IBC Prevails Over Power Purchase Agreements, Supreme Court Says
The cooling tower of a power plant stands behind an electrical grid in Patna, Bihar, India (Photographer: Prashanth Vishwanathan/Bloomberg)  

IBC Prevails Over Power Purchase Agreements, Supreme Court Says

A power purchase agreement cannot be terminated during the moratorium period under the Insolvency and Bankruptcy Code, the Supreme Court has held.

A two-member bench of Justice Dhananjaya Chandrachud and Justice MR Shah observed that a buyer cannot terminate a power purchase agreement even if it contains a clause allowing such an action if an insolvency application is admitted against a power supplier.

As such, the insolvency tribunals correctly stayed the termination because any action otherwise could have resulted in the corporate death of the company, the apex court observed.

The case emanates from a 25-year agreement for purchase of solar power between Gujarat Urja Vikas Nigam Ltd., a state undertaking, and Astonfield Solar Gujarat Pvt.—a power generator. Astonfield underwent financial issues on account of natural calamities which prompted lenders to declare it a non-performing asset in 2015.

The National Company Law Tribunal allowed the initiation of the insolvency resolution process of the company in February 2019, which prompted GVNL to issue a notice for terminating the PPA.

The move was challenged by the resolution professional. The notice was stayed by the NCLT and an appeal against this was dismissed by the appellate tribunal, which prompted the power purchaser to move the apex court.

IBC Will Override PPAs, Supreme Court Says

Section 238 of the Insolvency Code states it will override the contrary provisions in any other existing law. In case of any inconsistency, the code will prevail over others. The law also states that a license, permit or permission granted to a corporate debtor cannot be terminated or suspended due to insolvency.

Counsel representing GVNL relied on the presence of an ipso facto clause—a clause which allows termination of an agreement on occurrence of a specified event—to argue it was entitled to terminate the agreement as soon as insolvency was initiated against the power supplier. He argued that:

  • The Electricity Act says that a State Electricity Commission, and not the NCLT will have the power to adjudicate certain disputes under the PPA.
  • GVNL cannot be prevented from exercising its contractual right to terminate the agreement.
  • As a resolution plan cannot override any other law, the NCLT lacks inherent power to set aside the termination of a contract.
  • And lastly, the power purchaser cannot be compelled to continue with the agreement with a new person if the corporate debtor undergoes liquidation.

Counsel for Astonfield Solar argued that the NCLT has power to deal with questions relating to, or arising out of the insolvency process. Termination of PPA was being done only because of initiation of insolvency resolution process. And lastly, the resolution plan for corporate debtor was dependent on continuation of the PPA.

The apex court agreed with the resolution professional’s stand and concluded that:

  • Resolution professional can approach insolvency tribunals for disputes that are related to insolvency resolution process.
  • Agreement in this case was terminated solely because of insolvency, which confers jurisdiction on NCLT to decide its validity. However it cannot be invoked in case of legitimate termination or when it is done on grounds which do not relate to insolvency.

The apex court refused to delve into the question of whether ipso facto clauses are valid or not, observing that the question can be decided through legislative action.

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