The Supreme Court, in a recent order, has said that the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) had correctly stayed the termination of the power purchase agreement (PPA) between a solar power developer and the Gujarat Urja Vikas Nigam Limited (GUVNL).

The court said that allowing the PPA termination would have resulted in the corporate debtor’s ‘death’ due to the PPA being its sole contract.

GUVNL had filed a petition challenging NCLT and NCLAT’s jurisdiction over disputes arising from contracts such as the PPA and whether it had the right to terminate the PPA.

Background

On August 01, 2009, the Gujarat government allocated 25 MW capacity to Astonfield Solar Gujarat to set up a solar project. The developer expressed its intent to set up a 10 MW grid-connected solar power project and sell the entire energy to GUVNL.

GUVNL entered into a PPA with the solar developer on April 30, 2010, to purchase solar power.

The first few years of the PPA went smoothly, but the first major issue arose between July and December 2015. The period was marred by heavy rains and floods, which led to the project’s closure for two months. By December 2015, the normalcy was restored, and the project was generating 70% of the total capacity. During June and July 2017, Gujarat was again affected by floods, and it was only able to operate at 10-15% of the total capacity.

As a result of the solar developer’s persistent default, the lenders declared the company a non-performing asset. Later, the developer filed a petition with the NCLT to initiate the corporate insolvency resolution procedure. GUVNL issued the notice for default on May 1, 2019. The developer requested the NCLT to restrain GUVNL from terminating the PPA.

In its submission, GUVNL said that assuming that the NCLT could have had jurisdiction over the dispute, there was no embargo under the insolvency and bankruptcy code (IBC) on the exercise of contractual rights by it.

Consequently, NCLT  restrained GUVNL from terminating the PPA and held that the PPA clauses could not be put on a higher pedestal than the provisions of IBC. Aggrieved by the judgment of NCLT, GUVNL approached the Supreme Court on two grounds:

• NCLT and NCLAT do not have the jurisdiction to adjudicate a contractual dispute
• The termination of the PPA was valid under the provisions of the PPA

Court’s Analysis

The Supreme Court noted that NCLT had the sole power of addressing cases arising solely from or those relating to the corporate debtor’s insolvency. It said that there was no other ground to terminate the PPA signed between the parties.

The court said that the Electricity Act empowered the Gujarat Electricity Regulatory Commission (GERC) to adjudicate the dispute between the generator and the DISCOM. However, NCLT had the power to adjudicate the present dispute because the sole default attributed by GUVNL to the corporate debtor was that it was undergoing an insolvency resolution process.

“In the present case, the PPA was terminated 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 corporate debtor. In the absence of the corporate debtor’s insolvency, there would be no ground to terminate the PPA. The termination is not on a ground independent of the insolvency. The present dispute solely arises out of and relates to the insolvency of the corporate debtor,” the court noted.

The apex court observed that NCLT was empowered to restrain GUVNL from terminating the PPA and clarified that the decision was based on the fact that PPA was central in the present case for the success of the corporate insolvency resolution process (CIRP) since it was the sole contract for the sale of electricity which was entered into by the generator.

“Since we have set aside the termination of the PPA based on the reasons discussed above, the appellant is liable to pay for the electricity procured after June 07, 2019. Consequently, the appellant’s claim in respect of compensation for the termination of the PPA in terms of Article 9.3.1 of the PPA does not arise because it is restrained from terminating the PPA,” the court said.

Speaking to Mercom on the Supreme Court order, attorney Aditya K. Singh said, “If electricity regulatory commissions had adjudicated this dispute, they would not have any option except to recognize the right given under the PPA, and it would have disastrous consequences and would defeat the objectives of the IBC. However, the court has also rightly cautioned the NCLT and NCLAT to ensure that they do not usurp the legitimate jurisdiction of other courts and tribunals when the dispute does not arise solely from or relate to the insolvency of the corporate debtor.”

Previously, Mercom reported that the Supreme Court had ordered the quashing of a circular issued by the Reserve Bank of India (RBI) on non-performing assets. The RBI had issued a circular saying that the lenders have to provide for a resolution plan within 180 days in case of a large account of ₹20 billion (~$288 million) and above.