we, therefore, thought it proper to check how the Legislature has defined the term ‘instrument’ in other enactments.
23 . Finding that the PPA has been executed on a Stamp Paper, we referred to the Section 2(14) of the Indian Stamp Act, 1899, which reads as follows:
“Section 2(14): “Instrument” – “instrument” includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded.”
The court also in brief dealt with ipso facto clauses while dealing with the validity of the proposed termination of PPA and opined that it is rather a policy determination leaving it for legislative process.
Para 153 as Quoted
“As discussed in Section ―J.3 of this judgement, the broader question of the validity of ipso facto clauses has been the subject matter of sustained legislative intervention in many jurisdictions. This is an intricate policy determination, for it raises a series of questions about striking the appropriate balance between contractual freedom on the one hand and corporate rescue on the other. We are cognizant that any rule that we might craft, howsoever narrow, could have a series of unintended second order effects, in terms of opening the floodgates for intervention from the NCLT that might impinge upon contractual freedom of the terminating party. Further, the comparative experience also teaches us that, given that the invalidation of ipso facto clauses can unsettle the interests that contractual relationships are founded upon, some jurisdictions that have invalidated such clauses have done so in a cautious, prospective fashion. This ensures that while the policy of the insolvency law is brought into tandem with the global regimes, it does not affect the contractual rights of those parties who could not have reasonably accounted for this change in position while negotiating their contractual terms. Such an approach is an evidence and recognition of the harmful effects on commercial stability that such encroachment into contractual freedom can generate, even when done legislatively after careful deliberation.”
In view of the interpretation accorded by the NCLT in Astonfield Solar (Gujarat) Private Ltd v Gujarat Urja Vikas Nigam Limited to an “instrument” under Section 238 of the IBC read with the decision of the NCLAT and being upheld by the Apex Court, , keeping in mind the basic objective of the IBC, being, inter alia, the maximisation of value of assets of the corporate debtor and the fact that the sole business of the corporate debtor was to supply power to the Appellant, the termination of the PPA by the Appellant during insolvency proceedings would have rendered the CIRP redundant. Therefore, the termination of the PPA by the Appellant was not allowed rejecting the contention that it is a matter outside the jurisdiction of NCLT, However the apex court while Interpreting Section 60(5) IBC brought within it all the contracts that are related to or subject matter of the insolvency proceedings , the apex court appears to have further strengthened its approach to dealing with insolvency matters by favouring the alternative that allows keeping the corporate debtor as a going concern, while adopting a purposive interpretation of Section 60(5) and 238 of the IBC.
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