Terminating Contract with the Corporate Debtor during the CIRP – By Anoushka

Terminating Contract with the Corporate Debtor during the CIRP

(B.A.LL.B., Semester VII, National Law University, Jodhpur)

A. Introduction

Section 14 of the Insolvency and Bankruptcy Code (“The Code”) imposes a mortarium from taking certain actions against the corporate debtor from the date of the commencement of the Corporate Insolvency Resolution Process (“CIRP”). This includes a bar on the institution of new suits or continuation of them against the corporate debtor as well as any transferring or alienating of assets by the them along with other such restrictions. The goal of the mortarium is to protect the corporate debtor’s assets and to resurrect the firm as quickly as feasible through a change of management. As a result, the mortarium ensures a smooth and quick resolution process. However, the code does not, in entirety, answer the question of whether contracts with the corporate debtor can be terminated during the CIRP and does not provide a blanket bar on the same. In the absence of an explicit clause on the subject, Indian courts have stepped in with their own interpretation of sub-sections of Section 14, primarily prohibiting third parties from ending contractual relationships with the debtor since it would have a negative impact on them and so go against the spirit of the mortarium itself.

B. Analysing Section 14

(a) Section 14(1)(d)

This provision prohibits “recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.” It is, thus, evident from this clause that a lease agreement cannot be ended with the corporate debtor during the resolution process. Further, the Supreme Court in Rajendra K Bhutta v. Maharashtra Housing and Area Development Authority and Anr [2020] ibclaw.in 27 SC clarifying the scope of this provision, held that Section 14(1)(d) prohibits an “owner” from reclaiming property while the corporate debtor is in actual possession of such property, however “lessors” are prohibited from recovering property whether the debtor has physical or constructive possession under the lease agreement.

In Vijaykumar V Iyer v. Union of India [2019] ibclaw.in 09 NCLT the tribunal also read into Section 14(1)(d) to allow the uninterrupted use of an intangible asset, thereby holding that in agreements where ‘right to use’ is granted, should remain, during the period agreed upon, with the Corporate Debtor since the same is beneficial for the company as well as for all stake holders. In Vasudevan v. State of Karnataka and Others (2019) ibclaw.in 77 NCLT, the tribunal dismissed the termination of an iron ore mining lease since the corporate debtor’s primary business was the privilege granted to mine iron ore.

(b) Explanation to Section 14(1)

Added by an amendment in 2020, the explanation to Section 14(1) clarifies that any licence, permit, registration, quota, concession, clearances, or a similar grant or right that is vested to the corporate debtor by the government or an authority established under law, will not be suspended or terminated due to insolvency. However, it also cautions that the provision does not apply in cases where the non-payment of dues is happening during the mortarium period, therefore carving out an exception.

Additionally, the Supreme Court in the case of Gujarat Urja Vikas Nigam Limited v Amit Gupta and others (2021) ibclaw.in 44 SC had held that the incorporation of the explanation to Section 14(1) demonstrates that Parliament has been revising the IBC to ensure that a corporate debtor’s standing as a ‘going concern’ is not jeopardised due to various conditions that may not have been considered at the time the IBC was enacted.

(c) Section 14(2)

Section 14(2) of the Code expressly prohibits the termination of certain types of agreements with the corporate debtor during the mortarium; namely the suspension, termination, or interruption of the delivery of necessary goods or services to the corporate debtor.

According to the CIRP regulations, the term “essential goods and services” includes electricity, water, telecommunication services and information technology services. These are regarded as fundamental necessities for any corporate debtor to stay in business. However, the regulation also states that these would be essential supplies to the extent that these are not a direct input to the output produced or supplied by the corporate debtor. For example, Water supplied to a corporate debtor will be essential supplies for drinking and sanitation purposes, and not for generation of hydro-electricity.

 Further, the National Company Law Tribunals in various instances have not only restored the supply of these commodities to the corporate debtor, but have also gone beyond the scope of this provision to compel the continuance of additional supplies deemed important to the corporate debtor’s activities. For example, in Canara Bank v. Deccan Chronicle Holdings Limited, (CP No IB/41/7/HDB/2017) the tribunal held Water, Electricity, Prinking Ink, Printing Plates, Printing Blanker, Solvents etc. to also be under the purview of Section 14(2) as they are critical to the operations of the corporate debtor.

C. Termination clauses in PPA Agreements

In the landmark case of Gujarat Urja Vikas Nigam Limited v Amit Gupta and others (2021) ibclaw.in 44 SC the court gave an overriding effect to the code even when the PPA agreement allowed termination of contract on the grounds of insolvency. In this particular case, the PPA between the appellant (GUVN) and the corporate debtor stated that in the case of an event of default, the appellant would have the right to terminate the agreement. The event of default was also defined in the PPA under article 9.2.1(e) and stated that if the Corporate Debtor “becomes voluntarily or involuntarily, the subject of a proceeding in any bankruptcy or insolvency laws”, it would be considered as an event of default. The termination clause of the PPA is produced below for reference.

“9.3.1 Termination for Power Producer’s Default:

Upon the occurrence of an event of default as set out in sub-clause 9.21 above, GUNL may deliver a Default Notice to the Power Producer in writing which shall specify in reasonable detail the Event of Default giving rise to the default notice, and calling upon the Power Producer to remedy the same.

At the expiry of 30 (thirty) days from the delivery of this default notice and unless the Parties have agreed otherwise, or the Event of Default giving rise to the Default notice has been remedied, GUVNL may deliver a Termination Notice to the Power Producer. GUVNL may terminate this agreement by delivering such a Termination Notice to the Power Producer and intimate the same to the Commission. Upon delivery of the Termination Notice this Agreement shall stand terminated and GUVNL shall stand discharged of all its obligations. The Power Producer shall have liability to make payment within 30 days from the date of termination notice towards compensation to GUVNL equivalent to three years billing based on first year tariff considered on normative PLF while determining the tariff by Hon’ble GERC.

However, all payment obligations as per the Article 6 prior to the date of termination of the Agreement shall be met by the parties.

Where a Default Notice has been issued with respect to an Event of Default, which requires the co-operation of both GUVNL and the Power Producer to remedy, GUVNL shall render all reasonable cooperation to enable the Event of Default to be remedied without any legal obligations.”

The counsel for GUVNL contended that since it had followed the process provided in the clause 9.3 of PPA and had given notice of default, they thus acquired the absolute right to deliver the termination notice to the Corporate Debtor for termination of the PPA. The NCLT observed that, through the default notice, GUVNL asked that the Corporate Debtor correct the default mentioned in clause 9.2.1(e), which implies that, in order to avoid contract termination, the Corporate Debtor must terminate or complete the CIRP within 30 days of receipt of the notice. However, timelines of the CIRP statutorily prescribed under the IBC 2016, is 330 days. Thus, the tribunal concluded that clause 9.3.1 of the Power Purchase Agreement cannot be elevated above the statutory provisions of IBC 2016 in the context of establishing a timeframe for completion of the CIRP. When the matter went to Supreme Court on appeal, the court held that the termination sought by the appellant is solely on the ground of insolvency and going through with the same would affect the status of the corporate debtor as a going concern. It also agreed with NCLT’s interpretation of Section 238 – which allows the IBC to override other laws, and thus would also override the agreement between the parties in this case.

D. Exceptions to Non-Termination of Contract by Third Parties during CIRP

(a) Nature of contract not barred under Section 14

The courts have, however, allowed third parties to terminate the contracts with the corporate debtor during the CIPR on various instances. As we have seen above, various provisions within Section 14 bar certain types of contracts from being terminated by third parties. Thus, it logically follows that if the nature of the contract is not barred under Section 14, such a termination is allowed.

(b) Non-Payment of Dues is for the Moratorium Period

Further, it is also to be noted that IBC mandates that the dues owed for services provided to the Corporate Debtor during the CIRP be paid to the respective parties on an ongoing basis. In the event that the corporate debtor fails to make such payments, bankruptcy tribunals have granted third parties the right to terminate the underlying agreements. In the case of Uttarakhand Power Corporation vs ANG Industries, [2018] ibclaw.in 122 NCLAT the NCLAT ordered the appellant (Uttarakhand Power Corporation) in this case to pay the respondent the on-going dues for electricity and also allowed the respondent to terminate their agreement if the appellant does not pay within stipulated time.

(c) Does not lead to Corporate Death

However, the apex court, in the case of Gujarat Urja Vikas Nigam Limited v Amit Gupta and others (2021) ibclaw.in 44 SC warned the courts of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor’s sole contract. Thus, in this case, the court distinguished between a termination that would “dilute the worth of a corporate debtor” and one that would result in the corporate debtor’s “corporate death,” approving of the former and thus creating a welcome balance between the rights of the corporate debtor and counterparties.

E. Hurdles Present

Thus, in the absence of a definitive clause barring the termination of contracts with the corporate debtor, the Insolvency tribunals have set aside contract termination if it has the effect of either triggering the moratorium clauses described in Section 14 or prohibiting the corporate debtor from operating as a going concern. However, a legislative intervention is needed in the light of such a lacunae as differing interpretations of Section 14 lead to varying outcomes and leave the question of termination to the discretion of the courts on a case-by-case basis. Furthermore, while the CIRP Regulations specify the phrase “essential supplies,” the list is not exhaustive, and the courts have expanded the reach of this meaning to include supplies “critical” to the corporate debtor’s operations. However, there are no defined yardsticks for measuring the same, and various stakeholders may understand “essential supplies” differently.

F. A Way Forward

Assistance can be taken in this regard from the UNCITRAL Guide on Insolvency Law, which recommends to determine how contracts in which both the debtor and its counterparty have not yet completely completed their respective commitments should be dealt under insolvency law. Furthermore, while UNCITRAL recommendation 79 proposes mandating the counterparty to continue with the contract despite contractual breaches committed by the corporate debtor prior to the commencement of insolvency, it also requires the insolvency professional to cure the breach and return the counterparty to substantially the same economic position it was in prior to the breach. Incorporating a clause of a similar nature in the clause would ensure that, in addition to safeguarding the corporate debtor and supporting a successful resolution, the law considers the concerns and interests of affected third parties.


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