Supreme Court Upholds NCLT Jurisdiction in Contractual Disputes Arising from Insolvency: Gujarat Urja Vikas Nigam Limited vs. Amit Gupta & Ors. (2021) INSC 123

Introduction

Date of the Judgment: 8 March 2021

Citation: (2021) INSC 123

Judges: Dr. Dhananjaya Y Chandrachud, J and M. R. Shah, J

Can a contractual dispute arising from insolvency be adjudicated by the National Company Law Tribunal (NCLT)? The Supreme Court of India addressed this question in a recent case concerning the termination of a Power Purchase Agreement (PPA) due to the initiation of insolvency proceedings. The court examined the extent of NCLT’s jurisdiction over contractual matters intertwined with insolvency and the validity of clauses that allow contract termination upon insolvency. This judgment clarifies the powers of the NCLT in insolvency cases and the limitations on contractual rights during insolvency proceedings.

Case Background

The case involves a dispute between Gujarat Urja Vikas Nigam Limited (GUVNL), a state government undertaking, and Astonfield Solar (Gujarat) Private Limited, a solar power generating company. The dispute arose after Astonfield Solar entered into insolvency proceedings, leading GUVNL to attempt termination of their Power Purchase Agreement (PPA).

The Government of Gujarat had introduced a Solar Power Policy in 2009, encouraging solar power projects. Following this, GUVNL and Astonfield Solar entered into a PPA on April 30, 2010, for the purchase of power generated by Astonfield. The PPA was amended twice to increase plant capacity and change location. The agreement was to remain in force for 25 years from the commercial operation date, which was in December 2012.

In 2017, severe floods damaged Astonfield’s plant, causing financial distress and leading to the declaration of the company as a non-performing asset (NPA). Subsequently, Astonfield initiated Corporate Insolvency Resolution Process (CIRP) under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC) which was admitted by the NCLT on November 20, 2018.

On May 1, 2019, GUVNL issued two default notices to Astonfield, one citing the initiation of CIRP as an event of default under the PPA, and another citing issues with plant maintenance. GUVNL later stated that it would not act on the second notice. The NCLT, in response to applications by the Resolution Professional (RP) and Exim Bank, restrained GUVNL from terminating the PPA. This order was upheld by the National Company Law Appellate Tribunal (NCLAT), leading GUVNL to appeal to the Supreme Court.

Timeline

Legal Framework

The case involves several key legal provisions:

• Electricity Act, 2003: Sections 61(h), 62, and 86 empower the Gujarat Electricity Regulatory Commission (GERC) to regulate tariffs and adjudicate disputes in the power sector. Specifically, Section 86(1)(f) grants GERC the authority to adjudicate disputes between licensees and generating companies.
• Insolvency and Bankruptcy Code, 2016 (IBC):
  • Section 10: Allows a corporate debtor to initiate CIRP.
  • Section 14: Imposes a moratorium on actions against the corporate debtor during CIRP, including the recovery of property and termination of certain contracts. The explanation to Section 14(1) was added to clarify that government licenses and permits cannot be terminated solely due to insolvency.
  • Section 14(2) and 14(2A): Protects the supply of essential goods and services to the corporate debtor during the moratorium.
  • Section 20: Outlines the duties of the interim resolution professional (IRP) to maintain the corporate debtor as a going concern.
  • Section 25: Defines the duties of the resolution professional (RP), including the preservation of the corporate debtor’s assets and business operations.
  • Section 31: Deals with the approval of the resolution plan by the NCLT.
  • Section 60(5): Grants the NCLT jurisdiction over matters related to the insolvency resolution process, including questions of law or fact.
  • Section 238: Provides that the IBC overrides other laws that are inconsistent with it.
• Indian Contract Act, 1872: Governs the formation, novation, and alteration of contracts.

Arguments

Submissions on behalf of the appellant (GUVNL):

• The NCLT and NCLAT lack jurisdiction under the IBC to adjudicate contractual disputes.
• Section 60(5) of IBC should be interpreted in the context of Section 25(2)(b), which provides that the RP has to exercise the rights for the benefit of the corporate debtor in judicial, quasi judicial or arbitration proceedings.
• The PPA has a clause (Article 10.4) that grants jurisdiction to GERC for disputes, and Section 86(1)(f) of the Electricity Act also mandates that GERC should adjudicate disputes between licensees and generating companies.
• The NCLT cannot restrict GUVNL’s contractual rights under the PPA and the Electricity Act.
• The termination of the PPA was valid under Article 9.2.1(e) and Article 9.3.1 of the PPA.
• The PPA is not an “instrument” under Section 238 of the IBC and that the provisions of the PPA are not inconsistent with the IBC.
• The PPA’s ipso facto clause is a standard clause, and there is no provision in the IBC that prevents the exercise of such a contractual right.
• The NCLAT erred in setting aside the NCLT’s observation that the PPA could be terminated if liquidation proceedings were initiated.

Submissions on behalf of the respondents (RP and Exim Bank):

• The NCLT has jurisdiction under Section 60(5)(c) of the IBC to decide questions of law or fact arising out of or in relation to the insolvency resolution process.
• The termination of the PPA was directly related to the insolvency of the Corporate Debtor.
• The NCLT has the power to ensure the corporate debtor remains a “going concern”.
• The PPA is an “instrument” under Section 238 of the IBC, and the IBC overrides the PPA’s provisions.
• The PPA’s clauses are inconsistent with the IBC, as they specify a 30-day period for remedying default, while the IBC allows 330 days for CIRP.
• The legislative intent behind Section 14 is to protect the corporate debtor’s assets and ensure it remains a going concern, which requires the protection of the PPA.
• The PPA contemplates reorganization of the Corporate Debtor, and the insolvency proceedings are a form of reorganization.
• The termination of the PPA was not due to a default but a commercial decision to negotiate a better price.
• The resolution plan submitted by the Successful Resolution Applicant was dependent on the continuation of the PPA.

Summary of Arguments

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. Whether the NCLT/NCLAT can exercise jurisdiction under the IBC over disputes arising from contracts such as the PPA.
2. Whether the appellant’s right to terminate the PPA in terms of Article 9.2.1(e) read with 9.3.1 is regulated by the IBC.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Renusagar Power Co. Ltd. vs General Electric Company, Mansukhlal Dhanraj Jain vs Eknath Vithal Ogale, and Doypack System (P) Ltd. vs Union of India to interpret the expressions “arising out of” and “relating to” broadly.
• The Court referred to Sudharshan Chits (I) Ltd. vs O Sukumaran Pillar, Thampanoor Ravi vs Charupara Ravi, and Dhirendra Chandra Pal vs Associated Bank of Tripura Ltd. to discuss the interpretation of similar provisions in other insolvency laws.
• The Court relied on Union of India vs R. Gandhi, President, Madras Bar Association to discuss the history of NCLT and NCLAT.
• The Court considered Madras Petrochem Limited. vs BIFR, Innoventive Industries vs ICICI Bank, and Arcelor Mittal (India) (Private) Limited. vs Satish Kumar Gupta to highlight the objectives of IBC.
• The Court relied on Committee of Creditors of Essar Steel India Limited vs Satish Kumar Gupta to interpret Section 60(5)(c) as a residuary jurisdiction of NCLT.
• The Court used Remdeo Chauhan vs Bani Kant Das and D.R. Kohli vs Atul Products Ltd. to discuss the contours of residuary power.
• The Court referred to A. Deivendran vs State of T.N. to determine limitations of residuary jurisdiction under CrPC.
• The Court relied on Johri Lal Soni vs Bhanwari Bai to discuss the powers of an insolvency court.
• The Court distinguished the facts of the case from Embassy Property Development s (Private) Limited vs State of Karnataka and Municipal Corporation vs Abhilash Lal.
• The Court referred to Rai Sahib Ram Jawaya Kapur vs State of Punjab and Kesavananda Bharati vs State of Kerala to discuss the doctrine of separation of powers.
• The Court referred to Northern Securities Company vs United States to discuss the limitations of the judicial process.
• The Court relied on S. Sukumar vs The Secretary, Institute of Chartered Accountants of India to adopt a dialogical approach.
• The Court referred to P Mohanraj vs Shah Brothers Ispat Pvt. Ltd. to expound upon the object of Section 14 of the IBC.

What weighed in the mind of the Court?

The Supreme Court emphasized several points in its reasoning:

• The primary objective of the IBC is to ensure the revival and continuation of the corporate debtor as a going concern.
• The PPA was the sole contract of the Corporate Debtor, and its termination would lead to the corporate death of the debtor.
• The NCLT has the jurisdiction to intervene in contractual matters that are directly linked to the insolvency of the corporate debtor.
• The court acknowledged the tension between respecting contractual freedom and ensuring corporate rescue, emphasizing the need for legislative guidance.
• The court noted that the IBC has been amended multiple times to ensure the corporate debtor remains a going concern during CIRP.
• The court also noted that the PPA was terminated solely on the ground of insolvency, which gave the NCLT jurisdiction under Section 60(5)(c).

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning:

Conclusion

The Supreme Court’s judgment in Gujarat Urja Vikas Nigam Limited vs. Amit Gupta & Ors. clarifies the jurisdiction of the NCLT in contractual disputes arising from insolvency proceedings. The Court held that the NCLT has the power to adjudicate disputes arising out of or in relation to the insolvency of a corporate debtor, even if those disputes involve contractual matters. The Court also ruled that a contract’s ipso facto clause, which allows termination upon the initiation of insolvency proceedings, is not valid if it hinders the corporate debtor’s revival as a going concern.

Key Takeaways:

• The NCLT has broad jurisdiction under Section 60(5)(c) of the IBC to adjudicate disputes that are directly linked to the insolvency of a corporate debtor.
• Ipso facto clauses in contracts that allow termination upon the initiation of insolvency proceedings are not valid if they impede the corporate debtor’s revival.
• The primary objective of the IBC is to ensure the corporate debtor remains a going concern, which overrides contractual rights that hinder this objective.
• The judgment highlights the tension between respecting contractual freedom and ensuring corporate rescue, and the need for legislative guidance on ipso facto clauses.
• The judgment implies that contractual rights are not absolute and can be restricted in the interest of corporate rescue.

Implications:

• For Insolvency Law: The judgment reinforces the NCLT’s role as the primary authority for resolving disputes related to insolvency proceedings. It also clarifies that the IBC has primacy over other laws and contractual rights that are inconsistent with its objectives.
• For Contract Law: The judgment limits the enforceability of ipso facto clauses in contracts, particularly those that could lead to the corporate death of the debtor. It emphasizes that contractual rights are not absolute and can be restricted in the interest of corporate rescue.
• For Businesses: Businesses need to carefully review their contracts and avoid relying on ipso facto clauses that could be invalidated during insolvency proceedings. They should also be aware that the NCLT has broad jurisdiction to intervene in contractual matters related to insolvency.
• For Legislators: The judgment calls for legislative guidance on the validity of ipso facto clauses in contracts, particularly in the context of insolvency proceedings.