Termination of a PPA during the Subsistence of Moratorium is in Violation Of the IBC: NCLAT

This order by NCLAT which supports the order given under NCLT, Kolkata can be supported on the basis of the following analysis and the summary provided below:

Analysis

This order by NCLAT which supports the order given under NCLT, Kolkata can be supported on the basis of the following analysis and the summary provided below:
  • Under the Insolvency and Bankruptcy Code, it has clearly been stipulated under section 31(1) that once any resolution plan has been duly approved by a committee of creditors, it is then strictly binding on each party including all the guarantors and any other stakeholder.
  • Reference to this can also be seen in landmark judgments passed by the apex court in the case of Swiss Ribbons Pvt. Ltd v Union of India and in the case of the Committee of Creditors of Essar Steel India Limited v Satish Kumar Gupta wherein it was given under both these judgments that once the NCLT had approved any resolution plan and thereby attained finality, if any termination of a PPA occurs post this it would imply a gross violation of the provisions under the IBC.
  • Furthermore, it is important to analyse section 14 of the IBC wherein it clearly stipulates the procedure for declaring a moratorium once any insolvency proceeding has been admitted against any corporate debtor. According to this section, such a moratorium period also includes a prohibition over the institution or any continuation of legal proceedings against the said corporate debtor and the subsequent transfer, creation of encumbrance, alienation or disposal of any assets, legal rights or beneficial interests. This thus proves that any such moratorium is only issued for the revival of the corporate debtor in the first place.
  • Further, if we refer to section 238 of the IBC, it states that the provisions under the IBC shall have effect notwithstanding any other inconsistency which may arise under any other law in force or any instrument through which such law is implemented. The provisions of the IBC remain clear and solid in their rules. For this we can also refer to the case of Astonfield Solar (Gujarat) Private Ltd v Gujarat Urja Vikas Nigam Limited, wherein there was a similar issue pertaining to the termination of a PPA in New-Delhi. While interpreting the scope of the word “instrument” given under section 238 it was duly concluded by the IBC that the PPA is in fact an “instrument” under section 238 of the IBC and hence any terms under the PPA which may be in direct contravention of any provision of the IBC cannot be duly imposed.
  • In the case mentioned above, there was a termination of the PPA solely on the basis of the corporate insolvency resolution process (CIRP) against the requisite corporate debtor and due to their failure to examine the same default within the stipulated period of 30 days after having received the notice of such a default. However, the NCLT felt that giving any credence to such a termination of a PPA would result in a reduced statutory period which is made available for completing the CIRP from 330 days to 30 days instead. Hence the NCLT set aside the above mentioned termination on the grounds that it was in direct and gross contravention of the IBC under section 238.
  • Further the NCLAT upheld the decision given by the NCLT when a further appeal was filed for the same order while giving credence to the fact that the subsistence of the PPA is equally important for ensuring the status of the corporate debtor as a going concern.
The Case

In a recent case of in GRIDCO Limited v Surya Kanta Sathapathy and Others on the 24th of July 2020, the National Company Law Appellate Tribunal (NCLAT) has held that any termination of a Power Purchase Agreement (PPA) during the subsistence of a moratorium would be in violation of Section 14(1) of the Insolvency and Bankruptcy Code 2016, thereby eliminating the said clause. In the case stated above, it was seen that the primary business of the said corporate debtor was the provision of power supply to GRIDCO Limited as per the contract between them and under the provisions of the PPA.

The matter which arose for conflict can be summarised below:
  • The contract arrangement between the two parties mentioned above was further approved by the Odisha Electricity Regulatory Commission for the supply of power to the grid.
  • However, soon there was a situation due to which the said corporate debtor stopped supplying the power to the appellant (GRIDCO) in June of 2018 stating the extreme weather conditions as a reason since the same had destroyed the solar power plant as well.
  • In retort to this, the appellant filed insolvency proceedings against the corporate debtor with the NCLT in Kolkata and subsequently a moratorium was imposed under section 14(1) of the Insolvency and Bankruptcy Code in February of 2019.
  • Despite the above and in full knowledge of the subsisting period of moratorium and the admission of insolvency, the appellant terminated the said PPA in August of 2019 which led to a further challenge of the same by the requisite resolution professional before the NCLT in Kolkata.
  • Subsequently, the NCLT through an order dated October, 14th 2019, being the order impugned under the current appeal, held that such a termination was in gross violation of section 14(1) of the IBC and thus the PPA was rightfully restored due to the same.
  • Moreover, once the order restoring the PPA was passed by the NCLT, the subsequent successful resolution applicant, submitted a resolution plan stating that the said PPA was valid and hence subsisting which had then been duly approved by the NCLT in Kolkata on the 25th of November, 2019.
  • Further, the appellant did not challenge the given order of the NCLT thereby approving the resolution plan but instead filed an appeal against the order of the NCLT which restored the PPA and due to this, the NCLAT further stipulated over the matter and set aside any termination of the PPA and thereby upheld the order passed by the NCLT clearing supporting its verdict which stated that any such termination pending during moratorium would be in gross violation of section 14(1) of the Insolvency and Bankruptcy Code.
Conclusion

It can be said that under the interpretation given by the NCLT in the case of Astonfield Solar (Gujarat) Private Ltd v Gujarat Urja Vikas Nigam Limited  for an “instrument” as provided under Section 238 of the IBC read with the decision of the NCLAT in its above mentioned decision in the GRIDCO judgement, it can therefore be concluded that Section 14(1) of the IBC has an effect notwithstanding any other provisions of any other law or under the provisions of the PPA. Subsequently, in the event of any termination of a PPA as per the provisions given under the said PPA, it would still result in a violation of section 14(1) of the IBC, once any insolvency had been instituted against the corporate debtor.