The Hon’ble Supreme Court of India (“Court“) in Gujarat Urja Vikas Nigam Limited (“GVNL”) versus Amit Gupta vide its judgement dated March 8, 2021, ruled that the provisions of the Insolvency and Bankruptcy IBC, 2016 (“IBC”) shall override Power Purchase Agreements (‘PPA‘) entered into by a corporate debtor. It upheld the decision of the National Company Law Appellate Tribunal (‘NCLAT‘) that stayed the termination of the PPA. The judgement was delivered by Justice Dr. Dhananjaya Y Chandrachud and Justice M.R. Shah.
Facts of the case
The Government of Gujarat on January 6, 2009, notified the Solar Power Policy to develop solar power projects in the state of Gujarat. On August 1, 2009, the GVNL allocated a 25-megawatt capacity to Astonfield Solar Gujarat Pvt. Ltd (”Astonfield”) for setting up a solar power project in Gujarat. GVNL signed a PPA with Astonfield to buy the power generated by Astonfield for twenty-five years with a tariff at high rate in the first twelve to fifteen years and a tariff at low rate for the remaining years of the contract. In the year 2015, there were floods in Gujarat, due to which the plant was closed for two months. Consequently, the plant was severely damaged due to floods and its electricity production capacity was reduced significantly. Therefore, in the year 2017, Gujarat was again affected by floods, and the plant could only operate at 10-15% of its capacity. These events had put Astonfield into a financial crisis, due to which it was not able to fully repay its dues to its creditors, and thereafter creditors declared Astonfield a Non-Performing Asset (“NPA“). Astonfield went for insolvency under section 10 of the IBC, as a consequence of which the NCLT initiated a Corporate Insolvency Resolution Process in respect of Astonfield and issued an order of moratorium. Subsequently, GVNL terminated the PPA with Astonfield on account of the presence of an ipso facto clause. The Resolution Professional (“RP“) appointed by the NCLT challenged this move, and the NCLT stayed the termination of PPA. An appeal against the order of the NCLT was also rejected by the NCLAT. Therefore, GVNL decided to move the Supreme Court and challenge the order of NCLAT.
Issues
The issues under consideration before the Court related to the termination of agreements based on ipso facto clauses and the jurisdiction of NCLT and NCLAT on disputes related to contract under section 60 of the IBC.
The Court dealt with the following two issues:
- whether NCLT and NCLAT can exercise jurisdiction under the IBC over contractual disputes under section 60 of the IBC.
- Validity of termination of the agreement on the basis of ipso facto clause.
Analysis
The counsel for Astonfield had argued that the termination of PPA by GVNL was against the scheme of the IBC, as it would put Astonfield into insolvency, and the continuation of PPA was vitally important for the entire resolution process and to keep Astonfield as an ongoing concern.
However, the Court held that PPA was terminated by GVNL only on the ground that Astonfield was under insolvency and if insolvency had not been initiated against GVNL, then the PPA would not have been terminated. The Court further held that this matter comes under the ambit of IBC and hence, NCLAT has jurisdiction under Section 60(5)(c) of the IBC to adjudicate the dispute.
The Court also held that the PPA would be considered as an instrument under section 238 of the IBC and therefore, the NCLT will have jurisdiction as the PPA was terminated solely on the ground of insolvency of Astonfield. However, the Court categorically submitted that the residuary power of the NCLT to adjudicate the matters pertaining to termination of the PPA would be required to be tested on a case-to-case basis, and the Court will not lay down general principles in this regard as it will be outside the legislative scope of the IBC. The Court also stated that the NCLT and NCLAT must ensure that they do not supersede the original jurisdiction of other courts or tribunals if the subject matter does not solely fall under the ambit of the IBC.
The Court also discussed the ipso facto clause and how multiple jurisdictions across the globe either validate or invalidate them. The Court held that the validation of the ipso facto clause arises from the mutual respect between the parties, and it prevents the debtor from selectively performing the contract.
The Court also took note that in jurisdictions where insolvency law overrides ipso facto clauses by invoking an ipso facto clause when a debtor is under a financial crisis may result in obstruction of the restructuring plans of the debtor. This protection is provided in various jurisdictions, such as Article 7 of the EU Directives, which categorically states that a party will not be permitted to terminate a contract based on ipso facto clauses if the defaulting party/corporate debtor undergoing restructuring. The US Bankruptcy also does not allow for termination of a lease or a contract on the basis of ipso facto clauses, although the United States permits swap agreements and securities agreements to be terminated based on ipso facto clauses.
The Court also brought in notice the UK Supreme Court’s judgement in Belmont Park Investments Private Limited vs BNY Corporate Trustee Services Limited, in which the court held that ipso facto clauses could not help in validating contracts that did not fulfil a legitimate commercial intent and were present only to evade an illegitimate bankruptcy or insolvency law. Furthermore, amendments were introduced to the Insolvency Act, 1986 of UK by virtue of the Corporate Insolvency & Governance Act , which makes termination of a demand-supply contract unenforceable on the basis of ipso facto clauses. The UK Court also noted Singapore’s insolvency law where the Insolvency, Restructuring and Dissolution Act clearly provides that ipso facto clauses cannot invalidate agreements in cases of insolvency.
The Court also discussed the situation in India about ipso facto clauses and held that Expert Committee on Company Law recommended the legislature for the need to invalidate ipso facto clauses during insolvency proceedings to bring the corporate debtor to smoothen the process of insolvency of the corporate debtor. The Court also pertinently mentioned that the IBC does not contain a provision that directly declares ipso facto clauses invalid during insolvency proceedings; however, section 14 of the IBC provides that essential service agreements cannot be terminated during insolvency proceedings. The Court took note of the situation between the corporate debtor’s liabilities in a commercial Agreement and also the hardship that the corporate debtor goes through on the basis of termination of ipso facto clause during insolvency. Nevertheless, the Court did not conclusively deal with the validity/ invalidity of ipso facto clauses in an agreement and left it to the legislature to deliberate upon the same and bring necessary amendments to the IBC.
Conclusion
IBC was incorporated to provide financial relief to a corporate debtor and give it a new lease of life. In order to meet its objective, the termination of agreements on the grounds of insolvency through the ipso facto clauses cannot be legally valid. Similar clauses of the Events of Default present in all PPAs is always a concern of the lenders/investors that if a company goes under insolvency proceedings, this clause will make life tougher for the generator. However, it is high time legislature should bring necessary amendments concerning the validity of ipso facto clauses during the insolvency in consonance with the multiple jurisdictions like the UK, United States and Singapore, where they have already incorporated the invalidity of ipso facto clauses in their insolvency legislations.