1
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal No. 9241 of 2019
Gujarat Urja Vikas Nigam Limited .... Appellant
Versus
Mr. Amit Gupta & Ors. .... Respondents
2
J U D G M E N T
Dr Dhananjaya Y Chandrachud, J
This judgment has been divided into sections to facilitate analysis. They are:
A The appeal
B The genesis of the PPA
C Initiation of CIRP
D Termination of the PPA
E Proceedings before NCLT and NCLAT
F Proceedings by the Successful Resolution Applicant
G Submissions of counsel
G.1 Submissions on behalf of the appellant
G.2 Submissions on behalf of the respondents
H Issues arising from the dispute
I Jurisdiction of the NCLT/NCLAT over contractual disputes
I.1 Section 60(5)(c): ―arising out of‖ and ―in relation to‖
I.2 Jurisdiction of NCLT and GERC
I.3 Residuary jurisdiction of the NCLT under Section 60(5)(c)
J Validity of ipso facto clauses
J.1 Position of international and multilateral organisations
3
J.2 National jurisdictions
J.3 Position in India
K Appellant‘s right to terminate the PPA in the present case
K.1 Analysis of the PPA
K.2 Validity of the termination of PPA
K.3 Dialogical Remedies
L NCLAT‘s decision on the issue of liquidation
M Appellant‘s liability to pay for the electricity interjected by the Corporate
Debtor
N Conclusion
PART A
4
A The appeal
1 By its judgment dated 29 August 2019, the National Company Law
Tribunal1
stayed the termination by the appellant of its Power Purchase
Agreement2 with Astonfield Solar (Gujarat) Private Limited3
. The order of the
NCLT was passed in applications4 moved by the Resolution Professional of the
Corporate Debtor5
and Exim Bank6
under Section 60(5) of the Insolvency and
Bankruptcy Code, 20167
. On 15 October 2019, the NCLAT dismissed the appeal
by the appellant8
under Section 61 of the IBC. The decision by the NCLAT is
called into question.
2 The appellant assails the order dated 15 October 2019 of the NCLAT on,
inter alia, two broad grounds: first, that the NCLT and NCLAT do not possess
jurisdiction under the IBC to adjudicate on a contractual dispute between the
appellant and the Corporate Debtor; and second, in any event, the termination of
the PPA was validly made under Article 9.2.1(e) and Article 9.3.1 of the PPA.
1
―NCLT‖ or ―Adjudicating Authority”
2
―PPA‖
3
―third respondent‖ or ―Corporate Debtor‖
4 CA No. 701/2019 (first respondent); CA No. 700/2019 (second respondent)
5
―first respondent‖ or ―RP”
6
―second respondent‖
7
―IBC‖
8
―appellant‖ or ―GUVNL‖
PART B
5
B The genesis of the PPA
3 The narrative of this case begins with the Government of Gujarat notifying
the Solar Power Policy, 20099
on 6 January 2009, for development of Solar
Power projects in the state. The appellant, a Government of Gujarat undertaking,
is a successor to the Gujarat Electricity Board, and is also the holding company
of all the State Power Utilities in Gujarat.
4 On 1 August 2009, the Government of Gujarat allocated a 25-megawatt
capacity to the Corporate Debtor for developing and setting up a solar
photovoltaic based power project in the State of Gujarat. The Corporate Debtor
expressed its desire to setup a ‗Solar Photovoltaic Grid Interactive Power Plant'10
of 10-megawatt capacity and exercised its option for sale of the entire electrical
energy produced from the plant to the appellant for commercial purposes.
5 In exercise of its powers under Sections 61(h), 62 and 86 of the Electricity
Act, 200311, the Gujarat Electricity Regulatory Commission12 published a draft
tariff order for purchase of solar energy, inviting comments and suggestions from
members of the public and stakeholders. Public hearings were held by the State
Commission on the price at which power could be procured.
6 After the process of public hearings and consultations, a Tariff Order dated
29 January 201013 was issued by the State Commission for procurement of
power by the appellant from power producers, under Section 86(1)(a) of
9
―Policy‖
10 ―Plant‖
11 ―Electricity Act‖
12 ―State Commission‖ or ―GERC‖
13 ―First Tariff Order‖
PART B
6
Electricity Act. The tariff was determined on the basis of the then prevailing
capital and financing costs, and debt equity ratio. It was envisaged that the PPA
will be for 25 years, with higher tariffs in the first 12-15 years, and a scaled-down
tariff for the remaining years. The tariff was to be applicable to solar projects
commissioned within the control period of the First Tariff Order, i.e., from 29
January 2010 to 28 January 2012.
7 The appellant filed a petition before the State Commission on 28 May
2013, seeking initiation of proceedings for re-determination of the capital cost and
tariff fixed under the First Tariff Order. This petition was filed on the basis that
subsequent incentives given to power producers on 27 February 2010 had
brought down their cost of capital and, as a consequence, the tariff fixed under
the First Tariff Order should be revised. This petition was dismissed by the State
Commission on 8 August 2013. An appeal against the order was dismissed by
the Appellate Tribunal for Electricity14 on 22 August 2014. An appeal15 against
APTEL‘s decision is pending before this Court, with notice having been issued on
28 November 2014.
8 The appellant and the Corporate Debtor entered into a PPA on 30 April
2010, in accordance with which the appellant has to purchase all the power
generated by the Corporate Debtor. The PPA was amended by two
Supplementary Agreements dated 7 August 2010 and 13 April 2011, due to an
increase in the capacity of the Plant and a change in its location.
14 ―APTEL‖
15 Civil Appeal No. 10301 of 2014
PART B
7
9 Article 9.1 of the PPA provides that it would remain in force for 25 years,
from the ‗Commercial Operation Date‘ which, in accordance with Article 1.1 is
―the date on which the Solar Photovoltaic Grid Interactive power plant is available
for commercial operation (certified by GEDA) and such date as specified in a
written notice given at least ten days in advance by the [Corporate Debtor] to
GUVNL‖.
10 Article 5.2 of the PPA stipulates that in case the commissioning of the
Plant is delayed beyond 31 December 2011, the appellant shall pay the tariff as
determined by the State Commission for Solar Projects effective on the date of
commissioning of the Plant or the tariff provided under the clause, whichever is
lower. Article 5.2 provides that Rs 15 per unit is payable for the first 12 years and
Rs 5 per unit is payable from the 13th to the 25th year.
11 While the Corporate Debtor was in the process of commissioning the
Plant, the State Commission, in exercise of its powers under Sections 62 and 86
of the Electricity Act, issued the Tariff Order dated 27 January 201216 for
procurement of power from solar energy developers by distribution licensees in
the State of Gujarat. The tariff was to be applicable to solar projects
commissioned within the control period of the Tariff Order, i.e., from 29 January
2012 to 31 March 2015.
12 Having signed the financing documents and attained financial closure with
the second respondent and Power Finance Corporation in terms of the PPA, and
established the Plant as defined in it, the Corporate Debtor commissioned 1.296
16 ―Second Tariff Order‖
PART C
8
MW on 11 December 2012 and 10.212 MW on 20 December 2012. Accordingly,
the PPA was to remain in force until December 2037.
13 Since it was commissioned within the applicable period of the Second
Tariff Order, the tariff applicable was Rs 9.98 per unit for first 12 years and Rs 7
per unit for next 13 years.
C Initiation of CIRP
14 The initial years of the operationalization of the PPA appear to have been
relatively calm. The first major issue arose between July to December 2015.
During this period, there was heavy rainfall and floods in the State of Gujarat, due
to which the Plant was shut down for two months. The Plant was severely
damaged due to the floods, and the generation of electricity was temporarily
paused. By December 2015, normalcy was restored in the generation of
electricity and the Plant was generating electricity at 70% of its total generating
capacity.
15 During June and July 2017, Gujarat was again affected by floods due to
heavy rainfall. The Plant was severely damaged due to the floods. Resultantly, it
was only able to operate at 10-15% of its original capacity.
16 Due to the financial stress caused by the disruptions and damage, for
which insurance claims remained pending, the Corporate Debtor was unable to
fully service its debt to the Financing Parties (the second respondent and Power
Finance Corporation), who proposed to declare the Corporate Debtor a nonperforming asset (―NPA‖).
PART C
9
17 On 15 February 2018, in accordance with Article 8.1 of the PPA, the
Corporate Debtor intimated the appellant regarding the impact of the rainfall and
floods on the Plant, and the measures adopted by it in this regard. The Corporate
Debtor requested the appellant to treat the letter as a formal communication
regarding cause for failure in the performance of the Corporate Debtor's
obligations under the PPA, and to confirm that this event may be treated as a
‗Force Majeure Event' in accordance with Article 8.1.
18 On 4 May 2018, the second respondent declared the Corporate Debtor to
be an NPA. On 20 November 2018, the NCLT admitted a petition17 filed by the
Corporate Debtor under Section 10 of the IBC. NCLT commenced the Corporate
Insolvency Resolution Process18 in respect of the Corporate Debtor, issued an
order of moratorium and the first respondent was appointed as the Interim
Resolution Professional19
.
19 The second respondent and Power Finance Corporation Limited, filed an
appeal20 challenging the order dated 20 November 2018. The appeal was
dismissed by the NCLAT on 4 December 2018, holding that the right of the
Corporate Debtor‘s shareholders to vote on the initiation of the CIRP under
Section 10 of the IBC was not curtailed by the Deed of Pledge of Securities dated
28 March 2013 entered into between the Corporate Debtor, the second
respondent and Power Finance Corporation Limited. The first respondent was
confirmed as the RP by the NCLT on 1 February 2019.
17 CIRP petition, C.P. (I.B.) No. 940(ND)/2018
18 ―CIRP‖
19 ―IRP‖
20 Company Appeal (Insolvency) No. 754 of 2018
PART D
10
D Termination of the PPA
20 The appellant issued two notices of default to the Corporate Debtor on 1
May 2019, which were received by the first respondent on 8 May 2019:
(i) The basis of the First Notice is that under Article 9.2.1(e) of the PPA, the
Corporate Debtor undergoing CIRP under the IBC amounts to an ‗event of
default'. The appellant called upon the Corporate Debtor to remedy this
default within 30 days from the date of receipt of the said notice, failing
which the appellant stated that it shall terminate the PPA by issuing a
termination notice; and
(ii) The basis of the Second Notice is that under Article 9.2.1(a) of the PPA,
there was a default in the operation and maintenance of the Plant. Once
again, the appellant called upon the Corporate Debtor to remedy the O&M
default within 90 days from the receipt of the notice, failing which the
appellant stated that it shall terminate the PPA by issuing a termination
notice.
21 The first respondent issued his replies to both the notices on 10 May 2019.
The replies are summarized below:
(i) The reply to the First Notice states that the Corporate Debtor‘s PPA with
the appellant is its only PPA, and hence they are heavily dependent on it
for reaching a resolution under the IBC. In case the appellant terminates
the PPA, prospective resolution applicants21 who had submitted their
21 ―PRAs‖
PART D
11
expression of interest for the Corporate Debtor might not submit a
resolution plan, which would eventually lead to liquidation of the Corporate
Debtor, defeating the main object of the IBC; and
(ii) The reply to the Second Notice states that since the Corporate Debtor is
undergoing CIRP under the IBC, the operations at the Plant were severely
affected due to force majeure events in terms of the PPA. Thus, the
conditions of the PPA could not be said to have been breached.
22 On 21 May 2019, a meeting was scheduled between the first respondent
and the General Manager (IPP) of the appellant. During this meeting, the first
respondent emphasized that if the PPA was to be terminated, revival of the
Corporate Debtor will be at stake, since prospective resolution applicants may not
submit resolution plans or may withdraw the resolution plans, if submitted, citing
termination of the PPA. Declining to accede to this position, the appellant made it
clear that in accordance with a legal opinion obtained by them, they will be
terminating the PPA under Articles 9.2.1(e) and 9.3.1 under the First Notice,
since the Corporate Debtor is under CIRP. However, the appellant confirmed that
the O&M default stood cured, and hence it would not act upon the Second
Notice. It may also be noted at this stage that the appellant has not pressed the
issue of the O&M default either before this Court or before the NCLAT/NCLT.
PART E
12
E Proceedings before NCLT and NCLAT
23 In May 2019, the first and second respondents filed applications under
Section 60(5) of the IBC before the NCLT in regard to the Notices issued by the
appellant to the Corporate Debtor, and sought an injunction restraining the
appellant from terminating the PPA. By an interim order dated 31 May 2019,
NCLT restrained the appellant from terminating the PPA till the next date of
hearing.
24 While the interim order was in operation, the appellant wrote to the first
respondent on 7 June 2019, stating that the notice period for curing the default
had expired. The appellant claimed that Corporate Debtor had failed to cure the
default, as a result of which the appellant was entitled to issue the final
termination notice under Article 9.3.1 of the PPA. However, since the NCLT had
provided an interim protection to the Corporate Debtor till the next date of hearing
(12 June 2019), the appellant stated that it was not issuing the final termination
notice at the present.
25 On 29 August 2019, the NCLT issued its final order through which it
allowed the applications filed by the first and second respondents, thereby
restraining the appellant from terminating the PPA and setting aside the First
Notice. The NCLT‘s reasoning is premised on the following:
(i) The clauses of the PPA cannot be placed on a higher pedestal than the
provisions of the IBC, in the context of drawing a timeline for completion of
the CIRP. The fact that the CIRP has not concluded within 30 days from
PART E
13
the receipt of the notice of default cannot be construed as an event of
default since the time limit for the CIRP under the IBC is 330 days; and
(ii) The PPA is an ‗instrument‘ within the meaning of Section 238 of the IBC.
The clauses of the PPA are inconsistent with the provisions of the IBC, and
stand overridden.
However, in paragraph 35 of its order, the NCLT held that the appellant could
terminate the PPA, in the event that liquidation proceedings are initiated against
the Corporate Debtor. Paragraph 35 reads thus:
―35. It is however, made clear that if due to any reason, the
Corporate Debtor goes into liquidation, the Respondent
Company will be at liberty to terminate the Power Purchase
Agreement.‖
26 The NCLAT by its judgment dated 15 October 2019 dismissed the appeal
against the NCLT‘s order. The NCLAT noted that the appellant attempted to
terminate the PPA on the sole ground that the CIRP has been initiated for the
Corporate Debtor. It observed that during the CIRP, the first respondent has to
maintain the Corporate Debtor as a ‗going concern‘ and the termination of its sole
PPA, under which it supplied electricity only to the appellant, would render the
Corporate Debtor defunct. Hence, the NCLAT held that the appellant could not
terminate the PPA solely on the ground of the initiation of CIRP of the Corporate
Debtor, which was supplying power to the appellant during the period of the
CIRP. Further, it restrained the appellant from terminating the PPA even in the
event that the Corporate Debtor underwent liquidation, by setting aside the
PART F
14
observations made by the NCLT in paragraph 35 of the order dated 29 August
2019.
27 The NCLAT thereafter directed the appellant to pay the dues for power
supplied by the Corporate Debtor during the CIRP period. On 12 June 2020, the
appellant, as an interim measure but without prejudice to its rights, agreed to
release an ad-hoc payment of Rs 50 lakhs to the Corporate Debtor. However, the
appellant informed the first respondent that this payment to the Corporate Debtor
is conditional, and the Corporate Debtor must submit an undertaking on stamp
paper stating that the amount released by the appellant will be refunded to them
with interest, in case this Court allows the present appeal. The first respondent
furnished the undertaking sought on 18 June 2020, following which the appellant
released an ad-hoc payment of Rs 50 lakhs to the Corporate Debtor on 1 July
2020. Since then, the appellant has paid a further amount of Rs 1.07 crores to
the Corporate Debtor, against a similar written undertaking given by first
respondent dated 27 January 2021.
F Proceedings by the Successful Resolution Applicant
28 During the course of these hearings, the court has been informed of
parallel proceedings initiated against the respondents by M/s Kundan Care
Products Limited
22
, whose Resolution Plan in relation to the Corporate Debtor
was approved by 99.28% of voting shares of the Committee of Creditors23
.
22 ―Successful Resolution Applicant‖
23 ―CoC‖
PART F
15
29 An application24 under Section 31 of the IBC was filed by the first
respondent on 15 November 2019 before the NCLT seeking approval of the
Resolution Plan approved by the CoC. This application is currently pending
adjudication before the NCLT, due to the present appeal filed by the appellant
before this Court.
30 However, on 20 December 2019, the Successful Resolution Applicant filed
an application25 under Section 60(5) of the IBC before the NCLT, seeking
withdrawal of their Resolution Plan submitted for the Corporate Debtor. Further,
on 16 January 2020, the Successful Resolution Applicant filed an interlocutory
application26 before this Court in the present appeal, seeking certain reliefs from
this Court or, in the alternative, seeking permission of this Court to allow them to
withdraw their Resolution Plan dated 12 November 2019. This Court allowed the
Successful Resolution Applicant to withdraw the interlocutory application filed in
the present appeal on 20 July 2020.
31 The NCLT by an order dated 3 July 2020, dismissed the application filed
by the Successful Resolution Applicant, thereby refusing to grant them
permission to withdraw the Resolution Plan. Thereafter, the NCLAT by a
judgment dated 30 September 2020, dismissed the appeal filed by the
Successful Resolution Applicant against NCLT‘s order dated 3 July 2020.
24 C.A. No. 1526 of 2019
25 C.A. 1679 of 2019
26 I.A. No. 9682 of 2020
PART G
16
32 The Successful Resolution Applicant has since filed an appeal27 before this
Court challenging NCLAT‘s judgment dated 30 September 2020. By an order
dated 16 November 2020, this Court granted a stay against the NCLAT‘s
judgment dated 30 September 2020.
G Submissions of counsel
G.1 Submissions on behalf of the appellant
33 The case of the appellant has been presented initially in the articulate and
carefully reasoned submissions made by Ms Ranjitha Ramachandran, learned
counsel. Mr Shyam Diwan, learned senior counsel has then urged his
submissions. The following submissions were urged in relation to the jurisdiction
of the NCLT/NCLAT under section 60(5) of the IBC:
(i) Section 60(5) must be interpreted in the context of Section 25(2)(b) of the
IBC, which provides that the RP has to ―exercise the rights for the benefit
of the corporate debtor in judicial, quasi judicial or arbitration proceedings.‖
Hence, if NCLT is conferred with the exclusive jurisdiction in relation to the
Corporate Debtor, this section would be rendered redundant. This Court in
Embassy Property Developments (Private) Limited vs State of
Karnataka28 has held that the RP cannot sidestep the jurisdiction of other
authorities and approach the NCLT for the enforcement of the Corporate
Debtor‘s rights. Although this judgment was in the context of a renewal of a
mining lease by a statutory authority, the interpretation of Section 60(5)
would not be limited to statutory authorities particularly in the backdrop of
27 Civil Appeal No. 3560 of 2020
28 (2020) 13 SCC 308; hereinafter referred to as ―Embassy Property‖
PART G
17
Sections 18 (duties of interim resolution professional) and 25(2)(b). In the
present case, Article 10.4 of the PPA has granted jurisdiction to the State
Commission, the regulatory authority under the Electricity Act, to entertain
disputes relating to the PPA. Article 10.4 provides:
―In the event that such differences or disputes between the
Parties are not settled through mutual negotiations within
sixty (60) days, after such dispute arises, then it shall be
adjudicated by the Commission in accordance with Law.‖
(ii) Section 86(1)(f) of the Electricity Act provides that the State Commission
shall discharge the function of adjudicating ―the disputes between the
licensees, and generating companies and to refer any dispute for
arbitration‖. Therefore, any issue in relation to the PPA must be raised
before the State Commission, and not the NCLT. Further, the second
respondent has no locus to file a petition before the NCLT in relation to the
PPA;
(iii) The NCLT cannot preclude the appellant from exercising its contractual
rights under the PPA read with the Electricity Act;
(iv) If Section 60(5) is given a broad interpretation to include contractual
disputes, it would disrupt the streamlined and timebound process under
the IBC. Although the NCLT, being conscious of its limitations, has not
proceeded to adjudicate on whether the termination of the PPA was valid,
or dwelt on the interpretation of the PPA, it has still erroneously set aside
the termination of the PPA by the appellant without any basis under the
IBC;
PART G
18
(v) Even if it is assumed that NCLT has jurisdiction over disputes relating to
the PPA, the adjudication of such disputes should be in accordance with
the PPA. The sanctity of the contracts must be upheld unless there is a
statutory provision interdicting such contracts. There can be no exercise of
any inherent or residual power by the NCLT to set aside the termination of
a contract absent a statutory interdict. The Resolution Applicant or NCLT
have no powers to modify the PPA through a resolution plan. The
formation, novation or alteration of the contract must be in accordance with
Section 30(2)(e) of the IBC, which provides that the Resolution Plan
cannot contravene any provision of law which is in force. The provisions of
the Indian Contract Act, 1872 (―Contract Act‖), require mutual agreement
of the parties for such a modification;
(vi) The submission of the respondents that ‗property‘ under Section 3(27) of
the IBC includes an actionable claim and hence the dispute falls under the
jurisdiction of the NCLT is erroneous in view of the judgement in Embassy
Property (supra);
(vii) The contention of the respondents that there is a direct connection
between the termination of the PPA by the appellant and the insolvency
resolution process should be rejected because the issue in the present
case is not of interpretation of the insolvency resolution process but of the
PPA, and only the State Commission has the jurisdiction to interpret the
PPA; and
PART G
19
(viii) The respondents have relied on judgments under other statutes like the
Companies Act, 195629, Banking Regulation Act, 194930 and Provincial
Insolvency Act, 192031 with provisions corresponding to Section 60(5).
However, these statutes do not contain any provisions equivalent to
Sections 18 and 25 (2) (b) of IBC. The interplay between these provisions
and Section 60(5) must be considered for the purpose of determining
NCLT‘s jurisdiction. Further, the facts of these judgements are also
distinguishable from the present case.
34 However, assuming but not conceding that the NCLT could have had
jurisdiction over the dispute, the appellants argue that there is no embargo under
the IBC on exercise of contractual rights by the appellant, which does not include
this termination:
(i) Except for the moratorium stipulated under Section 14 of IBC, there is no
other bar in the scheme of the IBC to intervene in contractual
arrangements that the Corporate Debtor has entered with a third party. In
the present case, the NCLT/NCLAT did not hold that the termination of the
PPA was prohibited under Sections 14(1) and (2) of IBC. Sections 14(2)
and (2A) deal with supply of essential/critical goods and services to the
Corporate Debtor, and do not mandate the third party to purchase any
goods and services from the Corporate Debtor. Section 14(2) provides for
continued supply of essential goods and services to the Corporate Debtor.
However, there is no bar on termination of other agreements. Section
29 ―CA 1956‖
30 ―BRA‖
31 ―PIA‖
PART G
20
14(2A) was introduced after the issuance of the default notice by the
appellant and, in any event, it does not prohibit the termination of the PPA.
Parliament has chosen not to include any provision to this effect despite
the multiple amendments that have been made to the IBC;
(ii) The Explanation to Section 14(1) of the IBC, which was introduced by an
amendment in December 2019, covers licenses or approvals granted by a
government authority. However, no reference has been made there to
contracts such as PPAs;
(iii) The respondents are attempting to resurrect the regime under Section
22(3) of the Sick Industrial Companies (Special Provisions) Act, 198532
,
which empowered the Board to suspend the operation of all or any of the
contracts to which the sick industrial company was a party. In Swiss
Ribbons Private Limited vs Union of India33, this Court held that the IBC
was introduced because the regime under SICA and Board for Industrial
and Financial Reconstruction34 had failed. Under the IBC, there is no such
power to suspend contracts. Hence, when the legislature has wilfully
omitted something or in a situation of a casus omissus, this Court cannot
introduce what has been omitted by way of interpretation, analogy or
implication;
(iv) The termination of the PPA cannot be set aside based on the objective of
the IBC to ensure that the Corporate Debtor remains a ‗going concern‘, in
32 ―SICA‖
33 (2019) 4 SCC 17; hereinafter referred to as ―Swiss Ribbons‖
34 ―BIFR‖
PART G
21
the absence of a specific provision under the IBC. The objective of the IBC
cannot be understood to mean that the vested rights of parties can be
interfered with or extinguished except to the extent contemplated under
Section 14 of the IBC. While in the United States there are specific
provisions providing for non-enforcement of ipso facto clauses such as
Article 9.2.1(e) of the PPA, no such provisions exist under the IBC. Hence,
such a bar cannot be read into the legislation by reference to the object of
the IBC or duties of the RP. The parties cannot wish away a contractual
right because it is not suitable to them by way of a narrow understanding of
―public interest‖. The public interest lies in preserving the sanctity of
contracts and for the contractual bargains to play out;
(v) The duty of the RP to preserve the Corporate Debtor as a going concern
and the definition of resolution plan do not bind third parties to act in favour
of the Corporate Debtor. The NCLAT has stressed that the Corporate
Debtor would become defunct if the PPA is terminated because it supplies
power exclusively to the appellant. However, the Corporate Debtor chose
to supply power solely to the appellant. The Corporate Debtor was
empowered under Sections 7 and 10 of the Electricity Act to sell electricity
to any licensee or consumer. The power producing company can convey
electricity to any part of the country using the transmission network under
Sections 2(4), 38(2)(d), 39(2)(d), 40(c) and 42(2) of the Electricity Act.
Hence, the Corporate Debtor is free to supply power to any other licensee
or consumer after the termination of the PPA. The only difference would be
PART G
22
that the Resolution Applicant would have to supply electricity at a lower
cost;
(vi) The second respondent and Power Finance Corporation Limited were
aware that the appellant can terminate the PPA under Article 9.2.1(e).
They are vested with the right to assign the rights and obligations under
the PPA to a third party, in the event of a default committed by the
Corporate Debtor, under the financing documents under Article 12.9 of the
PPA. Hence, the second respondent could have exercised its power to
assign prior to the initiation of the CIRP on 20 November 2018. Instead, it
declared the account of Corporate Debtor as an NPA. Then, when the
Corporate Debtor applied for the initiation of the CIRP under Section 10 of
the IBC, which was admitted by the NCLT through its order dated 20
November 2018, it challenged the order before in an appeal, which was
dismissed by the NCLAT on 4 December 2019. Therefore, the appellant
has the right to terminate the PPA under Article 9.2.1(e), irrespective of
whether any assignment has taken place under Article 12.9;
(vii) The first respondent cannot rely on the resolution plan to prevent
termination of the PPA since the resolution plan or process does not
modify the terms of the contract of the Corporate Debtor with third parties.
Each party took a calculated risk to enter into the contract with the
knowledge that the appellant is entitled to terminate the PPA;
(viii) The PPA is not an instrument under Section 238 of IBC, since the phrase
used in the section - ―instrument having effect by virtue of any such law‖ -
PART G
23
does not cover commercial bilateral agreements between a corporate
debtor and a third party laying down the terms of an executory contract
entered between them. It only applies to a statutory contract or an
instrument entered into by operation of law that is inconsistent with the
IBC;
(ix) No provision of the PPA is inconsistent with the IBC. Article 9.3.1 which
specifies a period of 30 days for the Corporate Debtor to remedy a default,
and gives the appellant the right to terminate the contract in case of a
failure to do so, is not inconsistent with the time limit provided in section 12
of the IBC to complete the insolvency resolution process. Article 9.3.1
obliges the Corporate Debtor to ensure that the proceedings initiated
against it come to an end within 30 days by an act of the Corporate Debtor
and does not govern the resolution process undertaken under the IBC;
(x) The right to terminate the PPA in accordance with Article 9.3.1 has
accrued to the appellant, since an event of default has occurred within the
meaning of Article 9.2.1(e):
(a) Article 9.2.1(e) of the PPA provides that if the Corporate Debtor ―becomes
voluntarily or involuntarily, the subject of a proceeding in any bankruptcy or
insolvency laws‖, it would be considered as an event of default. Article
9.2.1(e) also lists other events of default like dissolution, liquidation and the
appointment of a receiver. Each of these eventualities is independent. The
clause may have referred to the legislation which preceded the IBC since
the PPA was entered into in 2010. However, each of these laws related to
PART G
24
companies that were bankrupt/insolvent. The exception under Article
9.2.1(e) covers voluntary reconstruction and merger undertaken under the
Companies Act, 201335, leading to a dissolution of the company without
liquidation or winding up. The exception is limited to dissolution undertaken
for the above purposes and does not contemplate a dissolution in relation
to an insolvency or bankruptcy proceeding. There is no dissolution in the
present case. Respondents have contended that the third ―or‖ under the
Article 9.2.1(e) should be changed into ―and‖ or other situations should be
read into the exception which is only for dissolution. The interpretation of
―or‖ as ―and‖ would mean that initiation of proceedings under any
bankruptcy or insolvency laws would constitute an event of default only if
the company goes into liquidation. The usage of words ―or‖ and ―and‖ are
deliberate. The interpretation proposed by the respondents would exclude
liquidation taking place for reasons other than insolvency/bankruptcy,
which could not have been the intent of the parties. In absence of any
ambiguity or uncertainty in the clause, the court cannot imply any term or
interpret the clause contrary to its plain meaning;
(b) Clauses such as Article 9.2.1(e) are standard clauses in agreements of
this nature. Even after the notification of the IBC, similar provisions
continue in PPA formats notified by the Government of India as part of the
Standard Bid Documents for Tariff Based Competitive Bid Process under
Section 63 of the Electricity Act for conventional power. Similar provisions
35 ―CA 2013‖
PART G
25
are found in the PPAs being drafted as per Guidelines for Tariff Based
Competitive Bidding Process for renewable energy sources; and
(c) The bargain between the parties was fair and not one sided. The same
default clause has been provided under the appellant‘s defaults in Article
9.2.2(c), and a corresponding right to terminate has been provided under
Article 9.3.2. Similar clauses are provided under the standard PPAs issued
by the Government of India for competitive bidding under Section 63 of the
Electricity Act. Therefore, the clauses cannot be said to be unreasonable
or unconscionable.
35 In summing up their submissions, the appellants have raised two more
arguments:
(i) The NCLAT‘s observations in relation to the termination of the PPA if the
Corporate Debtor goes into liquidation were incorrect:
(a) In the appeal filed by the appellant against the order of the NCLT dated 29
August 2019, the appellant had not challenged the determination of the
NCLT that the PPA can be terminated in the event of the initiation of a
liquidation proceeding against the Corporate Debtor. It is a settled principle
of law that the courts cannot go beyond the pleadings or the prayer put
forth by the parties; and
(b) NCLAT erroneously proceeded on the basis that there is no difference
between the liquidation and resolution process. On the commencement of
liquidation proceedings, the corporate debtor is no longer a going concern.
The assets of the corporate debtor are sold for recovery of money.
PART G
26
However, agreements with third parties are not assets. The appellant
cannot be compelled to continue the agreement with a new person or
entity for the benefit of the creditors of the Corporate Debtor.
(ii) NCLAT‘s direction to the appellant to pay for the electricity injected by the
Corporate Debtor was flawed:
(a) The appellant was entitled to terminate the PPA from 7 June 2019, and
cannot be compelled to procure and pay for power to preserve the value of
the Corporate Debtor. The injection of electricity from 7 June 2019 is due
to the orders of the court and not under the PPA. Under the principle of
―actus curiae neminem gravabit‖, the act of the court cannot prejudice any
party. The court is under an obligation to undo the wrong caused to a party
due to its actions. The appellant cannot be made to suffer on account of
the erroneous injunctions granted by NCLT/NCLAT when it could have
procured electricity at a lower cost from other solar power projects;
(b) The appellant has paid the Corporate Debtor an amount of Rs 50 lakhs
and Rs 1.07 crores pending the present appeal and against the
undertaking that the amount would be returned with interest if the appeal is
decided in its favour. Additionally, under Article 9.3.1 of the PPA, the
compensation for termination of the PPA is Rs 55.80 crores; and
(c) The issues relating to tariff determination and replacement of solar panels
raised by the respondents were not considered by the NCLT/NCLAT, and
are not relevant for the interpretation of the PPA and provisions of the IBC.
PART G
27
G.2 Submissions on behalf of the respondents
36 Mr C U Singh and Mr Nakul Dewan, learned Senior counsel appearing on
behalf of the first respondent, have argued that NCLT had the jurisdiction to
consider the validity of the termination of the PPA by the appellant on the sole
ground of the initiation of the insolvency proceedings of the Corporate Debtor and
that the jurisdiction was rightly exercised by the NCLT, in the present case. Mr C
U Singh has made the following submissions on the jurisdiction of the NCLT:
(i) The application for staying the termination of the PPA was filed by the first
respondent before the NCLT under Section 60(5) of the IBC. Section
60(5)(c) confers upon the NCLT complete jurisdiction to decide any
application by or against the Corporate Debtor on any question of priorities
or any question of law or facts, arising out of or in relation to the insolvency
resolution of the Corporate Debtor, notwithstanding any other law for the
time being in force. Hence, notwithstanding the provisions of the Electricity
Act, the NCLT has jurisdiction to consider an application filed by the RP
which may not specifically relate to a particular section of the IBC (such as
Section 14), provided the application involves any question of law or facts,
arising out of or in relation to the insolvency resolution of the third
respondent;
(ii) Relatedly, since the jurisdiction vested in the NCLT under Section 60(5)(c)
is of a residuary character, even where a question of law or fact is not
specifically covered under Section 14, the NCLT would have the
jurisdiction to consider such a question of law or fact, provided it arises out
PART G
28
or is in relation to the insolvency resolution process of the corporate
debtor. Any other interpretation of Section 60(5) would render it otiose;
(iii) A narrow interpretation of Section 60(5) is neither warranted from the
language of the section, nor is it in line with judicial precedents which have
interpreted similar provisions in other insolvency laws. Provisions similar to
Section 60(5)(c) have been read in an expansive way. In this regard,
reliance is placed on the interpretation of Section 446(2) of the CA 1956,
Section 4(1) of the PIA and Section 45-B of the BRA;
(iv) The expressions used in Section 60(5)(c), i.e., ‗relating to' and ‗arising out
of' have been interpreted as words of the widest amplitude. The expression
‗relating to' has been held to be equivalent to or synonymous with ‗as to,‘
‗concerning with,' and ‗pertaining to'. In view of the broad scope of these
terms, an interpretation divesting the NCLT of the power to injunct the
termination of the PPA should not be countenanced in this case;
(v) The first respondent is not advocating for the adoption of an absolute rule
about what falls within and beyond the NCLT‘s jurisdiction under Section
60(5)(c). Rather, it submits that this determination must be made on the
facts of each case;
(vi) The termination of the PPA in the present case is sought solely on the
ground of insolvency. The cause of action for termination is therefore
alleged to be the insolvency of the Corporate Debtor and the contention
that the Corporate Debtor is no longer ‗reliable' on account of the
insolvency resolution process. There would be no termination of the PPA
PART G
29
but for the initiation of the CIRP against the Corporate Debtor. Hence, the
cause of action arises out of and is in relation to the insolvency resolution
of the Corporate Debtor. This case is materially different from cases in
which termination of the PPA is sought for reasons independent of the
insolvency of the Corporate Debtor (for instance where termination is
sought for non-supply of electricity);
(vii) The fact that Sections 20(2)(e) and 25 of the IBC are couched in terms of a
duty, does not necessarily mean that the NCLT does not have jurisdiction
to decide matters that arise from the duty of the RP to preserve the assets
or maintain the Corporate Debtor as a ‗going concern‘. On the contrary,
NCLT is the only forum which has the jurisdiction to oversee the resolution
process of the Corporate Debtor which necessarily includes the
continuation of the Corporate Debtor as a going concern and its successful
resolution;
(viii) The facts of this case are different from those of Embassy Property
(supra) and Municipal Corporation vs Abhilash Lal36. Unlike Abhilash
Lal (supra), the property in this case (long term contractual right under the
PPA) is the property of the Corporate Debtor and not the property of a
statutory authority. Further, there was no violation of law when NCLT
injuncted the appellant from terminating the PPA on the ground of the
initiation of the CIRP of the Corporate Debtor. In addition, the facts in
Abhilash Lal (supra) dealt with the public duty of Municipal Corporation in
36 (2020) 13 SCC 234; hereinafter referred to as ―Abhilash Lal‖
PART G
30
respect of the construction of a hospital. Further, there were existing
defaults and a show cause-notice was issued in this regard prior to the
commencement of the CIRP of the company. As opposed to this, in the
present case, termination by the appellant is not on grounds of default but
solely on the ground of the initiation of the insolvency resolution process of
the Corporate Debtor and, that too, nearly six months after the admission
of the application under Section 10 of the IBC; and
(ix) In Embassy Property (supra), what was at issue in was whether the
NCLT has jurisdiction over a matter which is in the realm of public law. In
the present case, the decision of the appellant to terminate the PPA is not
a decision taken by the Government or by a statutory authority in relation
to a matter which is in the realm of public law. The decision of the
appellant to terminate the PPA is only because the Corporate Debtor is
undergoing insolvency resolution. The Corporate Debtor has not defaulted
in supplying solar power to the appellant and is otherwise not in breach of
its obligations under the PPA.
37 Assuming that the NCLT has jurisdiction, the following submissions were
made by Mr C U Singh in relation to the interpretation of the PPA:
(i) Article 9.2.1 of the PPA, read with Article 9.3.1, which allows the appellant
to terminate the PPA if the third respondent commits an event of default,
must be read with other provisions of the PPA. In this regard, our attention
was drawn to:
PART G
31
(a) The recitals to the PPA state that the Power Producer will include its
successors and assignees;
(b) Article 4.1(iii) of the PPA provides that the Corporate Debtor shall sell the
power produced by it to the appellant on first priority basis and is not
allowed to sell to any third party;
(c) Article 4.1(x) of the PPA provides for the eventuality of an equity dilution of
the power producer;
(d) Article 9.1 of the PPA provides for the term of the agreement, i.e., 25 years
from the commercial operation date;
(e) Article 9.3.1 of the PPA provides that in case of a default of the Corporate
Debtor, it shall have the liability to make payments towards compensation
to the appellant which is equivalent to three years billing based on the firstyear tariff considered on normative PLF while determining the tariff by
GERC, within 30 days from the termination notice;
(f) Article 12.9 of the PPA specifically provides that the financing parties may
cause the power producer to assign its interest, rights and obligations to a
third party; and
(g) The PPA contemplates the financing of the project and that there could be
financial defaults by the Corporate Debtor. Hence, the PPA specifically
allowed financing parties to step in and change the identity of the power
producer provided the successor was capable of and willing to assume the
PART G
32
obligations of the power producer under the PPA. Article 9.2.1(e) must be
read in light of this background.
(ii) In relation to the interpretation of Article 9.2.1(e), it was submitted:
(a) When the PPA was entered into in 2010, the IBC was not in existence. The
contract was a standard form contract. While the clause refers to
insolvency or bankruptcy proceedings, the intent of Article 9.2.1(e) could
only have been to cover liquidation proceedings as contemplated under
the CA 1956. The CA 1956 did not contemplate ‗insolvency' or ‗bankruptcy'
proceedings. Insolvency at the time of the drafting of the clause was
understood to include individual insolvency. Hence, Article 9.2.1(e) could
not have intended to cover ‗insolvency resolution' proceedings under the
IBC as a trigger for an event of default;
(b) If the term ‗insolvency' proceedings in Article 9.2.1(e) of the PPA, which
was entered into in 2010, is sought to be applied to the ‗insolvency
resolution' proceedings contemplated under the IBC then the exception in
the clause, in the form of ‗reorganization' will also necessarily need to be
applied in light of the updated understanding. Read thus, the term must
extend to any form of reorganization because of which the company does
not go into liquidation or winding-up. Read in this manner, Article 9.2.1(e)
must be interpreted to exclude the reorganization proceedings under the
IBC; and
(c) Assuming, arguendo, that Article 9.2.1(e) of the PPA is ambiguous, it
ought to be interpreted in favour of the power producer. The PPA is a
PART G
33
standard form contract. The third respondent and the appellant do not
stand on a footing of equality. The application of the rule of contra
preferentum is well settled and an interpretation of the contract which
favours the party with lesser bargaining power is preferred. Applying that
rule here, any ambiguity in the interpretation of Article 9.2.1(e) must be
resolved in favour of the third respondent.
38 Submissions were also urged by Mr C U Singh in relation to Sections 14
and 238 of the IBC:
(i) In relation to the application of Section 238 of the IBC to the PPA, it was
submitted that:
(a) Under Article 9.3.1 of the PPA, the third respondent is required to remedy
the default (if any) within 30 days of service of the default notice. If read in
this manner, on the receipt of a default notice during the pendency of the
CIRP, the third respondent would be required to complete the
reorganization process within 30 days so as to obviate the consequence of
the PPA getting terminated. The IBC provides a period of 330 days for the
completion of the CIRP. There is a dichotomy between the provisions of
the PPA and the IBC. The timelines under the PPA for curing a default are
inconsistent with those under the IBC for completing the CIRP with respect
to the third respondent. In view of the non-obstante clause in Section 238,
the provisions of the IBC would override those of the PPA;
(b) The argument that the PPA is not an ―instrument‖ under the IBC is
incorrect. Since the term ―instrument‖ has not been defined in the IBC, it
PART G
34
may bear a meaning drawn from the definition in other statutes. The PPA
is approved by the GERC and has the force of law under the Electricity
Act. The PPA sets out the rights and liabilities of the parties and is an
instrument for the purposes of Section 238. Being an ―instrument‖, which is
inconsistent with the provisions of the IBC, the latter would have overriding
effect over the former, in view of Section 238 of the IBC. Therefore, the
right to terminate would only arise in case the third respondent fails to cure
the default, i.e., resolve itself in accordance with the IBC; and
(c) In view of Section 238, the IBC overrides the provisions of the Electricity
Act. Section 63 of the IBC provides that ―No civil court or authority shall
have jurisdiction to entertain any suit or proceedings in respect of any
matter on which National Company Law Tribunal or the National Company
Law Appellate Tribunal has jurisdiction under IBC.‖ NCLT‘s jurisdiction
excludes that of the GERC.
(ii) In relation to the legislative intent underlying Section 14 of the IBC, it was
submitted that:
(a) The Notes on Clauses to the Insolvency and Bankruptcy Bill, 2015 and the
Insolvency Law Committee Report dated 20 February 2020 suggest a
clear legislative intent of Section 14 that, an ipso facto clause allowing a
party to terminate the contract if the counterparty enters into some form of
insolvency resolution process must either be declared void or be suitably
read down in order to ensure that the objective of the IBC in keeping the
company as a going concern is met. If in the facts of a given case, the
PART G
35
relevant authorities find that to preserve the assets of the Corporate Debtor
and to keep it as a going concern, certain contracts need to be protected,
they ought to be invalidated or read down; and
(b) The nature of the third respondent and its business renders the PPA a
valuable asset, and its termination would have the effect of running the
third respondent to the ground. Therefore, in view of the legislative intent,
and reading the provisions of the PPA as a whole, Article 9.2.1 (e) must be
read to exclude reorganization proceedings under the IBC as an event of
default.
39 Supplementing these submissions, Mr Nakul Dewan, learned Senior
Counsel made the following additional submissions:
(i) The Resolution Plan submitted by the Successful Resolution Applicant and
approved by the CoC was dependent on the continuation of the PPA:
(a) The following aspects of the resolution plan need to be highlighted: (i) the
significance of the PPA to the continued commercial viability of the
corporate debtor; (ii) the reason for the initiation of the CIRP including the
nature of the debts; (iii) the experience of the RP in reviving the Corporate
Debtor including the revival plan; (iv) the summary of the resolution plan,
including the ‗haircut‘ being taken by the creditors in order to ensure that
the Corporate Debtor is restructured; (v) the relevant rates pertaining to
solar tariff; (vi) the business plan; (vii) the financial plan; and (viii) the
potential risks and mitigation measures;
PART G
36
(b) The Corporate Debtor was put into financial difficulty on account of the
force majeure events which transpired in 2015 and 2017. The first
respondent had started putting the Corporate Debtor back on its track, and
along with the Resolution Applicant had formulated a plan under which the
Corporate Debtor would be revived. The resolution plan was dependent on
the continuation of the PPA; and
(c) If the termination is permitted, the Corporate Debtor would not be able to
revive in terms of the resolution plan which has been agreed upon by the
lenders, even though it continues to be able to perform its obligations
under the PPA.
(ii) In relation to the interpretation of Article 9.2.1(e):
(a) The term ‗law‘, in Article 9.2.1(e) must be interpreted in a dynamic sense.
The interpretation of Article 9.2.1(e) must be considered at the point of
time it was sought to be invoked in order to ascertain whether there was an
event of default. The exception under which ―reorganization‖ is excluded
as an event of default, would apply to the proceedings which were initiated
under section 10 of the IBC for the sole purpose of the reorganization of
the Corporate Debtor; and
(b) The invocation of Article 9.2.1(e) on the ground that proceedings under
Section 10 of the IBC had been commenced was both erroneous and
premature. It was erroneous because at the time of commencement of the
proceedings, the Corporate Debtor was looking at the reorganization of its
affairs. It squarely fell within the exception to Article 9.2.1(e). It was
PART G
37
premature because unless and until the appellant was sure that after a
reorganization the resulting entity would not have the financial standing to
perform its obligations or as to its lack of creditworthiness, it had no basis
to terminate the PPA on the ground that it constituted an event of default
under Article 9.2.1(e).
(iii) In relation to the jurisdiction of the NCLT, it was submitted that:
(a) The NCLT‘s jurisdiction with respect to Section 60(5) was invoked to seek
quashing of the default notice issued by ―taking insolvency proceedings as
Event of Default.‖ Therefore, the application filed before the NCLT was
within the realm of its jurisdiction under Section 60(5) of the IBC;
(b) The appellant‘s submission about GERC having jurisdiction should not be
accepted. Instead, this Court should adopt the position that, should the
commencement of proceedings under the IBC be used as a ground to
terminate a contract, then the matter ought to be determinable by the
NCLT. This is further bolstered by the exclusion of the jurisdiction of civil
courts under Section 231 of the IBC; and
(c) IBC, being a special law, enacted after the Electricity Act, the NCLT and
NCLAT have exclusive jurisdiction to govern all questions of fact and law
relating to the insolvency process of the corporate debtor.
40 Mr V Giri, learned senior counsel on behalf of the second respondent,
made the following submissions in support of the arguments made by the first
respondent:
PART G
38
(i) Once an application under sections 7, 9 or 10 of the IBC is admitted by the
NCLT, it is conferred with the jurisdiction to deal with matters relating to the
insolvency of the corporate debtor;
(ii) Both the Electricity Act and the IBC are special legislations, which have
been enacted to deal with electricity related issues and insolvency,
respectively. In Ashoka Marketing vs PNB37 this court held that a
harmonious construction of two special laws containing non-obstante
clauses can be undertaken by looking at the purpose of both the laws. This
Court was also mindful of the principle that a special law enacted at a later
date prevails over the earlier special law. In this regard, the non-obstante
clause under Section 174 of the Electricity Act would be overridden by
Section 238 of IBC in case of a conflict of jurisdiction to resolve a dispute;
(iii) The NCLT can exercise its jurisdiction under Section 60(5) of the IBC to
ensure that the Corporate Debtor survives as a ‗going concern‘. It would
not be possible to enter into another PPA with the same terms and
conditions as the current PPA;
(iv) The second respondent as a lender bank may not be able to initiate a
dispute resolution process under Section 86(f) of the Electricity Act since it
contemplates the resolution of disputes between a generator and a trading
licensee;
(v) Section 60(5)(c) of the IBC provides that the NCLT can entertain or
dispose of any event or action arising out of, in relation to, effecting or
37 1990 (4) SCC 406
PART G
39
hampering the insolvency resolution process. NCLT has the jurisdiction to
intervene to the extent of removing any obstacle in the CIRP process for it
to reach its logical end, which is approval of the resolution plan or
liquidation. The contours of Section 14 of the IBC must be determined
under such an understanding of Section 60(5)(c);
(vi) The moratorium under Section 14 of IBC is not exhaustive because:
(a) The object of section 14 is protection of the Corporate Debtor during the
CIRP;
(b) The preamble of the IBC provides for preserving the maximum value of the
assets of the Corporate Debtor; and
(c) Section 14(3) only excludes certain kinds of agreements and transactions
from moratorium under Section 14(1), as notified by the Central
Government in consultation with the financial regulator or any other
authority. The NCLT has the power to impose moratorium or status quo in
the interest of protecting the corporate debtor and the CIRP in addition to
the protections enumerated in Section 14(1);
(vii) Maintaining the Corporate Debtor as a ‗going concern‘ is the soul of the
CIRP. Section 14(2A) provides that a supply of goods or services which an
IRP or RP considers critical for protecting and preserving the value of the
Corporate Debtor, and managing its operation as a going concern cannot
be terminated, suspended or interrupted. Section 20(1) imposes a duty on
the IRP to protect and preserve the value of the Corporate Debtor and
manage the operations as a ‗going concern‘. The ‗Resolution Plan‘ has
PART G
40
been defined under Section 5(26) of the IBC as a plan proposed by the
resolution applicant for insolvency resolution of the Corporate Debtor as a
‗going concern‘. The termination of the PPA would push the Corporate
Debtor towards a corporate death, namely, liquidation;
(viii) The Explanation to Section 14(1) clarifies that, inter alia, ―a similar grant of
right given by the Central government, State government, local authority,
sectoral regulator or any other authority shall not be terminated on the
ground of insolvency‖. This indicates the intent of the legislature that no
right conferred on the Corporate Debtor can be taken away due to the
initiation of the CIRP;
(ix) Article 9.2.1(e) must be read with Article 12.9 of the PPA, which provides
that if a default is committed under the financing documents, lenders have
a right to assign the rights and obligations of the Corporate Debtor under
the PPA to a third party. Hence, the PPA contemplates a situation where
the Corporate Debtor may go through a reorganization. The present
proceedings under the IBC are in the nature of a reorganization. Hence,
the CIRP cannot be construed as event of default under the PPA;
(x) The lenders extended the loan based on the: (a) right of assignment
granted under Article 12.9 of the PPA; (b) purchase of electricity as a fixed
tariff; and (c) term of the PPA for a period of 25 years. The financial
projections on the loan and its repayment were made on the above terms.
The default notice is in violation of the terms of the PPA and the
understanding reached between the parties;
PART G
41
(xi) Article 9.3.1 of the PPA is inconsistent with the IBC, since the PPA grants
a time of 30 days to remedy the insolvency whereas the IBC provides a
timeline of 180 days, which is extendable up to 330 days. Section 238 of
IBC ensures that the IBC will prevail over the PPA. The phrase
―instrument‖ in Section 238 can be interpreted in light of Section 2(14) of
the Indian Stamp Act, 1899 and Section 2(b) of the Notaries Act, 1952
which provide that an ―instrument‖, ―includes every document by which any
right or liability is, or purports to be, created, transferred, limited, extended,
extinguished or recorded.‖ Hence the PPA qualifies as an instrument;
(xii) Section 14(1)(d) provides for protection of the property of the Corporate
Debtor. The expression ―property‖ would include the PPA in terms of its
definition in Section 3(27) of the IBC. Paras 8.1 to 8.3 of the Third
Insolvency Committee Report dated 20 February 2020 indicate that the
intent of the IBC is to ensure that the Corporate Debtor remains a going
concern and contracts cannot be terminated by way of ipso facto clauses
relating to insolvency; and
(xiii) The appellant terminated the PPA not due to the default per se but due to
a commercial decision to negotiate and reduce the purchase price of
electricity under tariff. It is not the intent of the IBC to allow an entity to take
the benefit of the CIRP to negotiate a better price for a contract and in
effect reduce the value of the Corporate Debtor.
PART H
42
H Issues arising from the dispute
41 The following two issues arise for determination:
(i) Whether the NCLT/NCLAT can exercise jurisdiction under the IBC over
disputes arising from contracts such as the PPA; and
(ii) 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.
PART I
43
I Jurisdiction of the NCLT/NCLAT over contractual disputes
42 The primary issue upon which the outcome of this appeal would turn is the
nature of the jurisdiction which is exercised by the NCLT under Section 60(5) of
the IBC. The provision reads thus:
―(5) Notwithstanding anything to the contrary contained in any
other law for the time being in force, the National Company Law
Tribunal shall have jurisdiction to entertain or dispose of –
(a) any application or proceeding by or against the corporate
debtor or corporate person;
(b) any claim made by or against the corporate debtor or corporate
person, including claims by or against any of its subsidiaries
situated in India; and
(c) any question of priorities or any question of law or facts, arising
out of or in relation to the insolvency resolution or liquidation
proceedings of the corporate debtor or corporate person under
this Code.‖
43 Sub-section (1) of Section 60 provides the NCLT with territorial jurisdiction
over the place where the registered office of the corporate person is located.
NCLT shall be the adjudicating authority ―in relation to insolvency resolution and
liquidation for corporate persons including corporate debtors and personal
guarantors‖. The NCLT has been constituted under Section 408 of the CA 2013
―to exercise and discharge such powers and functions as are, or may be,
conferred on it by or under this Act or any other law for the time being in force‖38
.
44 NCLT owes its existence to statute. The powers and functions which it
exercises are those which are conferred upon it by law, in this case, the IBC.
38 ―Section 408. The Central Government shall, by notification, constitute, with effect from such date as may be
specified therein, a Tribunal to be known as the National Company Law Tribunal consisting of a President and
such number of Judicial and Technical members, as the Central Government may deem necessary, to be
appointed by it by notification, to exercise and discharge such powers and functions as are, or may be, conferred
on it by or under this Act or any other law for the time being in force.‖
PART I
44
45 The NCLT in its decision dated 29 August 2019 did not specifically
examine the issue of its jurisdiction under Section 60(5)(c) of the IBC. It
prohibited the termination of the PPA on the ground that it is an ―instrument‖
under Section 238; Articles 9.2.1(e) read with 9.3.1 of the PPA are inconsistent
with the provisions of the IBC; and the latter overrides an instrument having effect
by virtue of law. One of the considerations which weighed with the NCLT while
coming to its determination was that termination of the PPA would prejudice the
status of the Corporate Debtor as a ‗‗going concern‘, and lead to the failure of the
CIRP. The NCLT observed:
―30. …the CIR process in the instant case was triggered on
20.11.2018, which was further extended by 90 days on
16.05.2019 and the default notices were issued by the
Respondent Company on 01.05.2019. That termination of
PPA at this stage may have adverse consequences on the
status of the Corporate Debtor as "going concern" and
eventually, may jeopardise the entire CIR Process. While
elaborating on the objectives of IBC as enshrined in the
Preamble, the Hon'ble Supreme Court, had held in the matter
of Swiss Ribbons Pvt. Ltd. v Union of India, 2019 SCC
Online SC 73:
" ....... What is interesting to note is that Preamble does not, in
any manner, refer to liquidation, which is only availed of as a
last resort if there is either no resolution plan or the resolution
plan submitted are not up to the mark. Even in liquidation, the
liquidator can sell the business of the corporate debtor as a
going concern".”
46 In appeal, the NCLAT by its order dated 15 October 2019, upheld the
exercise of jurisdiction by the NCLT. The NCLAT held:
―Taking into consideration the nature of the case, we are of
the view that to keep the 'Corporate Debtor' a going concern,
which is generating electricity and supplying only to 'Gujarat
Urja Vikas Nigam Ltd.', the Adjudicating Authority rightly
asked 'Gujarat Urja Vikas Nigam Ltd.' not to terminate the
'Power Purchase Agreement' dated 30th April, 2010.
PART I
45
We may make it clear that the 'Gujarat Urja Vikas Nigam
Limited', being purchaser of the electricity cannot terminate
the 'Power Purchase Agreement' solely on the ground that
the 'Corporate Insolvency Resolution Process' has been
initiated against 'Astonfield Solar (Gujrat) Pvt. Ltd.' (Corporate
Debtor) which is generating electricity and supplying it and
there is no default in supplying electricity and during the
'Corporate Insolvency Resolution Process'...‖
However, like the NCLT, the NCLAT did not give any specific finding on whether
it or the NCLT can exercise its jurisdiction under section 60(5)(c) over a dispute
arising out of the termination of the PPA. In this regard, the task falls on this
Court to enumerate the contours of the jurisdiction that can be exercised under
Section 60(5)(c) of the IBC.
I.1 Section 60(5)(c) : “arising out of” and “in relation to”
47 It has been submitted before us on behalf of the appellant that the NCLT
does not have any inherent powers, and its exercise of jurisdiction is
circumscribed by the provisions of the IBC. As such, it does not have the
jurisdiction to entertain all disputes or all issues related to the Corporate Debtor.
On the other hand, the respondents have made a limited submission that while
the NCLT may not have jurisdiction to adjudicate upon contractual disputes that
arise independent of the insolvency of the Corporate Debtor, it has the sole
jurisdiction to decide a dispute that arises from or relates to the insolvency of the
Corporate Debtor or where the property of the Corporate Debtor (in this case its
rights under the PPA) is sought to be taken away on the ground of insolvency.
For their argument, the respondents have relied on Section 60(5)(c) to submit
PART I
46
that NCLT is vested with a wide jurisdiction to consider questions of law or fact
―arising out of‖ or ―in relation to‖ insolvency resolution proceedings.
48 In varying contexts, this Court has expansively construed the expressions
―relating to‖ and ―arising out of‖ in its previous decisions. The respondents have
relied on some of these judgments to buttress their submissions in regard to the
width of Section 60(5)(c). In Renusagar Power Co. Ltd. vs General Electric
Company39, a two judge Bench while interpreting the words ―arising out of‖ or
―related to‖ in an arbitration clause held as follows, speaking through Justice V.D.
Tulzapurkar
―25…(2) Expressions such as "arising out of" or "in respect
of" or "in connection with" or "in relation to" or "in
consequence of" or "concerning" or "relating to" the contract
are of the widest amplitude and content..‖
49 In Mansukhlal Dhanraj Jain vs Eknath Vithal Ogale40, another two
judge Bench of this Court emphasized the comprehensive nature and wide
sweep of the term ―relating to‖ in the context of the Small Causes Courts Act,
1887. Justice S B Majumdar held:
―16. It is, therefore obvious that the phrase ―relating to
recovery of possession‖ as found in Section 41(1) of the
Small Cause Courts Act is comprehensive in nature and
takes in its sweep all types of suits and proceedings which
are concerned with the recovery of possession of suit
property from the licensee and, therefore, suits for permanent
injunction restraining the defendant from effecting forcible
recovery of such possession from the licensee-plaintiff would
squarely be covered by the wide sweep of the said phrase.
Consequently in the light of the averments in plaints under
consideration and the prayers sought for therein, on the clear
39 (1984) 4 SCC 679
40 (1995) 2 SCC 665
PART I
47
language of Section 41(1), the conclusion is inevitable that
these suits could lie within the exclusive jurisdiction of Small
Cause Court, Bombay and City Civil Court would have no
jurisdiction to entertain such suits.‖
50 In Doypack System (P) Ltd. vs Union of India41
, a two judge Bench held
that the expression ―in relation to‖ is broad and is equivalent to the expressions
―concerning with‖ and ―pertaining to‖, with the latter also being expansive in
ambit. Justice Sabyasachi Mukharji (as the learned Chief Justice of India then
was) observed:
―50. The expression ―in relation to‖ (so also ―pertaining to‖), is
a very broad expression which presupposes another subject
matter. These are words of comprehensiveness which might
have both direct significance as well as indirect significance
depending on the context [internal citation omitted]. Assuming
that the investments in shares and in lands do not form part of
the undertaking but are different subject matters, even then
these would be brought within the purview of the vesting by
reason of the above expressions. In this connection
reference may be made to 76 Corpus Juris Secundum at
pages 620 and 621 where it is stated that the term
“relate” is also defined as meaning to bring into
association or connection with. It has been clearly
mentioned that “relating to” has been held to be
equivalent to or synonymous with as to “concerning
with” and “pertaining to”. The expression “pertaining to”
is an expression of expansion and not of contraction.”
(emphasis supplied)
51 While the phrases ―arising out of‖‖ and ―relating to‖ have been given an
expansive interpretation in the above cases, words can have different meanings
depending on the subject or context. Words are after all, a vehicle for
communicating ideas, thoughts and concepts. A one-size-fits-all analogy may not
41 (1988) 2 SCC 299
PART I
48
always hold good when we construe similar words in entirely distinct settings.
Justice G.P. Singh in his authoritative commentary on the interpretation of
statutes, Principles of Statutory Interpretation, has noted that the same words
used in different sections of the same statute or used at different places in the
same clause or section can have different meanings42. Therefore, it is necessary
to bear in mind the context in which the phrases have been used. Justice G.P.
Singh has stated in his commentary that43:
―When the question arises as to the meaning of a certain
provision in a statute, it is not only legitimate but proper to
read that provision in its context. The context here means, the
statute as a whole, the previous state of the law, other
statutes in pari materia, the general scope of the statute and
the mischief that it was intended to remedy.‖
52 Bearing in mind the above caution, it may be of relevance to discuss the
interpretation of similar provisions in other insolvency laws. Textually, the
provisions of Section 60(5) bear a flavor of resemblance to the provisions which
were contained in sub-Section 2 of Section 44644 of the CA 1956, which
correspond now to Section 28045 of CA 2013.
42 G.P. Singh, Principles of Statutory Interpretation (1st edn., Lexis Nexis 2015)
43 Ibid.
44 Sub-section 2 of section 446 provides as follows:
―(2) The Court which is winding up the company shall, notwithstanding anything contained in any other law for the
time being in force, have jurisdiction to entertain, or dispose of- (a) any suit or proceeding by or against the
company; (b) any claim made by or against the company (including claims by or against any of its branches in
India); (c) any application made under section 391 by or in respect of the company; (d) any question of priorities
or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up
of the company; whether such suit or proceeding has been instituted, or is instituted, or such claim or question
has arisen or arises or such application has been made or is made before or after the order for the winding up of
the company, or before or after the commencement of the Companies (Amendment) Act, 1960.‖
45 Section 280 of the CA 2013 provides as follows:
―280. Jurisdiction of Tribunal.— The Tribunal shall, notwithstanding anything contained in any other law for the
time being in force, have jurisdiction to entertain, or dispose of,— (a) any suit or proceeding by or against the
company; (b) any claim made by or against the company, including claims by or against any of its branches in
India; (c) any application made under section 233; (d) any scheme submitted under section 262; (e) any question
of priorities or any other question whatsoever, whether of law or facts, including those relating to assets,
business, actions, rights, entitlements, privileges, benefits, duties, responsibilities, obligations or in any matter
PART I
49
53 A textual comparison of the provisions of Section 60(5) of the IBC with
Section 446(2) of CA 1956 would reveal some similarities of expression, with
textual variations. For the purposes of the present proceedings, it suffices to note
that clause (c) of Section 60(5) confers jurisdiction on the NCLT to entertain or
dispose of ―any question of priorities or any question of law or facts arising out of
or in relation to the insolvency resolution or liquidation proceedings of the
corporate debtor or corporate person under the Code‖. Section 446(2)(d) of CA
1956 and section 280(d) of CA 2013 use the expression any question of priorities
or any other question whatsoever whether of law or fact. These words bear a
striking resemblance to the provisions of section 60(5) (c) of the IBC. But textually
similar language in different enactments has to be construed in the context and
scheme of the statue in which the words appear. The meaning and content
attributed to statutory language in one enactment cannot in all circumstances be
transplanted into a distinct, if not, alien soil. For, it is trite law that the words of a
statute have to be construed in a manner which would give them a sensible
meaning which accords with the overall scheme of the statute, the context in
which the words are used and the purpose of the underlying provision. Therefore,
while construing of section 60(5), a starting point for the analysis must be to
decipher Parliamentary intent based on the object underlying the enactment of
the IBC. The Statement of Objects and Reasons leading up to the enactment to
the IBC conveys a strong sense of the intent of the legislature. According to it:
arising out of, or in relation to winding up of the company, whether such suit or proceeding has been instituted, or
is instituted, or such claim or question has arisen or arises or such application has been made or is made or such
scheme has been submitted, or is submitted, before or after the order for the winding up of the company is
made.‖
PART I
50
―There is no single law in India that deals with insolvency and
bankruptcy. Provisions relating to insolvency and bankruptcy
for companies can be found in the Sick Industrial Companies
(Special Provisions) Act, 1985, the Recovery of Debt Due to
Banks and Financial Institutions Act, 1993, the Securitisation
and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 and the Companies Act, 2013.
These statutes provide for creation of multiple fora such as
Board of Industrial and Financial Reconstruction (BIFR),
Debts Recovery Tribunal (DRT) and National Company Law
Tribunal (NCLT) and their respective Appellate Tribunals.
Liquidation of companies is handled by the High Courts.
Individual bankruptcy and insolvency is dealt with under the
Presidency Towns Insolvency Act, 1909, and the Provincial
Insolvency Act, 1920 and is dealt with by the Courts. The
existing framework for insolvency and bankruptcy is
inadequate, ineffective and results in undue delays in
resolution, therefore, the proposed legislation.
2. The objective of the Insolvency and Bankruptcy Code,
2015 is to consolidate and amend the laws relating to
reorganization and insolvency resolution of corporate
persons, partnership firms and individuals in a time bound
manner for maximization of value of assets of such persons,
to promote entrepreneurship, availability of credit and balance
the interests of all the stakeholders including alteration in the
priority of payment of government dues and to establish an
Insolvency and Bankruptcy Fund, and matters connected
therewith or incidental thereto. An effective legal framework
for timely resolution of insolvency and bankruptcy would
support development of credit markets and encourage
entrepreneurship. It would also improve Ease of Doing
Business, and facilitate more investments leading to higher
economic growth and development.
3. The Code seeks to provide for designating the NCLT and
DRT as the Adjudicating Authorities for corporate persons
and firms and individuals, respectively, for resolution of
insolvency, liquidation and bankruptcy. The Code separates
commercial aspects of insolvency and bankruptcy
proceedings from judicial aspects. The Code also seeks to
provide for establishment of the Insolvency and Bankruptcy
Board of India (Board) for regulation of insolvency
professionals, insolvency professional agencies and
information utilities. Till the Board is established, the Central
Government shall exercise all powers of the Board or
designate any financial sector regulator to exercise the
powers and functions of the Board. Insolvency professionals
will assist in completion of insolvency resolution, liquidation
and bankruptcy proceedings envisaged in the Code.
PART I
51
Information Utilities would collect, collate, authenticate and
disseminate financial information to facilitate such
proceedings. The Code also proposes to establish a fund to
be called the Insolvency and Bankruptcy Fund of India for the
purposes specified in the Code.‖
54 The salient aspects which emerge from the state of the law prior to the
enactment to the IBC can be formulated thus:
(i) There was a multiplicity of legislation dealing with insolvency and
bankruptcy;
(ii) Multiplicity of statutes led to the creation of multiplicity of fora;
(iii) Provisions relating to insolvency and bankruptcy of companies were
embodied in the SICA, the Recovery of Debt Due to Banks and Financial
Institutions Act, 199346
, the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 200247 and the CA 2013;
(iv) The above statutes provided for the establishment of multiplicity of
adjudicating bodies including the BIFR, Debt Recovery Tribunal48, NCLT
and the Appellate Tribunal;
(v) While the liquidation of companies was adjudicated upon by the High
Courts exercising company jurisdiction, individual insolvency was
governed by the Presidency-Towns Insolvency Act, 1909 and the PIA;
46 ―RDDB‖
47 ―SARFAESI‖
48 ―DRT‖
PART I
52
(vi) The multiplicity of statute and fora in the regime prior to the IBC led to a
framework for insolvency and bankruptcy which was inadequate and
ineffective, and resulted in undue delay;
(vii) The underlying purpose and object of enacting the IBC was to ensure a
timely resolution of insolvency and bankruptcy which would:
(a) Maximize of the value of assets;
(b) Promote entrepreneurship;
(c) Facilitate the availability of credit;
(d) Support the development of credit markets; and
(e) Balance interests of all stake-holders.
(viii) Bearing the above aspects in mind, the IBC, which is a consolidating and
amending statute, came to be enacted; and
(ix) The IBC, in a clear departure from the past, separates commercial aspects
of insolvency and bankruptcy proceedings from judicial aspects.
55 In the decision of this Court in Swiss Ribbons (supra), where the
challenge was to the constitutional validity of some provisions of the IBC, the
judgment by Justice RF Nariman contains a section titled ―Prologue: the preexisting state of the law‖. The problems which arise from multiplicities of
statutes and fora in the erstwhile regime were noticed in the report of the
Bankruptcy Law Reforms Committee (2015) (“BLRC”):
PART I
53
―14. …The current state of the bankruptcy process for firms is
a highly fragmented framework. Powers of the creditor and
the debtor under insolvency are provided for under different
Acts…
It is problematic that these different laws are implemented in
different judicial fora. Cases that are decided at the
tribunal/BIFR often come for review to the High Courts. This
gives rise to two types of problems in implementation of the
resolution framework. The first is the lack of clarity of
jurisdiction. In a situation where one forum decides on
matters relating to the rights of the creditor, while another
decides on those relating to the rights of the debtor, the
decisions are readily appealed against and either stayed or
overturned in a higher court. Ideally, if economic value is
indeed to be preserved, there must be a single forum that
hears both sides of the case and makes a judgment based on
both. A second problem exacerbates the problems of multiple
judicial fora. The fora entrusted with adjudicating on matters
relating to insolvency and bankruptcy may not have the
business or financial expertise, information or bandwidth to
decide on such matters. This leads to delays and extensions
in arriving at an outcome, and increases the vulnerability to
appeals of the outcome…a matrix of fragmented and contrary
outcomes,…‖
A ―debtor and creditor led process of corporate insolvency‖ had resulted in a
matrix of fragmented and contrary outcomes rather than ―coherent and
consistent.… precedents‖.
56 The BLRC noted that speed is of the essence for the working of a
bankruptcy code. From the point of the view of creditors, a good realization can
be obtained when a firm is sold as a going concern. The decisions of this Court in
Madras Petrochem49
, Innoventive Industries50 and Arcelor Mittal (India)
(Private) Limited51 emphatically advert to the failure of the statutory resolution
49 Madras Petrochem Limitted. vs BIFR : (2016) 4 SCC 1
50 Innoventive Industries vs ICICI Bank : (2018) 1 SCC 407; hereinafter referred to as ―Innoventive
Industries‖
51 Arcelor Mittal (India) (Private) Limited. vs Satish Kumar Gupta : (2019) 2 SCC 1; hereinafter referred to as
―Arcelor Mittal‖
PART I
54
machinery in the regime prior to the IBC. It was in this backdrop that the IBC was
enacted to provide for a timely resolution of the CIRP. The primary focus of the
IBC is to ensure the revival and continuation of the corporate debtor. The
interests of the corporate debtor have been bifurcated and separated from the
interests of persons in management. The timelines which are prescribed in the
IBC are intended to ensure the resuscitation of the corporate debtor.
57 The enactment of the IBC is in significant senses a break from the past.
While interpreting the provisions of the IBC, care must be taken to ensure that the
regime which Parliament found deficient and which was the basic reason for the
enactment of the new legislation is not brought in through the backdoor by a
process of disingenuous legal interpretation. However, this is not to say that the
interpretation given to the statutory provisions that existed prior to the enactment
IBC is to be rejected in toto. The interpretation given to such statutory provisions
that are textually similar to Section 60(5)(c) may be relevant, provided that such
interpretation is in tandem with the objective of enacting the IBC, that is, inter alia,
avoidance of multiplicity of fora and a timely resolution of the insolvency process.
58 In Sudharshan Chits (I) Ltd. vs O Sukumaran Pillar52
, a three judge
Bench of this Court held that the object of Section 446(2) of CA 1956 was to
enlarge the jurisdiction of the Company Court to avoid a multiplicity of
proceedings, delay and expensive litigation. The Court was speaking through
Justice D.A Desai held:
―8..Sub-Section (2) was introduced to enlarge the jurisdiction
of the court winding up the company so as to facilitate the
52 (1984) 4 SCC 657
PART I
55
disposal of winding-up proceedings…To save the Company
which is ordered to be wound up from this prolix and
expensive litigation and to accelerate the disposal of windingup proceedings, the Parliament devised a cheap and
summary remedy conferring jurisdiction on the court winding
up the company to entertain petitions in respect of claims for
and against the company. This was the object behind
enacting Section 446(2) and therefore, it must receive such
construction at the hands of the court as would advance the
object and at any rate not thwart it‖
59 Section 4(1) of the PIA used similar words in relation to the jurisdiction of
the insolvency court as Section 60(5) of the IBC. Section 4(1) of the PIA
provided:
―Section 4 - Power of Court to decide all questions
arising in insolvency
(1) Subject to the provisions of this Act, the Court shall have
full power to decide all questions whether of title or priority, or
of any nature whatsoever, and whether involving matters of
law or of fact, which may arise in any case of insolvency
coming within the cognizance of the Court, or which the
Court may deem it expedient or necessary to decide for the
purpose of doing complete justice or making a complete
distribution of property in any such case.‖
(emphasis supplied)
60 Another three judge Bench of this Court, in Thampanoor Ravi vs
Charupara Ravi53
, held that a High Court does not have the jurisdiction to
determine whether a person is an undischarged insolvent in an election petition
filed under the Representation of People Act, 1951, in view of the exclusive
jurisdiction conferred upon an insolvency court constituted under the PIA. Justice
S. Rajendra Babu, held:
53 (1999) 8 SCC 74
PART I
56
―11…..The Insolvency Act is a complete code and
determination of all questions regarding insolvency including
a question as to whether (1) a person is an insolvent or not,
or (2) an insolvent be discharged or not and subject to what
conditions, can be decided by the court constituted under that
Act alone…..
13. In the present case, as we have explained earlier the
scheme of the provisions of the Insolvency Act, the exclusive
jurisdiction to deal with any question relating to insolvency
could be adjudicated upon only by the court constituted under
that Act. In such a situation, it would not be possible to hold
that the High Court had, while dealing with an election
petition, jurisdiction to decide a question as to whether a
person is an undischarged insolvent or not. Admittedly, in this
case, there is no such adjudication. Hence the High Court
could not declare the appellant to be an 'undischarged
insolvent‘.‖
61 Section 45-B of the BRA uses language similar to Section 60(5) of the IBC.
Section 45-B of the BRA provides:
―Section 45B - Power of High Court to decide all claims
in respect of banking companies
The High Court shall, save as otherwise expressly provided in
section 45C, have exclusive jurisdiction to entertain and
decide any claim made by or against a banking company
which is being wound up (including claims by or against any
of its branches in India) or any application made under
section 39 of the Companies Act, 1956 by or in respect of a
banking company or any question of priorities or any other
question whatsoever, whether of law or fad [sic fact] which
may relate to or arise in the course of the winding up of a
banking company, whether such claim or question has
arisen or arises or such application has been made or is
made before or after the date of the order for the winding up
of the banking company or before or after the commencement
of the Banking Companies (Amendment) Act, 1953 (52 of
1953).‖
(emphasis supplied)
PART I
57
62 In Dhirendra Chandra Pal vs Associated Bank of Tripura Ltd.54, a four
judge Bench of this Court examined the scope of Section 45-B. Justice B.
Jagannadhas observed:
―4. It is to be remembered that section 45-B is not confined to
claims for recovery of money or recovery of property,
movable or immovable, but comprehends all sorts of claims
which relate to or arise in the course of winding up.‖
63 The above judgements were undoubtedly in relation to the jurisdiction of
courts in relation to winding up and insolvency proceedings under distinct
statutes. But considerations such as avoiding multiplicity of fora, speedy disposal
and litigation costs would also be germane to the establishment of an exclusive
body under the IBC to adjudicate matters arising from or in relation to the
insolvency resolution process.
64 In this context, it would be useful to trace the history of the NCLT and
NCLAT, which are empowered to deal with all issues relating to insolvency,
specifically with the aim of avoiding a multiplicity of fora. The Justice Eradi
Committee was constituted by the Department of Company Affairs to make
recommendations on reforming the existing law on winding up of companies to
increase transparency and reduce delays in the liquidation of companies. The
Report of the High Level Committee on Law relating to Insolvency and Winding
Up of Companies (2000) stated that:
―…there is a need for establishing a National Tribunal as a
specialized agency to deal with matters relating to
rehabilitation, revival and winding up of companies. With a
54 AIR 1955 SC 213
PART I
58
view to avoiding multiplicity of fora, the National
Tribunal. should be conferred with jurisdiction and
powers to deal with matters under Companies Act, 1956
presently exercised by the Company Law Board;
jurisdiction, power and authority relating to winding up of
companies vested with High Courts and power to
consider rehabilitation and revival of companies
presently vested in the BIFR. This suggestion of the
Committee will involve amending the provisions of Part VU of
Companies Act, 1956 besides repeal of Sick Industrial
Companies (Special Provisions) Act, 1985 and amending
section 10E of the Companies Act relating to the present
Company Law Board. All the existing cases pending with the
High Courts and the Company Law Board may be transferred
to the Tribunal and the pending references before BIFR/
AAFIR shall abate.‖
(emphasis supplied)
65 The above report was discussed in the decision of this Court in Union of
India vs R. Gandhi, President, Madras Bar Association55. A Constitution
Bench noted that the recommendations of the Committee were accepted by the
Government, which established the NCLT and NCLAT to transfer the functions
being performed by High Courts, Company Law Board, BIFR and Appellate
Authority for Industrial and Financial Reconstruction to a single forum to avoid
long drawn litigation before multiple fora. Justice R.V. Raveendran observed:
―3. (…) The Committee found that multiplicity of court
proceedings is the main reason for the abnormal delay in
dissolution of companies. It also found that different
agencies dealt with different areas relating to companies,
that Board for Industrial & Financial Reconstruction
(BIFR) and Appellate Authority for Industrial & Financial
Reconstruction (AAIFR) dealt with references relating to
rehabilitation and revival of companies, High Courts dealt
with winding-up of companies and Company Law Board
(CLB) dealt with matters relating to prevention of
oppression and mismanagement etc. Considering the laws
on corporate insolvency prevailing in industrially advanced
55 (2010) 11 SCC 1
PART I
59
countries, the Committee recommended various amendments
in regard to the provisions of Companies Act, 1956 for
setting-up of a National Company Law Tribunal which will
combine the powers of the CLB under the Companies Act,
1956, BIFR and AAIFR under the Sick Industrial Companies
(Special Provisions) Act, 1985 as also the jurisdiction and
powers relating to winding-up presently vested in the High
Courts.
4. It is stated that the recommendations of the Eradi
Committee were accepted by the Government and Company
(Second Amendment) Act, 2002 was passed providing for
establishment of NCLT and NCLAT to take-over the functions
which are being performed by CLB, BIFR, AAIFR and the
High Courts. It is submitted that the establishment of NCLT
and NCLAT will have the following beneficial effects: (i)
reduce the pendency of cases and reduce the period of
winding-up process from 20 to 25 years to about two years;
(ii) avoid multiplicity of litigation before various fora (High
Courts and quasi-judicial Authorities like CLB, BIFR and
AAIFR) as all can be heard and decided by NCLT; (iii) the
appeals will be streamlined with an appeal provided against
the order of the NCLT to an appellate Tribunal (NCLAT)
exclusively dedicated to matters arising from NCLT, with a
further appeal to the Supreme Court only on points of law,
thereby reducing the delay in appeals; and (iv) with the
pending cases before the Company Law Board and all
winding-up cases pending before the High Courts being
transferred to NCLT, the burden on High Courts will be
reduced and BIFR and AAIFR could be abolished.‖
(emphasis supplied)
66 The IBC was a reform which was distilled through many committee reports,
most importantly the Report of the BLRC, which recommended that the earlier
institutional framework relating to the winding up and liquidation of the companies
should continue under the IBC. The Report stated:
―4.2.2 Territorial jurisdiction
…
Further, following from current law, once a liquidation or
bankruptcy order has been made, leave of the NCLT or DRT
would be necessary to proceed with any pending suit or
proceeding or to file any fresh suit or proceeding by or against
PART I
60
the debtor firm or individual. This will ensure the sanctity of
the liquidation or bankruptcy process. The NCLT or DRT
should also have jurisdiction to entertain and dispose of
any pending or fresh suit or legal proceeding by or
against the debtor company or individual; question of
priorities or any other question, whether of law or facts,
in relation to the liquidation or bankruptcy. By bringing
all litigations that may have a monetary impact on the
economic value of debtor firm or individual’s assets
within the jurisdiction of the NCLT, the liquidation or
bankruptcy process will be made streamlined and
efficient…
4.21 Tribunals Jurisdiction on firm insolvency and
liquidation
Under Companies Act, 2013, the National Company Law
Tribunal (NCLT) has jurisdiction over the winding up and
liquidation of companies. NCLAT has been vested with the
appellate jurisdiction over NCLT. Similarly, the Limited
Liability Partnership Act, 2008 also confers jurisdiction to
NCLT for dissolution and winding up of limited liability
partnerships, while appellate jurisdiction is vested with
NCLAT. The Committee recommends continuing with this
existing institutional arrangement. NCLT should have
jurisdiction over adjudications arising out of firm
insolvency and liquidation, while NCLAT will have
appellate jurisdiction on the same.‖
(emphasis supplied)
67 The institutional framework under the IBC contemplated the establishment
of a single forum to deal with matters of insolvency, which were distributed earlier
across multiple fora. In the absence of a court exercising exclusive jurisdiction
over matters relating to insolvency, the corporate debtor would have to file and/or
defend multiple proceedings in different fora. These proceedings may cause
undue delay in the insolvency resolution process due to multiple proceedings in
trial courts and courts of appeal. A delay in completion of the insolvency
proceedings would diminish the value of the debtor‘s assets and hamper the
PART I
61
prospects of a successful reorganization or liquidation. For the success of an
insolvency regime, it is necessary that insolvency proceedings are dealt with in a
timely, effective and efficient manner. Pursuing this theme in Innoventive (supra)
this court observed that ―one of the important objectives of the Code is to bring
the insolvency law in India under a single unified umbrella with the object of
speeding up of the insolvency process‖. The principle was reiterated in Arcelor
Mittal (supra) where this court held that ―the non-obstante Clause in Section
60(5) is designed for a different purpose: to ensure that the NCLT alone has
jurisdiction when it comes to applications and proceedings by or against a
corporate debtor covered by the Code, making it clear that no other forum has
jurisdiction to entertain or dispose of such applications or proceedings‖.
Therefore, considering the text of Section 60(5)(c) and the interpretation of similar
provisions in other insolvency related statutes, NCLT has jurisdiction to
adjudicate disputes, which arise solely from or which relate to the insolvency of
the Corporate Debtor. However, in doing do, we issue a note of caution to the
NCLT and NCLAT to ensure that they do not usurp the legitimate jurisdiction of
other courts, tribunals and fora when the dispute is one which does not arise
solely from or relate to the insolvency of the Corporate Debtor. The nexus with
the insolvency of the Corporate Debtor must exist.
68 It is appropriate to refer to the observations in the Report of the BLRC,
wherein it noted the role of the NCLT, as the Adjudicating Authority for the CIRP,
in the following terms:
―An adjudicating authority ensures adherence to the
process
PART I
62
At all points, the adherence to the process and compliance
with all applicable laws is controlled by the adjudicating
authority. The adjudicating authority gives powers to the
insolvency professional to take appropriate action against the
directors and management of the entity, with
recommendations from the creditors committee. All material
actions and events during the process are recorded at the
adjudicating authority. The adjudicating authority can assess
and penalise frivolous applications. The adjudicator hears
allegations of violations and fraud while the process is on.
The adjudicating authority will adjudicate on fraud, particularly
during the process resolving bankruptcy. Appeals/actions
against the behaviour of the insolvency professional are
directed to the Regulator/Adjudicator.‖
As such, it is important to remember that the NCLT‘s jurisdiction shall always be
circumscribed by the supervisory role envisaged for it under the IBC, which
sought to make the process driven by trained resolution professionals.
69 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 insolvency of the Corporate Debtor, 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.
70 Ms Ramachandran and Mr Diwan have contended that CA 1956, PIA and
BRA do not contain any provisions equivalent to Sections 25(2)(b) and 18(f)(vi) of
the IBC which empower the RP to exercise rights for the benefit of the Corporate
Debtor in certain adjudicatory proceedings. They submit that Section 60(5)(c) of
the IBC must be read in consonance with Sections 25(2)(b) and 18(f)(iv), which
would be rendered nugatory if NCLT becomes the exclusive forum for the
PART I
63
enforcement of all the Corporate Debtor‘s rights. Section 25(2)(b) of the IBC
provides:
―Section 25 - Duties of resolution professional
(2) For the purposes of sub-section (1), the resolution
professional shall undertake the following actions, namely:--
….
(b) represent and act on behalf of the corporate debtor with
third parties, exercise rights for the benefit of the corporate
debtor in judicial, quasi-judicial or arbitration proceedings;‖
Section 18(f)(vi) provides:
―Section 18 - Duties of interim resolution professional
The interim resolution professional shall perform the following
duties, namely:-
……
(f) take control and custody of any asset over which the
corporate debtor has ownership rights as recorded in the
balance sheet of the corporate debtor, or with information
utility or the depository of securities or any other registry that
records the ownership of assets including—
…….
(vi) assets subject to the determination of ownership by a
court or authority;‖
71 We are inclined to agree with the submission made by Mr Singh that
merely because a duty has been imposed on the IRP or the RP, it does not mean
that the jurisdiction of the NCLT is circumscribed under section 60(5)(c) of the
IBC. In Embassy Property (supra), it was argued that the term ―property‖ under
Section 3(27) of the IBC includes a mining lease granted by government and the
lRP is duty bound under Section 20(1) of the IBC to preserve the value of the
PART I
64
property of the Corporate Debtor. Hence, the submission was that the RP can
invoke the jurisdiction of the NCLT to adjudicate upon a dispute relating to nonextension of the lease. However, Justice V. Ramasubramanian, speaking for this
Court, observed that ―the said argument cannot be sustained for the simple
reason that the duties of a resolution professional are entirely different from the
jurisdiction and powers of NCLT‖
56
.
72 Therefore, we hold that the RP can approach the NCLT for adjudication of
disputes that are related to the insolvency resolution process. However, for
adjudication of disputes that arise dehors the insolvency of the Corporate Debtor,
the RP must approach the relevant competent authority. For instance, if the
dispute in the present matter related to the non-supply of electricity, the RP would
not have been entitled to invoke the jurisdiction of the NCLT under the IBC.
However, since the dispute in the present case has arisen solely on the ground of
the insolvency of the Corporate Debtor, NCLT is empowered to adjudicate this
dispute under Section 60(5)(c) of the IBC.
I.2 Jurisdiction of NCLT and GERC
73 It has been urged on behalf of the appellant that in terms of Article 10.4 of
the PPA, GERC is entitled to entertain the disputes relating to the PPA.
74 Our attention has also been drawn to Section 86(1)(f) of the Electricity Act,
which provides that GERC shall discharge the function of adjudicating ―the
disputes between the licensees, and generating companies and to refer any
56 Embassy Property (supra), para 39.
PART I
65
dispute for arbitration‖. It has been submitted that, therefore, any issue in relation
to the PPA must be raised before the GERC and not the NCLT.
75 Reliance has also been placed on the judgement of this Court in Embassy
Property (supra), where this Court held that the NCLT and NCLAT did not have
jurisdiction over a dispute arising under the Mines and Minerals (Development
and Regulation) Act, 1957, in relation to the refusal of the State of Karnataka to
extend a mining lease. The primary consideration which weighed with this Court
while coming to its decision was that NCLT cannot have jurisdiction on matters of
public law. This Court held:
―37….Clause (c) of Sub-section (5) of Section 60 is very
broad in its sweep, in that it speaks about any question of law
or fact, arising out of or in relation to insolvency resolution.
But a decision taken by the government or a statutory
authority in relation to a matter which is in the realm of public
law, cannot, by any stretch of imagination, be brought within
the fold of the phrase "arising out of or in relation to the
insolvency resolution" appearing in Clause (c) of Sub-section
(5)...‖
In the present case the decision to terminate the PPA has not been taken by any
governmental or statutory authority acting within the domain of its public law
functions. The decision has been simply taken by a contracting party solely on
account of the initiation of insolvency proceedings against the Corporate Debtor
in terms of an agreement between the parties.
76 Ms Ramachandran and Mr Diwan have also relied on the judgment of this
Court in Abhilash Lal (supra), which concerned taking the approval of the
Municipal Corporation of Greater Mumbai (―MCGM‖) for implementing a
resolution plan. The Corporate Debtor in that case had committed defaults prior
PART I
66
to the initiation of the CIRP, in relation to its obligation to construct a hospital on a
land owned by the MCGM, subsequent to which a lease deed was to be
executed. It had also apparently failed to pay annual lease rentals. In this context,
Justice S. Ravindra Bhat, speaking for this Court held that:
―47….. Section 238 cannot be read as overriding the MCGM‘s
right – indeed its public duty to control and regulate how its
properties are to be dealt with.‖ Further, this Hon‘ble Court
held that ―in the absence of approval in terms of Section 92
and 92A of the MMC Act, the adjudicating authority could not
have overridden MCGM‘s objections and enabled the creation
of a fresh interest in respect of its properties and
lands….Nevertheless, the authorities under the Code could
not have precluded the control that MCGM undoubtedly has,
under law, to deal with properties and land in question, which
undeniably are public properties. The resolution plan,
therefore, would be a serious impediment to MCGM‘s
independent plans to ensure that public health amenities are
developed in the manner it chooses, and for which fresh
approval under the MMC Act may be forthcoming for a
separate scheme formulated by that corporation (MCGM)‖
In other words, the statutory powers entrusted to the Municipal Corporation to
exercise control over its own properties are not overridden by Section 238 of the
IBC. Once again, the present situation is distinguishable. The contract in question
in Abhilash Lal (supra) was terminated due to defaults unrelated to the
insolvency of the corporate debtor. In the present case, the sole default attributed
by the appellant to the Corporate Debtor was that it was undergoing an
insolvency resolution process, which makes the present dispute amenable to the
jurisdiction of the NCLT under Section 60(5)(c) of the IBC.
77 Section 238 of the IBC stipulates that IBC would override other laws,
including an instrument having effect by virtue of any such law. The NCLT in its
decision dated 29 August 2019 gave detailed findings on the issue of whether the
PART I
67
PPA is an instrument within the meaning of section 238 of the IBC. Section 238
of the IBC provides:
―Section 238 - Provisions of this Code to override other
laws
The provisions of this Code shall have effect, notwithstanding
anything inconsistent therewith contained in any other law for
the time being in force or any instrument having effect by
virtue of any such law.‖
The findings of the NCLT are extracted below:
―19. That from the plain reading of Section 238, it is evident
that the aforesaid Section is applicable to an 'instrument' too.
However, we find that the term 'instrument' has not been
defined anywhere under IBC 2016.
20. To know, whether the Power Purchase Agreement (PPA)
is an 'instrument' or not, we referred to the provisions of
Section 3 (37) of the Code, which is reproduced as below:
"Section 3(37) : Words and expressions used but not defined
in this Code but defined in the Indian Contract Act, 1872, the
Indian Partnership Act, 1932, the Securities Contract
(Regulation) Act, 1956, the Securities Exchange Board of
India Act, 1992, the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993, the Limited Liability
Partnership Act, 2008 and the Companies Act, 2013, shall
have the meanings respectively assigned to them in those
Acts."
21. However, in the definition clauses of all these enactments
and of General Clause Act 1897, we failed to find a definition
of the term 'instrument'.
22. For interpretation of the term 'instrument', we, therefore,
thought it proper to check how the Legislature has defined the
term 'instrument' in other enactments.
23 . Finding that the PPA has been executed on a Stamp
Paper, we referred to the Section 2(14) of the Indian Stamp
Act, 1899, which reads as follows:
"Section 2(14): "Instrument" - "instrument" includes every
document by which any right or liability is, or purports to be,
created, transferred, limited, extended, extinguished or
recorded".
PART I
68
24. That near similar definition of the term 'instrument' is
provided under Section 2(b) of Notaries Act, 1952 :
"Section 2(b): "instrument" includes every document by which
any right or liability is, or purports to be, created, transferred,
modified, limited, extended, suspended, extinguished or
recorded;"
25. Further, the Bombay Stamp Act, 1958 defines the term
'instrument' in Section 2(1) as follows :
"Section 2(1): instrument" includes every document by which
any right or liability is, or purports to be, created, transferred,
limited, extended, extinguished or recorded, but does not
include a bill of exchange, cheque, promissory note, bill of
lading, letter of credit, policy of insurance, transfer of share,
debenture, proxy and receipt;"
26. That the Merriam-Webster Dictionary defines the word
'instrument', inter alia, as:
"a formal legal document (such as a deed, bond or
agreement)"
27. Since, the rights and liabilities of parties have been
created in the Power Purchase Agreement and such an
agreement is enforceable by law and the word 'instrument'
inter alia, includes an 'agreement', we are of the view, that the
Power Purchase Agreement i.e., PPA is an 'Instrument' for
the purpose of Section 238 of IBC 2016.‖
78 It has been urged on behalf of the appellant that Section 238 does not
apply to a bilateral commercial contract between a Corporate Debtor and a third
party and only applies to statutory contracts or instruments entered into by
operation of law. The basis of this submission is that the word ―instrument‖ should
be given a meaning ejusdem generis to the provision ―contained in any other
law‖. We do not find force in this argument. Section 238 does not state that the
―instrument‖ must be entered into by operation of law; rather it states that the
instrument has effect by virtue of any such law. In other words, the instrument
need not be a creation of a statute; it becomes enforceable by virtue of a law.
PART I
69
Therefore, we are inclined to agree with the view taken by the NCLT. Section 238
is prefaced by a non-obstante clause. NCLT‘s jurisdiction could be invoked in the
present case because the termination of the PPA was sought solely on the
ground that the Corporate Debtor had become subject to an insolvency resolution
process under the IBC.
79 Section 63 of the IBC provides that ―no civil court or authority shall have
jurisdiction to entertain any suit or proceedings in respect of any matter on which
National Company Law Tribunal or the National Company Law Appellate Tribunal
has jurisdiction under this Code‖.
I.3 Residuary jurisdiction of the NCLT under section 60(5)(c)
80 The respondents have relied upon the decision of this Court in Committee
of Creditors of Essar Steel India Limited vs Satish Kumar Gupta57
, where this
Court held that section 60(5)(c) of the IBC ―is in the nature of residuary
jurisdiction vested in the NCLT so that NCLT may decide all questions of law or
fact arising out of or in relation to insolvency or liquidation under the Code‖58
.
81 At this stage we may visit some of the precedents emanating from this
court where a statutory conferment of residuary powers has been analyzed. A
two-judge Bench of this Court discussed the contours of the residuary power in
Remdeo Chauhan vs Bani Kant Das59, while interpreting sub-Section (j) of
Section 12 of the National Human Rights Commission Act, 1993 which confers
57 (2020) 8 SCC 531; hereinafter referred to as "Satish Kumar Gupta‖
58
Ibid, para 69
59 (2010) 14 SCC 209
PART I
70
NHRC with ―such other functions as it may consider necessary for the promotion
of human rights‖. While construing the provision, this Court held that:
―45….It is not necessary that each and every case relating to
the violation of human rights will fit squarely within the four
corners of Section 12 of the 1993 Act for invoking the
jurisdiction of the NHRC. One must accept that human rights
are not edicts inscribed on a rock. They are made and
unmade on the crucible of experience and through reversible
process of human struggle for freedom. They admit of a
certain degree of fluidity. Categories of human rights, being of
infinite variety, are never really closed. That is why the
residuary clause in Sub-section (j) has been so widely
worded to take care of situations not covered by Subsections (a) to (i) of Section 12 of the 1993 Act.
46. The jurisdiction of NHRC thus stands enlarged by Section
12(j) of the 1993 Act, to take necessary action for the
protection of human rights. Such action would include
inquiring into cases where a party has been denied the
protection of any law to which he is entitled, whether by a
private party, a public institution, the government or even the
Courts of law. We are of the opinion that if a person is entitled
to benefit under a particular law, and benefits under that law
have been denied to him, it will amount to a violation of his
human rights.‖
(emphasis supplied)
82 In D.R. Kohli vs Atul Products Ltd.60, a three judge Bench of this Court
differentiated between the power of Central Excise authorities for recovery of
monies due to the Government under two provisions, one of them being a
residuary provision:
―14. The next question relates to the appropriate provision of
law under which action could have been taken in this case by
the Central Excise authorities. This question was not decided
by the High Court in view of its finding on the liability of the
respondent to pay excise duty on the products manufactured by
60 (1985) 2 SCC 77
PART I
71
it. Since we have not agreed with the decision of the High Court
on this point, it has become necessary for us to decide this
question in this appeal. While the Department asserts that it
was open to it to proceed under Rule 10-A of the Rules, the
respondent contends that even if there was any short levy, the
proper Rule applicable to its case was Rule 10 and not Rule 10-
A. Rule 10 and Rule 10-A of the Rules during the relevant
period ran as follows :
10. Recovery of duties or charges short-levied, or erroneously
refunded: When duties or charges have been short-levied
through inadvertence, error, collusion or misconstruction on the
part of an officer, or through misstatement as to the quantity,
description or value of such goods on the part of the owner, or
when any such duty or charge, after having been levied/has
been owing to any such cause, erroneously refunded, the
person chargeable with the duty or charge, so short-levied, or
to whom such refund has been erroneously made, shall pay the
deficiency or pay the amount paid to him in excess, as the case
may be, on written demand by the proper officer being made
within three months from the date, on which the duty or charge
was paid or adjusted in the owner's account-current, if any, or
from the date of making the refund.
10-A. Residuary powers for recovery of sums due to
Government:
Where these Rules do not make any specific provision for the
collection of any duty, or of any deficiency in duty if the duty has
for any reason been short-levied, or of any other sum of any
kind payable to the Central Government under the Act or these
Rules, such duty, deficiency in duty or sum shall, on a written
demand made by the proper officer, be paid to such person and
at such time and place, as the proper officer may specify.
15. The points of difference between the above two Rules were
that (i) whereas Rule 10 applied to cases of short levy through
inadvertence, error, collusion or misconstruction on the part of
an officer, or through misstatement as to the quantity,
description or value of the excisable goods-on the part of the
owner Rule 10-A which was a residuary clause applied to
those cases which were not covered by Rule 10 and that (ii)
whereas under Rule 10, the deficit amount could not be
collected after the expiry of three months from the date on
which the duty or charge was paid or adjusted in the owners
account-current or from the date of making the refund, Rule 10-
A did not contain any such period of limitation.‖
(emphasis supplied)
PART I
72
83 Hence, the residuary jurisdiction conferred by statute may extend to
matters which are not specifically enumerated under a legislation. While a
residuary jurisdiction of a court confers it wide powers, its jurisdiction cannot be in
contravention of the provisions of the concerned statute. In A. Deivendran vs
State of T.N.61
, a two judge Bench of this Court, while determining the limitations
of the residuary jurisdiction under Section 465 of the Code of Criminal Procedure,
197362
, held that a residuary jurisdiction cannot be invoked when there is a patent
defect of jurisdiction or an order is passed in contravention of any mandatory
provision of the CrPC. Speaking through Justice G.B. Pattanaik, this Court
observed that a competent court is vested with the power to exercise residuary
jurisdiction under section 465 of the CrPC in the following terms:
―15. We may notice also the arguments advanced by Mr
Mohan, learned counsel appearing for the State, that the
conviction and sentence against the appellants should not be
interfered with in view of the provisions of Section 465 of the
Code, inasmuch as there has been no failure of justice. We
are unable to accept this contention. Section 465 of the Code
is the residuary section intended to cure any error, omission
or irregularity committed by a Court of competent jurisdiction
in course of trial through accident or inadvertence, or even an
illegality consisting in the infraction of any provisions of law.
The sole object of the Section is to secure justice by
preventing the invalidation of a trial already held, on the
ground of technical breaches of any provisions in the Code
causing no prejudice to the accused. But by no stretch of
imagination the aforesaid provisions can be attracted to
a situation where a Court having no jurisdiction under
the Code does something or passes an order in
contravention of the mandatory provisions of the Code.
In view of our interpretation already made, that after a
criminal proceeding is committed to a Court of Sessions it is
only the Court of Sessions which has the jurisdiction to tender
pardon to an accused and the Chief Judicial Magistrate does
61 (1997) 11 SCC 720
62 ―CrPC‖
PART I
73
not possess any such jurisdiction, it would be impossible to
hold that such tender of pardon by the Chief Judicial
Magistrate can be accepted and the evidence of the approver
thereafter can be considered by attracting the provisions of
Section 465 of the Code. The aforesaid provision cannot
be applied to a patent defect of jurisdiction. Then again it
is not a case of reversing the sentence or order passed by a
Court of competent jurisdiction but is a case where only a
particular item of evidence has been taken out of
consideration as that evidence of the so-called approver has
been held by us to be not a legal evidence since pardon had
been tendered by a Court of incompetent jurisdiction. In our
opinion, to such a situation the provisions of Section 465
cannot be attracted at all. It is true, that procedures are
intended to subserve the ends of justice and undue emphasis
on mere technicalities which are not vital or important may
frustrate the ends of justice. The Courts, therefore, are
required to consider the gravity of irregularity and whether the
same has caused a failure of justice. To tender pardon by a
Chief Judicial Magistrate cannot be held to be a mere case of
irregularity nor can it be said that there has been no failure of
justice. It is a case of total lack of jurisdiction, and
consequently the follow up action on account of such an
order of a Magistrate without jurisdiction cannot be taken
into consideration at all. In this view of the matter the
contention of Mr Mohan, learned Counsel appearing for the
State in this regard has to be rejected.‖
(emphasis supplied)
84 In Johri Lal Soni vs Bhanwari Bai63 (―Johri Lal Soni‖), a two judge
Bench of this Court had to determine whether an insolvency court can scrutinize
the validity of a transfer made seven years before the transferor was adjudged as
insolvent, when Section 53 of the PIA classified only those transfers as voidable
against the receiver, where the transferor was adjudged insolvent on a petition
presented within two years after the date of transfer. This Court, in view of the
wide discretion granted in terms of Section 4, held that the insolvency court will
have the jurisdiction to determine the validity of void transfers undertaken at any
63 (1977) 4 SCC 59 : hereinafter, referred to as ―Johri Lal Soni‖
PART I
74
point of time. While Section 53 was applicable only to voidable transactions, this
Court was of the view that Section 4 provides a discretion to an insolvency court
to decide all questions which arise in a case of insolvency and an interpretation
which allowed the court to examine void transfers undertaken at any point of time
would be in consonance with the object of the provision. The Court held:
―4. We now proceed to interpret the provisions of s. 4 itself,
the relevant part of which may be extracted thus:
4. (1) Subject to the provisions of this Act, the Court shall
have full power to decide all questions whether of title or
priority, or of any nature whatsoever and whether involving
matters of law or of fact, which may arise in any case of
insolvency coming within the cognizance of the Court, or
which the Court may deem it expedient or necessary
to decide for the purpose of doing complete justice or making
a complete distribution of property in any such case.
5. It would be seen that the section has been couched in the
widest possible terms and confers complete and full powers
on the Insolvency Court to decide all questions of title or
priority, or of any nature whatsoever, which may arise in any
case of insolvency. The only restriction which is contained
in Section 4 is that these powers are subject to the other
provisions of the Act. In other words, the position is that
where any other section of the Act contains a provision which
either runs counter to Section 4 or expressly excludes the
application of Section 4, to that extent Section 4 would
become inapplicable. Counsel for the respondent strongly
relied on the provisions of Section 53 which runs thus:
53. Any transfer of property not being a transfer made before
and in consideration of marriage or made in favour of a
purchaser or incumbrancer in good faith and for valuable
consideration shall, if the transferor is adjudged insolvent on a
petition presented within two years after the date of the
transfer, be voidable as against the receiver and may be
annulled by the Court.‖
(emphasis supplied)
PART I
75
It is relevant to note that unlike Section 4 of the PIA, Section 60(5)(c) of the IBC is
not subject to other provisions of the statute. Hence, Section 60(5)(c) of the IBC
has been worded more expansively than Section 4 of the PIA.
85 In respect of the interplay between Sections 53 and 4 of the PIA, in Johri
Lal Soni (supra), this Court further held:
―6. It was submitted that the effect of Section 53 of the
Act clearly is that it bars the jurisdiction of the
Insolvency Court to determine the validity of any transfer
made beyond two years of the transferor being adjudged
insolvent. It is no doubt true that the words "within two
years after the date of the transfer" being voidable as
against the receiver does fix a time-limit within which the
transfer could be annulled by the Court. But a plain
construction of Section 53 would manifestly/indicate that
the words "within two years after the date, be voidable as
against the receiver and shall be annulled by the Court"
clearly connote that only those transfers are excepted
from the jurisdiction of the Court which are voidable. The
section has, therefore, made a clear distinction between
void and voidable transfers-a distinction which is wellknown to law. A void transfer is no transfer at all and is
completely destitute of any legal effect: it is a nullity and
does not pass any title at all. For instance, where a transfer
is nominal, sham or fictitious, the title remains with the
transferor and so does the possession and nothing passes to
the transferee. It is manifest, therefore, that such a transfer is
no transfer in the eye of the law. Such transfers, therefore,
clearly fall beyond the purview of Section 53 of the Act
which refers only to transfers which are voidable. It is well
settled that a voidable transfer is otherwise a valid transaction
and continues to be good until it is avoided by the party
aggrieved. For instance, transfers executed by the transferor
to delay or defraud his creditors may be avoided under
Section 53 of the Transfer of Property Act. Similarly transfers
made under coercion, fraud or undue influence may be
avoided by the party defrauded. It is only such transfers
which, if they take place beyond two years of the date of
transfer, cannot be enquired into by the Court by virtue of
Section 53 of the Act. This appears to us to be the plain
and simple interpretation of the combined reading of
Sections 4 and 53 of the Act. Indeed, if a different
interpretation is given, it will render the entire object of
the section [4] nugatory, because the Court would be
PART I
76
powerless to set at naught transfers which are patently
void, merely because they had been made at a particular
point of time.‖
(emphasis supplied)
86 The decision in Johri Lal Soni (supra) gave an expansive interpretation to
the powers of an insolvency court under Section 4 of the PIA, which is similar to
Section 60(5)(c) of the IBC. This Court held that an insolvency court was
empowered to consider the validity of void transfers under Section 4 of the PIA,
which did not explicitly fall under Section 53 of the PIA. However, this Court‘s
decision was premised on the finding that Section 53 of the PIA only dealt with
voidable transfers. This Court noted that the jurisdiction of an insolvency court will
be restricted in matters where a voidable transfer has taken place beyond the
time-limit stipulated under Section 53 within which the transfer could be annulled
by the court. Hence, in the name of exercising a residuary jurisdiction, a court
cannot cloak itself with jurisdiction which is contrary to the provisions of a statute.
However, at the same time, as held by this Court in Johri Lal Soni (supra), an
interpretation which renders the objective of a residuary jurisdiction nugatory
cannot be upheld by this Court. A fine line has to be drawn between ensuring that
a residuary jurisdiction is not rendered otiose due to an excessively restrictive
interpretation, as well as, guarding against usurpation of power by a court or a
tribunal not vested in it.
87 The residuary jurisdiction of the NCLT under Section 60(5)(c) of the IBC
provides it a wide discretion to adjudicate questions of law or fact arising from or
in relation to the insolvency resolution proceedings. If the jurisdiction of the NCLT
PART J
77
were to be confined to actions prohibited by Section 14 of the IBC, there would
have been no requirement for the legislature to enact Section 60(5)(c) of the IBC.
Section 60(5)(c) would be rendered otiose if Section 14 is held to be the
exhaustive of the grounds of judicial intervention contemplated under the IBC in
matters of preserving the value of the corporate debtor and its status as a ‗going
concern‘. We hasten to add that our finding on the validity of the exercise of
residuary power by the NCLT is premised on the facts of this case. We are not
laying down a general principle on the contours of the exercise of residuary
power by the NCLT. However, it is pertinent to mention that the NCLT cannot
exercise its jurisdiction over matters dehors the insolvency proceedings since
such matters would fall outside the realm of IBC. Any other interpretation of
Section 60(5)(c) would be in contradiction of the holding of this Court in Satish
Kumar Gupta (supra).
J Validity of ipso facto clauses
88 Before we proceed to analyze the validity of the termination of the PPA by
the appellant under Articles 9.2.1(e) and 9.3.1 in the present case, it is important
to contextualize it within the larger debate on this issue. Globally, ipso facto
clauses arise in a variety of contracts. Ipso facto clauses are contractual
provisions which allow a party (―terminating party‖) to terminate the contract
with its counterparty (―debtor‖) due to the occurrence of an ‗event of default‘. In
the context of insolvency law, in some of these ipso facto clauses, the ‗event of
default‘ includes applying for insolvency, commencement of insolvency
proceedings, appointment of insolvency representative, et al. The United Nations
PART J
78
Commission on International Trade Law64
released its Legislative Guide on
Insolvency Law in 200465. This guide defines ipso facto clauses in the following
terms:
―114. Many contracts include a clause that defines events of
default giving the counterparty an unconditional right, for
example, of termination or acceleration of the contract
(sometimes referred to as ―ipso facto‖ clauses). These events
of default commonly include the making of an application for
commencement, or commencement, of insolvency
proceedings; the appointment of an insolvency
representative; the fact that the debtor satisfies the criteria for
commencement of insolvency proceedings; and even
indications that the debtor is in a weakened financial
position…‖
The validity of such ipso facto clauses has been considered in a global
perspective by international organizations and in the domestic jurisdictions of
nation-states in their national insolvency laws. In order for us to assess their
validity in India, we must first understand the global trends in contemporary
jurisprudence. We can attempt to extrapolate our experiential learning from
comparative law. As India develops into a responsive member of the international
community, our laws cannot afford to be inward-looking.
J.1 Position of international and multilateral organizations
89 The UNCITRAL Guide notes that insolvency laws across various
jurisdictions either uphold ipso facto clauses or invalidate them. It notes the
arguments of both sides thus:
64 ―UNCITRAL‖
65―UNCITRAL Guide‖; Available at <https://uncitral.un.org/sites/uncitral.un.org/files/mediadocuments/uncitral/en/05-80722_ebook.pdf> accessed 18 February 2021. The UNITRAL Guide was created with
the intent that it would be used ―as a reference by national authorities and legislative bodies when preparing new
laws and regulations or reviewing the adequacy of existing laws and regulations‖
PART J
79
―115. The approach of upholding these types of clauses may
be supported by a number of factors, including the desirability
of respecting commercial bargains; the need to prevent the
debtor from selectively performing contracts that are
profitable and rejecting others (an advantage that is not
available to the counterparty); the effect on financial contract
netting of not upholding an automatic termination provision;
the belief that, since an insolvent business will generally be
unable to pay, delaying the termination of contracts potentially
only increases existing levels of debt; the need for creators of
intellectual property to be able to control the use of that
property; and the effect on the counterparty‘s business of
termination of a contract, especially one with respect to an
intangible.
116. Under a different approach, the insolvency law overrides
those clauses, making them unenforceable. Where the clause
provides, for example, for termination on the occurrence of
the defined event, the contract can be continued over the
objection of the counterparty. Although the approach of
overriding such clauses can be regarded as interfering with
general principles of contract law, such interference may be
crucial to the success of the proceedings. In reorganization,
for example, where the contract is a critical lease or involves
the use of intellectual property embedded in a key product,
continued performance of the contract may enhance the
earnings potential of the business; reduce the bargaining
power of an essential supplier; capture the value of the
debtor‘s contracts for the benefit of all creditors; and assist in
locking all creditors into a reorganization.‖
90 In finding a pragmatic solution to a vexed issue such as the validity of ipso
facto clauses, the law acknowledges the inherent tension between the primary
arguments on both sides of the debate. One the one hand there is a need of
ensuring that the debtor remains as a ‗going concern‘ throughout the insolvency
process. On the other hand, the law has to respect the freedom to enter upon
contracts and the sanctity of enforcing contractual remedies. Controlling the
ambit of ipso facto clauses does give rise to arguments of infringing upon the
parties‘ freedom to enter into and enforce their contracts. The UNCITRAL Guide
offers guidance to national authorities by concluding that it is desirable that their
PART J
80
national insolvency laws override such ipso facto clauses, subject to limited
exceptions, since the continued performance of the terminated contracts is often
crucial to the success of the insolvency process. The UNCITRAL Guide states
this in the following terms:
―118. Although some insolvency laws do permit these types of
clause to be overridden if insolvency proceedings are
commenced, this approach has not yet become a general
feature of insolvency laws. There is an inherent tension
between promoting the debtor‘s survival, which may require
the preservation of contracts, and injecting unpredictability
and extra cost into commercial dealings by creating a variety
of exceptions to general contract rules. While this issue is
clearly one that may require a careful weighing of the
advantages and disadvantages, there are, nevertheless,
circumstances where the ability of the insolvency
representative to ensure that a contract continues to be
performed will be crucial to the success of reorganization
and also, but perhaps to a lesser extent, liquidation
where the business is to be sold as a going concern. For
these reasons, it is desirable that an insolvency law
permit such clauses to be overridden. Any negative impact
of a policy of overriding these types of clauses can be
balanced by providing compensation to creditors who can
demonstrate that they have suffered damage or loss as a
result of the contract continuing to be performed after
commencement of insolvency proceedings, or including
exceptions to a general override of these clauses for certain
types of contracts, such as contracts to lend money and, in
particular, financial contracts (see below, paras. 208-215).‖
(emphasis supplied)
91 The World Bank, in its Principles for Effective Insolvency and
Creditor/Debtor Regimes published in 201666, notes that ipso facto clauses
should be overridden, subject to limited exceptions. It states thus:
―C10 Treatment of Contractual Obligations
66 Available at <http://pubdocs.worldbank.org/en/919511468425523509/ICR-Principles-Insolvency-CreditorDebtor-Regimes-2016.pdf> accessed 18 February 2021.
PART J
81
…
C10.2 To gain the benefit of contracts that have value, the
insolvency representative should have the option of
performing and assuming the obligations under those
contracts. Contract provisions that provide for termination of a
contract upon either an application for commencement or the
commencement of insolvency proceedings should be
unenforceable subject to special exceptions.‖
92 While assessing the position adopted by supranational organizations, we
note that the European Parliament issued Directive (EU) 2019/1023 on 20 June
201967 in relation to the restructuring and insolvency framework in the European
Union, thereby amending the previous Directive. The EU Directive notes in its
Recitals the issues which can arise for a Corporate Debtor undergoing
restructuring when its suppliers terminate contracts based on ipso facto clauses.
The Recitals state as follows:
―(40) When a debtor enters an insolvency procedure, some
suppliers can have contractual rights, provided for in so called
ipso facto clauses, entitling them to terminate the supply
contract solely on account of the insolvency, even if the
debtor has duly met its obligations. Ipso facto clauses could
also be triggered when a debtor applies for preventive
restructuring measures. Where such clauses are invoked
when the debtor is merely negotiating a restructuring
plan or requesting a stay of individual enforcement
actions or invoked in connection with any event
connected with the stay, early termination can have a
negative impact on the debtor's business and the
successful rescue of the business. Therefore, in such
cases, it is necessary to provide that creditors are not
allowed to invoke ipso facto clauses which make
reference to negotiations on a restructuring plan or a
stay or any similar event connected to the stay.
(41) Early termination can endanger the ability of a
business to continue operating during restructuring
negotiations, especially when contracts for essential
67 ―EU Directive‖
PART J
82
supplies such as gas, electricity, water,
telecommunication and card payment services are
concerned. Member States should provide that creditors to
which a stay of individual enforcement actions applies, and
whose claims came into existence prior to the stay and have
not been paid by a debtor, are not allowed to withhold
performance of, terminate, accelerate or, in any other way,
modify essential executory contracts during the stay period,
provided that the debtor complies with its obligations under
such contracts which fall due during the stay. Executory
contracts are, for example, lease and licence agreements,
long term supply contracts and franchise agreements.‖
(emphasis supplied)
93 Thereafter, the EU Directive recommends that the member States of the
European Union shall ensure that creditors are not allowed to terminate contracts
based on ipso facto clauses when the ‗event of default‘ is a Corporate Debtor
undergoing restructuring. Article 7 of the Directive states as follows:
―Article 7
Consequences of the stay of individual enforcement actions
…
5. Member States shall ensure that creditors are not allowed
to withhold performance or terminate, accelerate or, in any
other way, modify executory contracts to the detriment of the
debtor by virtue of a contractual clause providing for such
measures, solely by reason of:
(a) a request for the opening of preventive restructuring
proceedings;
(b) a request for a stay of individual enforcement actions;
(c) the opening of preventive restructuring proceedings; or
(d) the granting of a stay of individual enforcement actions as
such.‖
PART J
83
J.2 National jurisdictions
94 As we begin assessing the positions of national jurisdictions, it is apposite
that we begin by analyzing the contradictory positions adopted by the United
States and the United Kingdom before looking at European and other nations
with civil law traditions, and thereafter at nations with common law roots.
J.2.1 United States
95 In the US, Section 365(e) of the United States Bankruptcy Code, 1979
(―US Bankruptcy Code‖) renders ipso facto clauses unenforceable when they
are present in an executory contract or an unexpired lease. Section 365(e)
stipulates:
―(1) Notwithstanding a provision in an executory contract or
unexpired lease, or in applicable law, an executory contract or
unexpired lease of the debtor may not be terminated or
modified, and any right or obligation under such contract or
lease may not be terminated or modified, at any time after the
commencement of the case solely because of a provision in
such contract or lease that is conditioned on-
(A) the insolvency or financial condition of the debtor at any
time before the closing of the case;
(B) the commencement of a case under this title; or
(C) the appointment of or taking possession by a trustee in a
case under this title or a custodian before such
commencement‖
96 A related provision, Section 541(c)(1)(B) of the US Bankruptcy Code
provides that ―an interest of the debtor in property becomes property of the
estate‖ in spite of any ―agreement, transfer instrument, or applicable nonbankruptcy law‖ which ―gives an option to effect a forfeiture, modification, or
termination of the debtor's interest in property‖. However, even so, the US
PART J
84
Bankruptcy Code does allow ipso facto clauses in certain contracts (swap
agreements, securities, forwarding, et al) to be enforceable.
97 Further, there have been instances where District Bankruptcy Courts in
United States have invalidated ipso facto clauses in contracts other than
executory contracts or unexpired leases based on broad considerations relating
to the purpose of the US Bankruptcy Code. The ipso facto provisions in such
contracts may not be per se invalid, but they may be set aside where ―any such
default would deprive the debtor of the advantages of the Code‘s liquidation
procedures‖68. For instance, the District Court for the District of Delaware has
noted ―the general trend of the federal courts that the prohibition against ipso
facto clauses is not limited to actions [involving executory contracts or unexpired
leases]‖, while invalidating an ipso facto clause premised on bankruptcy filing69
.
Similarly, in another case, an ipso facto clause in a non-executory contract was
held to be invalid because ―it would defeat the purposes of the [US] Bankruptcy
Code‖ and ―cannot be enforced by a court of equity‖70
. The Bankruptcy Court
reasoned that:
―Under the Bankruptcy Code, there is no statutory mandate that
bankruptcy-default clauses are valid and enforceable. The only
Congressional statement is clear that in most, if not all, instances,
such clauses are not enforceable. Also, cf. Sections 363(l) and
541(c)(1)(B) of the Bankruptcy Code, where bankruptcy-default
clauses are not given effect. Thus, there is simply no reason to
assume that Congress intended to make these clauses
enforceable only in non-executory contracts. Such an assumption
would be directly contrary to the spirit and purposes of the
68 Riggs National Bank of Washington, D.C. v. John Gillis Perry, Jr., in Re John Gillis Perry, Jr., Debtor, 729 F.2d
982 (4th Cir. 1984)n(Court of Appeals for the Fourth Circuit).
69 In re W.R. Grace & Co., 475 B.R. 34, 154 (D. Del. 2012).
70 In the Matter of James Margaret Rose Jr., Debtors 21 B.R. 272 (Bankr. D.N.J. 1982) (United States
Bankruptcy Court, D. New Jersey).
PART J
85
Bankruptcy Code. One of the objectives of bankruptcy laws is to
enable debtors to make a fresh start.‖
71
However, it is important to note that District Court of New York has taken a
contrary position, holding that the text of Section 365(e) of the US Bankruptcy
Code is clear and limits its prohibition only to executory contracts and unexpired
leases72. Hence, the position in relation to this issue seems to be unsettled even
in the US.
J.2.2 United Kingdom
98 Coming to the position of law in the UK, we must first acknowledge that the
insolvency regime there is governed not just by legislation but also through
common law doctrine. The important common law doctrine is the ‗anti-deprivation
rule‘, which seeks to prevent the improper removal of an asset from the debtor's
estate, which would reduce the debtor's overall net asset value, which would in
turn reduce the size of the pie. Hence, the rule seeks to prevent the debtor‘s
assets from being reduced before they can become subject to the insolvency
process. As such, it has been argued that ipso facto clauses could be in violation
of the anti-deprivation rule since they allow a party to terminate a contract upon
commencement on insolvency, which then takes away the debtor‘s valuable
asset (i.e., the contract).
71 Ibid
72 In Re General Growth Properties, Inc., 451 B.R. 323 (Bankr. S.D.N.Y. 2011) (United States Bankruptcy Court,
S.D. New York).
PART J
86
99 The scope of the anti-deprivation rule was clarified by the UK Supreme
Court73 in the case of Belmont Park Investments Pty Ltd and others vs BNY
Corporate Trustee Services Ltd and another (Revenue and Customs Comrs
and another intervening)74
. The facts of this case have been succinctly
summarized in an article by Adrienne Ho in the McGill Law Journal: the
reproduction below is from the footnoted article 75:
(i) Lehman Brothers set up special purpose vehicles ("Issuer"), which in turn
issued Notes to investors ("Noteholders"), including the respondents. The
Issuer used the Notes' proceeds to purchase secure investments
("Collateral") while simultaneously entering into credit default swap
agreements (―Agreements‖) with Lehman Brothers Special Financing
(―LBSF‖). LBSF agreed to pay the Issuer premiums in exchange for the
latter's credit protection on loans owned by Lehman Brothers. The
premiums the Issuer received from LBSF were then paid to the
Noteholders. The Agreement was governed by English law;
(ii) On the basis that Lehman Brothers‘ and LBSF's Chapter 11 filings (i.e., for
bankruptcy in the US) in 2008 were ‗Events of Default‘ as outlined in the
Agreements, the Noteholders directed the Trustee to terminate the
Agreements. The Collateral, which was held by the Trustee, provided
security for the Issuer's obligations to the Noteholders and LBSF. Although
the latter had priority to the Collateral, the Agreements contained a
73 ―UKSC‖
74 [2011] 3 W.L.R. 521; hereinafter referred to as ―Belmont Park‖
75 As noted in Adrienne Ho, The Treatment of Ipso Facto Clauses in Canada, (2015) 61:1 McGill LJ 139.
PART J
87
provision (―flip clause‖) that would reverse the priorities in favour of the
Noteholders if an Event of Default occurred; and
(iii) LBSF argued the flip clause was invalid for two reasons: first, it deprived
LBSF of property that it would have been otherwise entitled to in its
bankruptcy; and second, the clause offended the anti-deprivation rule by
reversing LBSF's and the Noteholders' respective priorities on the basis of
LBSF's bankruptcy.
100 The UKSC in this case was considering the contours of the anti-deprivation
rule, which protects against the dilution of the debtor‘s value. This is quite distinct
from a situation where the effect of the concerned clause would be the failure of
the insolvency resolution process in its entirety. Writing the majority opinion, Lord
Collins upheld the flip clause on the basis that it was ―a complex commercial
transaction entered into in good faith‖ and that the provisions were not used
deliberately to evade the application of insolvency law, which was a key
requirement for the application of the anti-deprivation rule. The learned judge
held thus:
―102 It would go well beyond the proper province of the
judicial function to discard 200 years of authority, and to
attempt to re-write the case law in the light of modern
statutory developments. The anti-deprivation rule is too
well-established to be discarded despite the detailed
provisions set out in modern insolvency legislation, all of
which must be taken to have been enacted against the
background of the rule.
103 As has been seen, commercial sense and absence of
intention to evade insolvency laws have been highly relevant
factors in the application of the anti-deprivation rule. Despite
statutory inroads, party autonomy is at the heart of English
commercial law. Plainly there are limits to party autonomy in
the field with which this appeal is concerned, not least
PART J
88
because the interests of third party creditors will be involved.
But, as Lord Neuberger stressed [2010] Ch 347, para 58,
it is desirable that, so far as possible, the courts give
effect to contractual terms which parties have agreed.
And there is a particularly strong case for autonomy in
cases of complex financial instruments such as those
involved in this appeal.
104 No doubt that is why, except in the case of a blatant
attempt to deprive a party of property in the event of
liquidation (Folgate London Market Ltd v Chaucer Insurance
plc [2011] EWCA Civ 328; The Times, 13 April 2011), the
modern tendency has been to uphold commercially
justifiable contractual provisions which have been said
to offend the anti-deprivation rule: Money Markets
International Stockbrokers Ltd v London Stock Exchange Ltd
[2002] 1 WLR 1150; Lomas v JFB Firth Rixson Inc [2011] 2
BCLC 120; and the judgments of Sir Andrew Morritt C and the
Court of Appeal in these proceedings. The policy behind the
anti-deprivation rule is clear, that the parties cannot, on
bankruptcy, deprive the bankrupt of property which would
otherwise be available for creditors. It is possible to give
that policy a common sense application which prevents
its application to bona fide commercial transactions
which do not have as their predominant purpose, or one
of their main purposes, the deprivation of the property of
one of the parties on bankruptcy.‖
(emphasis supplied)
101 Lord Mance in his concurring opinion, expressed a similar view:
―177 However, Mr Snowden advanced propositions which
would mean that any provision for termination on bankruptcy,
which would deprive the trustee or liquidator of the
opportunity of continuing the contract and so the bankrupt
estate of future potential advantage, would infringe the
principle. There is in my opinion no basis for any such rule.
Where a contract provides for the performance in the
future of reciprocal obligations, the performance of each
of which is the quid pro quo of the other, I see nothing
objectionable or evasive about a provision entitling one
party to terminate if the other becomes bankrupt.‖
(emphasis supplied)
PART J
89
As such, it was understood that bona fide commercial contracts entered into by
parties which contained ipso facto clauses would not violate the anti-deprivation
rule.
102 Lord Mance also discussed the parallel proceedings in the US and the
legislative invalidation of ipso facto clauses there. Noting the difference between
the position in the UK and the US, he concluded by holding that a similar
invalidation of ipso facto clauses in the UK should be done legislatively, and not
through a common law development. He held thus:
―173 It is relevant to note that the American bankruptcy rule
invalidating ipso facto termination clauses is a product of
legislation: section 365(e) of the Bankruptcy Code 1978…
174 The anti-deprivation principle recognised in English
case law finds a parallel in section 541. But the English
case law has to date focused on deprivation of property,
and has not recognised any equivalent principle to that
enacted in section 365(e). Further, section 365(e) is itself
qualified by the ―safe harbour‖ provisions of section 560,
which specifically protect a non-defaulting swap participant‘s
contractual rights to liquidate, terminate or accelerate a swap
agreement because of a condition of the kind specified in
section 365(e)(1), that is the insolvency or financial condition
of the debtor and the commencement of a bankruptcy case...
What it does suggest is that any general rule invalidating
ipso facto termination clauses ought to be a matter for
legislative attention, rather than novel common law
development.‖
(emphasis supplied)
PART J
90
103 The decision in Belmont Park (supra) has been followed by the Chancery
Division in Fibria Celulose S/A v Pan Ocean Co Ltd vs Fibria Celulose S/A
Chancery Division, dated 30 June 201476
. Morgan J held thus:
―12 In some jurisdictions, a clause which allows a party to a
contract to terminate the contract by reason of the insolvency
of the counterparty is called an ipso facto clause. In certain
jurisdictions in the United States of America such clauses are
automatically invalid. In Canada, the court has power to stay
the exercise of rights under such clauses. Later in this
judgment, I will consider how such clauses are treated under
Korean insolvency law.
13 There was no dispute before me as to the efficacy in
English law of the provisions in clause 28.1 of the
contract which allow termination by reason of an
insolvency event. It was accepted that those provisions
are valid in English law. In particular, it was accepted that
the rule of insolvency law, known as the anti-deprivation
rule, does not strike down those provisions.
14 Although there was no argument as to the approach of an
English court to the insolvency provisions in clause 28.1 of
the contract, it is helpful for present purposes to understand
why those provisions do not infringe the anti-deprivation rule
or any other rule of English insolvency law. The scope of the
anti-deprivation rule has been considered recently by the
Supreme Court in Belmont Park Investments Pty Ltd v BNY
Corporate Trustee Services Ltd (Revenue and Customs
Comrs intervening) [2011] Bus LR 1266; [2012] 1 AC 383…‖
(emphasis supplied)
104 In his treatise, Principles of Corporate Insolvency Law77, Professor Roy
Goode has discussed the effect of the decision in Belmont Park (supra) on the
validity of ipso facto clauses. Professor Goode does so in the following terms:
―As explained above, the validity of provisions for the
termination of contracts by reason of one party’s entry
into insolvency proceedings has long been assumed,
76 [2014] Bus. L.R. 1041; hereinafter referred to as ―Pan Ocean Co Ltd‖
77 5th ed (London: Sweet & Maxwell, 2018), paras 7-24 and 7-29
PART J
91
and appears to have been accepted by Lord Mance in
Belmont. Such provisions do not escape the rule
because they effect no deprivation of property (in
substance, they do), but because they are commercially
sensible or (in Lord Mance’s language) have a legitimate
commercial basis.
…
The statute law of some jurisdictions prohibits counterparties
from relying on clauses in contracts that permit termination on
another party‘s entry into insolvency proceedings (so-called
ipso facto clauses). Absent statutory control, such clauses
allow a counterparty to terminate even in circumstances
where the debtor is ready, willing and able to perform their
part of the bargain so that creditors can enjoy the benefit of
performance by the counterparty. Such clauses can also be
wielded as leverage to extract concessions from the debtor,
as where the counterparty agrees to keep the contract on foot
on the proviso that any outstanding debts owing by the
company to it are discharged.
English law has traditionally taken a generous approach
to such clauses. The common law anti-deprivation rule
does not invalidate termination clauses, there being
“nothing objectionable or evasive about a provision
entitling one party to terminate it [a bilateral contract] if
the other becomes bankrupt”. As David Richards J
explained in the Football Creditors case:
―In the absence of specific statutory provision, insolvency law
does not compel a party to continue to deal with a company in
administration or liquidation, nor does it prohibit a party from
stipulating that all future dealings shall be on terms that not
only future debts but also existing debts are paid in full. It is
then for the administrator or liquidator to decide whether to
accept these terms.‖‖
(emphasis supplied)
105 On the legislative side, the insolvency regime in the UK is governed by the
Insolvency Act, 198678, which does not invalidate ipso facto clauses. However,
the UK Act was recently amended by the Corporate Insolvency and Governance
78 ―UK Act‖
PART J
92
Act 202079, which came into force on 26 June 2020. Amongst other changes, it
introduced Section 233B into the UK Act. Section 233B reads thus:
―Protection of supplies of goods and services
(1)This section applies where a company becomes subject to
a relevant insolvency procedure.
(2) …
(3)A provision of a contract for the supply of goods or
services to the company ceases to have effect when the
company becomes subject to the relevant insolvency
procedure if and to the extent that, under the provision—
(a)the contract or the supply would terminate, or any
other thing would take place, because the company
becomes subject to the relevant insolvency procedure, or
(b)the supplier would be entitled to terminate the contract
or the supply, or to do any other thing, because the
company becomes subject to the relevant insolvency
procedure.
(4)Where—
(a)under a provision of a contract for the supply of goods
or services to the company the supplier is entitled to
terminate the contract or the supply because of an event
occurring before the start of the insolvency period, and
(b)the entitlement arises before the start of that period,
the entitlement may not be exercised during that period.
(5)Where a provision of a contract ceases to have effect
under subsection (3) or an entitlement under a provision
of a contract is not exercisable under subsection (4), the
supplier may terminate the contract if—
(a)in a case where the company has become subject to a
relevant insolvency procedure as specified in subsection
(2)(b), (c), (e) or (f), the office-holder consents to the
termination of the contract,
(b)in any other case, the company consents to the termination
of the contract, or
79 ―CIGA‖
PART J
93
(c)the court is satisfied that the continuation of the
contract would cause the supplier hardship and grants
permission for the termination of the contract.
(6)Where a provision of a contract ceases to have effect
under subsection (3) and the company becomes subject
to a further relevant insolvency procedure, the supplier
may terminate the contract in accordance with
subsection (5)(a) to (c).
(7)The supplier shall not make it a condition of any supply of
goods and services after the time when the company
becomes subject to the relevant insolvency procedure, or do
anything which has the effect of making it a condition of such
a supply, that any outstanding charges in respect of a supply
made to the company before that time are paid.
(8) …
(9) …
(10) …‖
(emphasis supplied)
106 The Legislative Comment to the introduction of Section 233B reads as
follows:
―Ipso facto (termination) clauses
A permanent change to the use of termination clauses in supply
contracts is introduced by the Bill. In circumstances where a
company has entered an insolvency or restructuring
procedure, or obtains a moratorium, the company’s
suppliers will not be able to rely on contractual terms to stop
supplying the company or vary the contract terms (e.g. by
increasing the price of supplies).
The customer is required to pay for any supplies made once
the company is in the insolvency process, but is not required
to pay outstanding amounts due for past supplies while it is
arranging its rescue plan. Safeguards are contained in the
Bill to ensure that suppliers can be relieved of the
requirement to supply if it causes hardship to their business,
and a temporary exemption will operate for small companies
during the Coronavirus emergency.‖
(emphasis supplied)
PART J
94
107 We can therefore conclude that while Section 233B invalidates ipso facto
clauses, it does so only in relation to contracts where the terminating party is
supplying goods and services to the Corporate Debtor, and does not cover those
contracts where the Corporate Debtor was supplying to the terminating party.
Further, Section 233B(5)(c) allows an exception even in relation to supplier
contracts when it causes ―financial hardship‖ to the terminating party, and Section
233B(6) allows a termination if once after the terminating party is prevented from
terminating, the Corporate Debtor goes through another insolvency proceeding. It
has also been noted by certain commentators that, given the narrow scope of
Section 233B, the decision in Belmont Park (supra) would still have been
decided in the same way even under this new regime80. Finally, discussing the
legislative process behind CIGA, Felicity Toube QC and Joanne Rumley have
noted that the UK Parliament did not intend to use CIGA to bring UK in line with
the US position on broad invalidation of ipso facto clauses, but rather their focus
was on ensuring that the Corporate Debtor retains its supply of goods during the
insolvency process81
.
J.2.3 Austria
108 A position similar to the US has been adopted in Austria where, after the
insolvency regime reform which came into force on 1 July 2010, ipso facto
clauses are broadly considered invalid in accordance with Section 25b(2) of the
80 ‗Corporate Insolvency and Governance Act: Ipso Facto (Termination) Clauses‘ (Ashurst, 26 June 2020)
<https://www.ashurst.com/en/news-and-insights/legal-updates/ciga---ipso-facto-termination-clauses/> accessed
18 February 2021.
81 Felicity Toube QC, Joanne Rumley ‗A brave new world? Should the UK ban ipso facto clauses in nonexecutory contracts?‘ Insolvency Intelligence 2018
PART J
95
Austrian Insolvency Code82. This law renders unenforceable all such provisions in
contracts which provide a party with termination rights, due to the opening of
insolvency proceedings against the debtor. However, this is only so when the
terminating party‘s interests are not unreasonably affected, i.e., when a
terminating party can show a good cause for termination, the termination shall not
be rendered unenforceable. Further, contractual terminations due to other events
of defaults mentioned in contracts remain valid83
.
J.2.4 France
109 This is also the position in France which, since its 2014 reform, in
accordance with Articles L622-1384, L631-14(I)85 and L641-1186 of the
Commercial Code, categorically states that ipso facto clauses in executory
contracts are invalid87. However, termination rights referring to breaches of
executory contract, other than ipso facto clauses, remain valid due to events of
default occurring both pre- and post-commencement of insolvency proceedings.
Further, the insolvency administrator does not have to treat pre-insolvency claims
arising out of an executory contract preferentially to continue the contract;
82 ―Invalid Agreements. Section 25b. - (2) A contractual provision rescinding or terminating a contract in the event
of the opening of insolvency proceedings shall be unenforceable, except for contracts pursuant to Section 20(4).‖
English Translation available at <https://www.rautner.com/wpcontent/uploads/2016/05/3645187_Austrian_Insolvency-Code_ENG.pdf> accessed 24 February 2021.
83 Jan Felix Hoffmann, 'Executory Contracts, Ipso Facto Clauses and Licensing Agreements in Cross-Border
Insolvencies' (2018) 27 Int'l Insolvency Rev 300, 304; ‗International Comparative Legal Guides‘ (International
Comparative Legal Guides International Business Reports) <https://iclg.com/practice-areas/restructuring-andinsolvency-laws-and-regulations/austria> accessed 18 February 2021.
84 ―…Notwithstanding any legal rule or contractual term to the contrary, the indivisibility, termination or rescission
of the contract may not result from the commencement of safeguard proceedings alone…‖ English Translation
available at <https://www.wipo.int/edocs/lexdocs/laws/en/fr/fr199en.pdf> accessed 24 February 2021.
85 ―I - Articles L622-2 to L622-9 and L622-13 to L622-33 shall apply to reorganization proceedings.‖ English
Translation available at <https://www.wipo.int/edocs/lexdocs/laws/en/fr/fr199en.pdf> accessed 24 February 2021.
86 ―The supervisory judge shall perform the duties entrusted to him by Articles L621-9, L623-2 and L631-11, the
first paragraph of Article L622-13 and the fourth paragraph of Article L622-16.‖ English Translation available at
<https://www.wipo.int/edocs/lexdocs/laws/en/fr/fr199en.pdf> accessed 24 February 2021.
87 ‗International Comparative Legal Guides‘ (International Comparative Legal Guides International Business
Reports) <https://iclg.com/practice-areas/restructuring-and-insolvency-laws-and-regulations/france> accessed 18
February 2021.
PART J
96
however, she has to comply with the contract in the future to prevent
termination88
.
J.2.5 Germany
110 The German insolvency regime is governed by Insolvency Statute, 1999
(Insolvenzordnung)89. However, a change is forthcoming, since on 17 December
2020, the German Parliament passed the Act on the Further Development of
Restructuring and Insolvency Law90, which is expected to lead to a fundamental
modification of the restructuring landscape in Germany. The SanInsFoG primarily
serves to implement the EU Directive discussed above, and aims at introducing a
comprehensive legal framework for out-of-court restructurings. The centerpiece
of the SanInsFoG is the Act on the Stabilization and Restructuring Framework for
Companies91, which partially entered into force on 1 January 2021. In accordance
with Section 46 of the StaRUG, during the moratorium period, the contracting
parties of the debtor cannot terminate their contract with the debtor based on ipso
facto clauses in a pending restructuring matter.
111 However, before the StaRUG came into effect, the validity of ipso facto
clauses had been previously considered by German Courts. On 15 November
2012, the 9th Senate of the Federal Supreme Court of Germany issued a
decision which overruled the lower courts‘ decisions and held that ipso facto
clauses in contracts regarding the continuous delivery of goods or energy should
be invalid if such termination is either triggered by a request for the opening of
88 Ibid at 305.
89 ―InsO‖
90 ―SanInsFoG‖
91 ―StaRUG‖
PART J
97
insolvency proceedings or the opening of insolvency proceedings over the assets
of the other contractual party. The Federal Supreme Court also held that for such
invalidation, it was irrelevant whether the trigger was institution of insolvency
proceedings or filing of an insolvency petition. Briefly, the facts of the case were
that a utility provider had entered into a long-term contract for providing
electricity. The energy contract had an ipso facto clause which allowed for
automatic termination if bankruptcy proceedings were instituted over the utility
provider‘s customer or if the customer filed a petition for bankruptcy. The ipso
facto clause was then given effect to by the terminating party.
112 The Federal Supreme Court based its decision on the purpose of the
insolvency administrator‘s right to opt for the performance/non-performance of
contracts, which protects the assets of the insolvent company and increases such
assets in the interest of a settlement of creditor claims pari passu. Particularly, it
was noted that the insolvency administrator has the right to choose which
contracts of the insolvent debtor she will perform in accordance with Section 103
of the InsO. Hence, any contractual provision excluding or limiting this right is
invalid in accordance with Section 119 of the InsO. Therefore, this would be
obstructed if the contractual partner of the insolvent debtor, just because of its
insolvency, could terminate a contract which is in the interest and to the benefit of
the insolvent debtor. Further, the Federal Supreme Court noted that the stay on
termination based on ipso facto clauses did not lead to any disadvantage to the
PART J
98
terminating party since they will then receive payment for their deliveries in full as
so-called preferred estate liability92
.
113 However, to the extent the statutory law itself already provides for an ipso
facto termination right, such termination rights have been held to be valid and
enforceable. Accordingly, the ipso facto termination of a partnership contract has
in the past been upheld by the Federal Supreme Court93. Further, in a 2016
decision, the 7th Senate of the Federal Supreme Court upheld an ipso facto
clause contained in a construction contract, in favour of the terminating party. It
held that such clauses are valid when the contracting party has a reasonable
right to terminate the contract in insolvency, and the estate‘s interests are not
unreasonably affected. Thus, the position of German law on the validity of such
clauses was never entirely settled judicially94
.
J.2.6 Greece
114 Article 32 of the Bankruptcy Code (Law 3588/2007) states that there would
be ―no prejudice to the counter contracting party's rights to rescind the contract,
based on a clause that allows the rescission in case of insolvency of the other
party or subjection to collective execution proceedings‖95. Hence, ipso facto
clauses are legislatively provided validity in Greece.
92 ‗Potential Invalidity of Insolvency-Related Termination Clauses under German Insolvency Rules‘ (Global
Restructuring Watch, 17 September 2014) <https://www.globalrestructuringwatch.com/2014/09/potentialinvalidity-of-insolvency-related-termination-clauses-under-german-insolvency-rules/> accessed 18 February
2021.
93 Volker Gattringer, ‗German Supreme Court renders ipso facto clauses invalid and unenforceable – Roma
locuta, causa finita?‘ (K&L Gates, 27.02.2013).
94 Jan Felix Hoffmann, 'Executory Contracts, Ipso Facto Clauses and Licensing Agreements in Cross-Border
Insolvencies' (2018) 27 Int'l Insolvency Rev 300, 305.
95 Christoph G Paulus and Stathis Potamitis and Alexandros Rokas and Ignacio Tirado, 'Insolvency Law as a
Main Pillar of Market Economy - A Critical Assessment of the Greek Insolvency Law' (2015) 24 Int'l Insolvency
Rev 1, 18.
PART J
99
J.2.7 Republic of Korea
115 The Republic of Korea follows the civil law tradition. Under Article 119(1) of
the Debtor Rehabilitation and Bankruptcy Act of Korea96, the custodian of a
company undergoing rehabilitation may choose to cancel or terminate an
unperformed bilateral contract. Article 119 appears to allow the custodian to
require the other party to fulfil its obligations under such a contract. While some
commentators have noted that this is believed to essentially be in the nature of a
restriction on an ipso facto clause, others state that this position has not been
adopted uniformly by all courts97. In fact, the International Monetary Fund issued
a technical note in September 2020 on ―Insolvency and Creditor Rights‖ while
conducting a ―Financial Sector Assessment Program‖ of Republic of Korea, in
which they also noted this lack of clarity and recommended legislative
guidance98
.
116 A lack of this clarity is shown by a case where the predecessor of Article
119 was considered by the Korean Supreme Court in its decision dated 6
September 2007 in the case of Allied Domecq (Holdings) plc vs The trustee of
Jinro Co Ltd99
. This was noted in the decision of Pan Ocean Co Ltd (supra)100
,
96 ―Article 119 (Options when Both Parties Fail to Fulfill Bilateral Contract) - (1) When the debtor and the other
party to a bilateral contract have yet to complete performance of the contract at the time rehabilitation procedures
commence, any custodian may cancel or terminate such bilateral contract and request the debtor to meet his/her
obligations and require the other party to fulfill his/her obligations: Provided, That the custodian shall not cancel
or terminate the bilateral contract after the assembly of related persons held to deliberate on a rehabilitation
proposal or a decision is made to pass a written resolution on any case pursuant to the provisions of Article 240.‖
97 June Young Chung and Sy Nae Kim, ―Korean Corporate Rehabilitation Proceedings and Cross-Border
Insolvency - From the Perspective of the Hanjin Shipping Bankruptcy Case‖
<https://nysba.org/NYSBA/Sections/International/Events/2018/Seoul%20Regional%20Meeting/Course%20Materi
als/4_Korean%20Corporate%20Rehabilitation%20Proceedings%20and%20Cross-border%20Insolvency_....pdf>
accessed 24 February 2021.
98 Footnote 26 at Page 16, available at
<https://www.imf.org/~/media/Files/Publications/CR/2020/English/1KOREA2020003.ashx> accessed 24
February 2021.
99 ―Allied Domecq‖
100 Para 49.
PART J
100
discussed above, where the Chancery Division was considering the ipso facto
clause in a contract governed by English law, but where the party was
undergoing insolvency proceedings in Republic of Korea. The Korean Supreme
Court held in Allied Domecq (supra) that, in a case not governed by Article 119,
an insolvency termination clause would be valid. It then considered the types of
contract which came within Article 119, and referred to the nature of the
obligations under the particular unperformed bilateral contract in that case.
Ultimately, it held that the contract in that case was not governed by Article 119.
117 Further, Pan Ocean Co Ltd (supra) also discussed101 a later decision of a
Korean Court dated 24 January 2014 in Trustee of Tongyang Networks Co Ltd
vs Standard Chartered Bank Ltd, which concerned a contract under which the
debtor company was to provide services to the bank. The contract contained an
insolvency termination clause and the bank gave, or purported to give, notice to
terminate pursuant to that clause. The trustee of the debtor company argued that
the bank's right to terminate should be considered null and void by reason of
Article 119 or, alternatively, the bank should refrain from terminating the contract
at least during the period of the rehabilitation. The court considered the earlier
decision in Allied Domecq (supra) and held that to achieve a proper balance
between the purpose of rehabilitation and the principle of freedom of contract and
the counterparty's need to be able to trust the debtor company, it was necessary
to look at all the circumstances, such as the nature of the contract, the necessity
to protect the debtor and the counterparty and allied relevant factors. The Court
101 Para 52.
PART J
101
then conducted a detailed examination of what it regarded as the relevant factors,
and held that Article 119 did not render the insolvency termination clause null and
void. However, the Chancery Division in Pan Ocean Co Ltd (supra) did note that
this decision may have been appeal in Republic of Korea.
J.2.8 Canada
118 Legislatively, in Canada, Sections 65.1102, 66.34103 and 84.2104 of the
Bankruptcy & Insolvency Act105 and provisions of the Companies‘ Creditors
Arrangement Act106 invalidate ipso facto clauses in both commercial and
consumer restructurings, and are intended to protect consumer debtors from the
deleterious consequences of provisions that trigger upon bankruptcy. These
provisions also clarify that any contractual clause that, in substance, is contrary to
102 ―Certain rights limited
65.1 (1) If a notice of intention or a proposal has been filed in respect of an insolvent person, no person may
terminate or amend any agreement, including a security agreement, with the insolvent person, or claim an
accelerated payment, or a forfeiture of the term, under any agreement, including a security agreement, with the
insolvent person, by reason only that:
(a) the insolvent person is insolvent; or
(b) a notice of intention or a proposal has been filed in respect of the insolvent person.
…
Provisions of section override agreement
(5) Any provision in an agreement that has the effect of providing for, or permitting, anything that, in substance, is
contrary to subsections (1) to (3) is of no force or effect.‖
103 ―Certain rights limited
66.34 (1) If a consumer proposal has been filed in respect of a consumer debtor, no person may terminate or
amend any agreement, including a security agreement, with the consumer debtor, or claim an accelerated
payment, or the forfeiture of the term, under any agreement, including a security agreement, with the consumer
debtor, by reason only that:
(a) the consumer debtor is insolvent, or
(b) a consumer proposal has been filed in respect of the consumer debtor until the consumer proposal has been
withdrawn, refused by the creditors or the court, annulled or deemed annulled.
…
Provisions of section override agreement
(5) Any provision in an agreement that has the effect of providing for, or permitting, anything that, in substance, is
contrary to subsections (1) to (3) is of no force or effect.‖
104 ―Certain rights limited
84.2 (1) No person may terminate or amend — or claim an accelerated payment or forfeiture of the term under —
any agreement, including a security agreement, with a bankrupt individual by reason only of the individual‘s
bankruptcy or insolvency.
…
Provisions of section override agreement
(5) Any provision in an agreement that has the effect of providing for, or permitting, anything that, in substance, is
contrary to this section is of no force or effect.‖
105 ―BIA‖
106 ―CCAA‖
PART J
102
the provisions as a whole is of no force or effect. However, their prohibition on
ipso facto clauses does not apply to agreements such as commodities and
forward contracts. Further, the terminating party, including utilities, can apply for a
court order that these provisions do not apply, or only apply to an extent
determined by the court, if they can demonstrate that the operation of these
provisions will cause it significant hardship107
.
119 On the other hand, judicially, in a split decision on 2 October 2020, the
Supreme Court of Canada108 upheld the Alberta Court of Appeal‘s majority
decision in Chandos Construction Ltd. vs Deloitte Restructuring Inc.109 in its
capacity as Trustee in Bankruptcy of Capital Steel Inc., a bankrupt (Chandos).
Briefly, the facts of the case were that:
(i) Chandos had subcontracted a project‘s steel work to Capital Steel. The
subcontract included a term under which Capital Steel agreed to forfeit ten
percent of the contract price if it became insolvent ―as a fee for the
inconvenience of [Chandos] completing the work using alternate means
and/or for monitoring the work‖ (―Insolvency Clause‖); and
(ii) Capital Steel completed most of its work under its subcontract with
Chandos before making an assignment in bankruptcy. Deloitte was
appointed as trustee of the estate of Capital Steel and Capital Steel
ceased operations at that time. As a result, Chandos had to complete the
steel work at its own cost. Even after costs of completion were accounted
107 See Adrienne Ho, The Treatment of Ipso Facto Clauses in Canada, (2015) 61:1 McGill LJ 139.
108 ―SCC‖
109 2020 SCC 25
PART J
103
for, Chandos owed a balance to the estate of Capital Steel based on the
remaining unpaid contract price. However, Chandos took the position that
it could rely on the Insolvency Clause to deduct 10% of the contract price
(almost $140,000) as an ‗inconvenience fee‘ and that, once deducted,
Chandos owed nothing to Capital Steel. The trustee brought an application
seeking a judicial determination of whether the Insolvency Clause was
enforceable.
120 The majority opinion of the SCC held that the present clause violated the
common law doctrine grounded in the ‗anti-deprivation rule‘, which invalidates
provisions that are ―engaged by a debtor‘s insolvency and remove value from the
debtor‘s estate to the prejudice of creditors‖. Further, it reasoned that the antideprivation rule continues to exist at common law; that it was part of Canadian
law, and was neither judicially nor legislatively excluded. It further continued to
exist even though it was not fully codified in the BIA. Since this rule voids
contractual terms that prevent property from passing to the bankruptcy trustee,
the non-application of this rule would also go against the purpose of section 71 of
the BIA. The majority opinion ultimately relied on the ‗effects-based‘ test for
understanding the anti-deprivation rule, noting it was in consonance with the BIA,
thereby holding that any clause which had the ‗effect‘ of removing a debtor‘s
estate would be invalid as being against the anti-deprivation rule. On the
contrary, the dissenting opinion relied on the ‗bona fide commercial transaction
test‘ as enunciated by the UKSC in Belmont Park (supra), and noted that the
codification of the invalidity of ipso facto clauses in BIA was unrelated to the
PART J
104
principles behind anti-deprivation rule since ―ipso facto provisions are aimed at
protecting debtors; the anti-deprivation rule, by contrast, protects creditors‖110
.
121 Some commentators note that the practical effect of this decision is that if
a contracting party enters insolvency proceedings, certain contractual clauses
that are triggered by insolvency and remove value from the debtor‘s estate are
void and will not be given effect by Canadian courts. Further, they believe that the
SCC rejected the UK Supreme Court‘s more lenient view of the anti-deprivation
rule and aligned more closely to the policy underlying the anti-ipso facto clause
provisions in the US Bankruptcy Code111
.
J.2.9 Australia
122 Recently in Australia, the Treasury Laws Amendment (2017 Enterprise
Incentives No. 2) Act, 2017112
amended the Corporations Act, 2001, which
governs the insolvency regime. Under this new regime, during the period of a
specified restructuring or insolvency procedure, a right in a contract, agreement
or arrangement will not be enforceable, and ‗self-executing provisions‘ will not
apply, by reason only of ―[t]he company entering the specified procedure; the
company‘s financial position; a prescribed reason; or a reason that is in
substance contrary to the above‖.
110 Para 118.
111 ‗Chandos Upheld by Supreme Court of Canada: The Anti-Deprivation Rule in Canada‘ (Norton Rose Fulbright,
January 2021) <https://www.nortonrosefulbright.com/en-ca/knowledge/publications/db4bb7a6/chandos-upheldby-supreme-court-of-canada> accessed 18 February 2021.
112 ―Amending Act‖
PART J
105
123 Before this amendment, termination of contracts based on ipso facto
clauses was permitted113. The new regime also applies to contracts entered into
on or after 1 July 2018, i.e., its application is prospective only. However, certain
contracts and contractual rights have been excluded from the operation of the
stay under this new regime. Critically, in respect of financing arrangements, the
ipso facto reforms will not apply to (amongst other things) syndicated loans,
securities, bonds, promissory notes, financial products, derivatives, and certain
contracts involving special purpose vehicles. The excluded contractual rights do
not depend on the type of contracts in which they are embodied.
124 However, according to the Explanatory Memorandum to the Amending Act,
the stay is not intended to restrict a counterparty from enforcing a right (or
disapply self-executing provisions) for any other reason, such as a breach
involving non-payment or non-performance. Further, the ipso facto provisions
also allow the relevant insolvency administrator to apply for an order expanding
the stay to prohibit the exercise of rights (for example, a right to terminate for
convenience), even where the right does not expressly operate on the basis of
one of the prohibited reasons set out above, if the court is satisfied that a
counterparty is likely to exercise those rights for a prohibited reason114
.
113 'The Impact of Insolvency on Licence Agreements' (2015) 254 Managing Intell Prop 31, 32.
114 ‗Australia‘s New Ipso Facto Regime Is Now Live: Are Your Contractual Rights Affected?‘ (Herbert Smith
Freehills | 2 July 2018) <https://www.herbertsmithfreehills.com/latest-thinking/australia%E2%80%99s-new-ipsofacto-regime-is-now-live-are-your-contractual-rights-affected> accessed 18 February 2021.
PART J
106
J.2.10 Singapore
125 In Singapore, ipso facto clauses are prohibited in accordance with Section
440115 of the Insolvency, Restructuring and Dissolution Act, 2018 (―IRDA‖), which
came into force on 30 July 2020. This provision limits the exercise of ipso facto
clauses which are triggered by reason only of the insolvency of a contracting
party or the commencement of corporate rescue proceedings, namely
proceedings for judicial management and schemes of arrangement116. However,
this provision may not restrict a contracting party from terminating the contract if
there are other events of default, for instance: (a) failure to pay outstanding sums;
(b) appointment of a receiver; or (c) passing of a resolution for the winding up of
the debtor. Further, section 440 does not apply retroactively, and only applies to
contracts entered into after 30 July 2020117
.
115 ―Certain contractual rights limited
440.—(1) No person may, at any time after the commencement, and before the conclusion, of any proceedings
by a company —
(a) terminate or amend, or claim an accelerated payment or forfeiture of the term under, any agreement
(including a security agreement) with the company; or
(b) terminate or modify any right or obligation under any agreement (including a security agreement) with
the company,
by reason only that the proceedings are commenced or that the company is insolvent.
(2) …
(3) Any provision in an agreement that has the effect of providing for, or permitting, anything that, in substance,
is contrary to this section is of no force or effect.
(4) On an application by a party to an agreement, the Court may declare that this section does not apply, or
applies only to the extent declared by the Court, if the applicant satisfies the Court that the operation of this
section would likely cause the applicant significant financial hardship.
(5) Subsection (1) does not apply in respect of any legal right under —
(a) any eligible financial contract as may be prescribed;
(b) any contract that is a licence, permit or approval issued by the Government or a statutory body;
(c) any contract that is likely to affect the national interest, or economic interest, of Singapore, as may be
prescribed;
(d) any commercial charter of a ship;
(e) any agreement within the meaning of the Convention as defined in section 2(1) of the International
Interests in Aircraft Equipment Act (Cap. 144B); or
(f) any agreement that is the subject of a treaty to which Singapore is party, as may be prescribed.
(6) …‖
116 ‗Singapore - Restructuring: Ipso Facto Clauses, Distressed Debt Market Update And DIP/Rescue Finance |
Conventus Law‘ <https://www.conventuslaw.com/report/singapore-restructuring-ipso-facto-clauses/> accessed
18 February 2021.
117 ‗Ipso Facto Clauses under the New Insolvency, Resolution & Dissolution Act‘ (Rajah Tann & Asia, July 2020)
<https://eoasis.rajahtann.com/eoasis/lu/pdf/2020-07_Ipso-Facto-Clauses.pdf> accessed 18 February 2021.
PART J
107
126 In addition, two legislative safeguards have been built into the IRDA to
balance the contractual interests of stakeholders:
(i) Certain types of contracts are exempted from these restrictions. These are
the following: (a) derivatives contracts, margin lending agreements or
securities contracts; (b) master netting agreements,
securities/commodities lending or repurchase agreements, or spot
contracts, that contain a netting or set-off arrangement; (c) covered bond
or connected agreements; (d) debentures or connected agreements; (e)
any agreement to clear or settle transactions relating to a derivatives
contract; and (f) business rules of an approved exchange, a licensed trade
repository, an approved or recognized clearing house or a recognized
market operator; and
(ii) Exclusion from this provision can also be sought, in accordance with
section 440(4), if the injunction of the ipso facto clause would ―likely cause
the applicant significant financial hardship‖118
.
127 It is also important to note the background to this legislative reform. In
2013, Singapore‘s Insolvency Law Committee recommended against the
adoption of such restrictions on ipso facto clauses. It noted the benefits in favour
of restricting such clauses, which included: (a) keeping key contracts alive; and
(b) protecting the interests of different contract holders and incentivizing the
management to bring the defaulting company back on track. Further, it also noted
118 ‗Ipso facto clauses under the Insolvency, Restructuring and Dissolution Act‘ (White and Case LLP | 20 August
2020) <https://www.whitecase.com/publications/alert/ipso-facto-clauses-under-insolvency-restructuring-anddissolution-act> accessed on 18 February 2021.
PART J
108
the disadvantages of such restrictions, which included: (A) existing counterparties
would be locked-in to unfavourable contracts, and compelled to perform their
contractual obligations even where there may be no hope of being paid; and (B) a
legislative provision would be too static for the dynamic character of modern-day
commercial transactions in this domain. It therefore advised against legislative
intervention to restrict such clauses. However, having taken note of these
criticisms, Singapore nevertheless followed the examples of Australia and the UK
in legislating such restrictions on ipso facto clauses119
.
J.2.11 Analysis
128 On the basis of our discussion of the above-mentioned jurisdictions, the
following conclusions emerge:
(i) Many jurisdictions follow the US model of legislatively invalidating ipso
facto clauses. Interestingly, this shift has been far more prominent in the
last decade even though the US Bankruptcy Code has had this position
since 1979;
(ii) Some of the recent jurisdictions to follow the US model, such as Australia
and Singapore, invalidate ipso facto clauses prospectively, i.e., ipso facto
clauses contained in the contracts entered into before the laws came into
effect will not be invalidated;
(iii) The UK, through the CIGA, only invalidates ipso facto clauses in supplier
contracts, which is similar to the effect of Section 14(2) of the IBC. Further,
119 ‗Singapore‘s Restrictions on Ipso Facto Clauses: What Comes next? | Lexology‘
<https://www.lexology.com/library/detail.aspx?g=4d40d932-2ac4-45dd-abf4-76853aa7331a> accessed 18
February 2021.
PART J
109
other ipso facto clauses are understood to be valid, based on the UKSC‘s
decision in Belmont Park (supra). However, as noted previously, the
UKSC decision was given in the context of the application of the antideprivation rule, which protects against the dilution of the value of the
company in debt and does not necessarily affect the status of the company
as a ‗going concern‘;
(iv) Greece is one of the few countries which legislatively upholds ipso facto
clauses;
(v) The position of law in the Republic of Korea is unclear due to contradictory
judicial decisions, which has prompted demands for legislative clarity. This
highlights the growing commercial importance of legislative clarity in this
area;
(vi) Generally, even where ipso facto clauses are invalidated, it does not have
effect on the termination rights of the terminating party based on other
events of default in the contract;
(vii) Some nations which invalidate ipso facto clauses, such as Austria,
Canada, Singapore and UK (limited to supplier contracts), provide for an
exception based on ―hardship‖ being caused to the terminating party. This
―hardship‖ is to be determined by the courts; and
(viii) Even in nations which legislatively invalidate ipso facto clauses, there are
often contrasting judicial decisions in relation to the scope of their
invalidation. There are certain judicial decisions which go beyond the
legislative text to invalidate ipso facto clause on broad considerations of
PART J
110
the object and purpose of the relevant insolvency regimes. On the other
hand, there are judicial precedents, which follow a more conservative
approach and strictly construe the legislative mandate.
J.3 Position in India
129 Before we consider the extent to which the lessons of other jurisdictions
should be applied to India, it is important to advert to the discussion on the
invalidation of ipso facto clauses in India.
130 In 2005, the Report of the Expert Committee on Company Law headed by
J.J. Irani120 noted the requirement of reforms in the Indian insolvency regime,
specifically citing the lessons from the recently published UNCITRAL Guide. In
relation to the moratorium period, it made the following observations:
―Moratorium and suspension of proceedings
13.1 A limited standstill period is essential to provide an
opportunity to genuine business to explore re-structuring.
…
13.4 The law should provide for treatment of
unperformed contracts. Where the contracts provide for
automatic termination on filing of insolvency, its
enforcement should be stayed on commencement of
insolvency.
13.5 There should be enabling provisions to interfere with the
contractual obligations which are not fulfilled completely.
Such interference or overriding powers would assist in
achieving the objectives of the insolvency process. The power
is necessary to facilitate taking appropriate business and
other decisions including those directed at containing rise in
liabilities and enhancing value of assets.
120 Available at
<https://ibbi.gov.in/uploads/resources/May%202005,%20J.%20J.%20Irani%20Report%20of%20the%20Expert%
20Committee%20on%20Company%20Law.pdf> accessed 24 February 2021.
PART J
111
13.6 Exceptions of such powers are also essential to be
insured in the law where there is a compelling, commercial,
public or social interest in upholding the contractual rights of
the counter party to the contract.‖
(emphasis supplied)
131 The Committee noted the need to invalidate ipso facto clauses so as to
prevent the value of a Corporate Debtor‘s assets from becoming diluted during
the insolvency process. However, this invalidation was to be subject to
exceptions, keeping in mind the ―compelling, commercial, public or social interest
in upholding the contractual rights of the counter party to the contract‖.
132 However, as is evident, this recommendation was never directly embodied
legislatively since the current IBC contains no clear-cut provision which
invalidates ipso facto clauses. In fact, the issue of the invalidation of ipso facto
clauses was noted in a December 2018 report titled ‗Insolvency and Bankruptcy
Code: The journey so far and the road ahead‘ issued by Vidhi Centre for Legal
Policy121. The report notes that the IBC ―does not per se prohibit the operation of
ipso facto clauses during insolvency proceedings. However, Section 14 provides
for a limited exception prohibiting the termination, suspension or interruption of
specified ―essential goods or services‖ (i.e. water, electricity, telecommunication
services and information technology services to the extent they are not direct
inputs to the output produced or supplied by the corporate debtor), and also
provides relief to the corporate debtor from the recovery of any property by an
owner or lessor during the moratorium‖. As a solution, the report recommends a
121Pages 34-35, available at <https://vidhilegalpolicy.in/wpcontent/uploads/2019/05/IBC_Thejourneysofarandtheroadahead_Dec18.pdf> accessed on 18 February 2021.
PART J
112
conditional stay on the operation of ipso facto clauses, beginning from the
insolvency commencement date, since ―a complete stay on the operation of ipso
facto clauses would constitute a serious restraint on the freedom of contract and
would effectively compel suppliers to perform contracts even when such an
action is against their commercial interests‖. In relation to the implementation of
this solution, the report suggests the insertion of a new provision to the IBC.
133 More recently, however, the IBC was amended by the Insolvency and
Bankruptcy Code (Amendment) Act, 2020 which, inter alia, introduced an
Explanation to Section 14(1). The Explanation to Section 14(1) reads thus:
―14. Moratorium.—
…
Explanation.—For the purposes of this sub-section, it is
hereby clarified that notwithstanding anything contained in
any other law for the time being in force, a license, permit,
registration, quota, concession, clearances or a similar grant
or right given by the Central Government, State Government,
local authority, sectoral regulator or any other authority
constituted under any other law for the time being in force,
shall not be suspended or terminated on the grounds of
insolvency, subject to the condition that there is no default in
payment of current dues arising for the use or continuation of
the license, permit, registration, quota, concession,
clearances or a similar grant or right during the moratorium
period.‖
134 The legislative intent behind this amendment was discussed in the Report
of the Insolvency Law Committee dated 20 February 2020. The Report noted the
importance of keeping the Corporate Debtor as a ‗going concern‘ during the
moratorium period imposed under Section 14, and how it was being affected by
the termination of certain Government licenses, permits, et al, based on ipso
PART J
113
facto clauses which allowed termination upon commencement of insolvency.
Noting that the legislative intent underlying Section 14 would be to invalidate such
terminations, the Report recommended the addition of the Explanation to Section
14(1) of the IBC. The relevant portion, in relation to the Explanation to Section
14(1), reads thus122:
―Prohibition on Termination on Grounds of Insolvency
…
8.3. It was brought to the Committee that in some cases
government authorities that have granted licenses, permits
and quotas, concessions, registrations, or other rights
(collectively referred to as ―grants‖) to the corporate debtor
attempt to terminate or suspend them even during the CIRP
period. This could be attempted in two ways: one, by relying
on ipso facto clauses, by virtue of which these grants may be
terminated on the advent of insolvency proceedings
themselves, and second, by initiating termination on account
of non-payment of dues.
8.4. The Committee discussed that by and large, the grants
that the corporate debtor enjoys form the substratum of its
business. Without these, the business of the corporate debtor
would lose its value and it would not be possible to keep the
corporate debtor running as a going concern during the CIRP
period, or to resolve the corporate debtor as a going concern.
Consequently, their termination during the CIRP by
relying on ipso facto clauses or on non-payment of dues
would be contrary to the purpose of introducing the
provision for moratorium itself. Thus, the Committee
concluded that the legislative intent behind introducing
the provision for moratorium was to bar such
termination.
8.5. In this regard, the Committee noted that depending on
the nature of rights conferred by them, these grants may
constitute the ―property‖ of the corporate debtor. Section
3(27) of the Code provides an inclusive definition of property
which includes ―money, goods, actionable claims, land and
every description of property situated in India or outside India
and every description of interest including present or future or
vested or contingent interest arising out of, or incidental to,
122 Available at <https://ibbi.gov.in/uploads/resources/c6cb71c9f69f66858830630da08e45b4.pdf> accessed on
18 February 2021.
PART J
114
property.‖ This definition is substantially the same as the
definition of ―property‖ under Section 436 of the Insolvency
Act, 1986 (UK), which has been considered the widest
possible definition of property. In India too, it is accepted that
certain licenses and concessions can convey permission to
use property, or may embody a lease, permit, etc. granting
rights in the property. Thus, their termination in certain
circumstances, could have been considered contrary to an
order of moratorium barring actions under Section 14(1)(d) or
preventing alienation of property by any person.
8.6. Similarly, in many circumstances, termination or
suspension of grants, particularly registrations, would be
through proceedings that follow due process of law. Such
proceedings may be a form of enforcement that would
deprive the corporate debtor of its assets. In this regard, The
Committee noted that the Section 14(1)(a) prevents ―the
institution of suits or continuation of pending suits or
proceedings against the corporate debtor including execution
of any judgement, decree or order in any court of law,
tribunal, arbitration panel or other authority.‖ (Emphasis
supplied). This provision has been given an expansive
reading by the Appellate Authority and the Adjudicating
Authority, that had passed orders preventing recovery by
stock exchanges and regulators, as well as the de-registration
of aircrafts.
8.7. Relying on this, the Committee was of the view that
termination or suspension of such grants during the
moratorium period would be prevented by Section 14.
However, to avoid any scope for ambiguity and in
exercise of abundant caution, the Committee
recommended that the legislative intent may be made
explicit by introducing an Explanation by way of an
amendment to Section 14(1).‖
135 The position of law in India today invalidates ipso facto clauses in:
(i) Government licenses, permits, registrations, quotas, concessions,
clearances or a similar grant or right given by the Central Government,
State Government, local authority, sectoral regulator or any other authority
constituted under any other law for the time being in force, in accordance
with the Explanation to Section 14(1); and
PART J
115
(ii) Contracts where the counter-party supplies essential/critical goods and
services to the Corporate Debtor, within the meaning of Sections 14(2) and
14(2A).
However, no clear position emerges in relation to the validity of ipso facto clauses
in other contracts, from the bare text of the IBC. Hence, this task is now left to
this Court in the present case.
136 In order to fully appreciate the weight of this task upon us, it is important to
understand that one of the key principles enshrined within our Constitution is
separation of powers between our three main organs: the legislature, the
executive and the judiciary. In Rai Sahib Ram Jawaya Kapur vs State of
Punjab123, speaking for a Constitution Bench, Chief Justice Bijan Kumar
Mukherjea, spoke about the ‗separation of powers‘ doctrine in the following
terms:
―12…The Indian Constitution has not indeed recognised the
doctrine of separation of powers in its absolute rigidity but the
functions of the different parts or branches of the Government
have been sufficiently differentiated and consequently it can
very well be said that our Constitution does not contemplate
assumption, by one organ or part of the State, of functions
that essentially belong to another…‖
137 In Kesavananda Bharati vs State of Kerala124, Chief Justice S.M. Sikri
noted that the ‗separation of powers‘ doctrine is part of the basic structure of the
Constitution:
123 (1955) 2 SCR 225
124 (1973) 4 SCC 225
PART J
116
―292. The learned Attorney-General said that every provision
of the Constitution is essential; otherwise it would not have
been put in the Constitution. This is true. But this does not
place every provision of the Constitution in the same position.
The true position is that every provision of the Constitution
can be amended provided in the result the basic foundation
and structure of the constitution remains the same. The basic
structure may be said to consist of the following
features:
(1) Supremacy of the Constitution;
(2) Republican and Democratic form of Government;
(3) Secular character of the Constitution;
(4) Separation of powers between the legislature, the
executive and the judiciary;
(5) Federal character of the Constitution.‖
(emphasis supplied)
138 In performing our duties as members of the judicial branch in this case, we
must tread a fine line between providing a just decision while not entering into the
domain of the legislature.
139 We have already noted above in our analysis of the laws of various other
national jurisdictions that the invalidation of ipso facto clauses seems to have
occurred through legislative intervention. Although, in certain jurisdictions, there
have been a few judicial decisions which have given an expansive interpretation
to the legislative text, in order to invalidate ipso facto clauses (and their
variations) which have not been explicitly barred by the legislature, these
decisions have often been issued in order to give effect to legislative policy, intent
and purpose of the insolvency regime. In countries like the Republic of Korea,
where it is yet to happen legislatively, it is recommended. In others like the UK,
PART J
117
Lord Mance in his concurring opinion in Belmont Park (supra) has noted that it
should happen only legislatively, and not through the intervention of the court.
140 Further, we also acknowledge the myriad complex questions which will
arise while deciding on the issue of the validity/invalidity of ipso facto clauses,
such as:
(i) The extent of invalidation of ipso facto clauses, i.e., termination solely
based on an ‗insolvency event‘ (filing of an application for commencement
of CIRP, commencement of CIRP, appointment of RP, et al) within the IBC
will be invalid;
(ii) Whether the invalidation is absolute or conditional during the insolvency
process;
(iii) What kinds of contracts should be exempt from this invalidation;
(iv) What should be the nature of the exceptions to the invalidation of ipso
facto clauses to preserve the interests of the terminating party;
(v) Whether the invalidation should happen prospectively or retrospectively;
and
(vi) What safeguard will be required to ensure that parties do not circumvent
the invalidation.
141 The issues which we have delineated above are not exhaustive. The
enumeration only seeks to highlight the complexity of the task at hand, which will
require consideration of a variety of principles, which have to be balanced. The
PART J
118
tension between the rights of a corporate debtor during the insolvency process as
against the contractual rights of a terminating party, which is central to the task at
hand, is one which has been acknowledged even by the UNCITRAL in its
UNCITRAL Guide. There is a public interest underlying each of these balancing
considerations. The law confronts the judge with the greatest challenges of
adjudication when a balance has to made between what is right and what is right.
142 There are limitations of the judicial process in providing absolute answers
to these questions. Judgments are rendered in cases involving specific fact
situations. While they immediately bind the parties before the court, the impact of
the pronouncement of principle will have a bearing on others whose contracts
may contain similar provisions. In Northern Securities Company vs United
States125, Justice Oliver Wendell Holmes Jr. acknowledged a similar judicial
conundrum in the following terms in his dissenting opinion:
―356. Great cases, like hard cases, make bad law. For great
cases are called great, not by reason of their real importance
in shaping the law of the future, but because of some
accident of immediate overwhelming interest which appeals
to the feelings and distorts the judgment…‖
143 Consequently, we hold that question of the validity/invalidity of ipso facto
clauses is one which the court ought not to resolve exhaustively in the present
case. Rather, what we can do is appeal in earnest to the legislature to provide
concrete guidance on this issue, since the lack of a legislative voice on the issue
will lead to confusion and reduced commercial clarity.
125 1904 SCC OnLine US SC 63 : 24 S.Ct. 436
PART K
119
K Appellant’s right to terminate the PPA in the present case
K.1 Analysis of the PPA
144 We now turn to a consideration of the text, structure and salient features of
the PPA. As the PPA records in its recitals:
―[T]he Government of Gujarat through letter dated 1st August
2009 has allocated 25 MW capacity to power producer for
developing and setting up Solar Photovoltaic based power
project in the State of Gujarat. The power Producer desires to
set up a Solar Photovoltaic Grid Interactive Power Plant of 10
MW capacity at village Loria, Taluka-Bhuj, District Kutchh
using new Solar Photovoltaic Grid Interactive power plants to
produce the Electric Energy.‖
145 The preambular portion of the PPA also clarifies that the Power Producer
(the Corporate Debtor) includes its respective successors and permitted
assignees. Article 1, containing the definitions, clarifies that the term
‗Commission‘ refers to the GERC.
146 The PPA defines the term ‗law‘ in the following terms:
"Law" means any valid legislation, statute, rule, regulation,
notification, directive or order, issued or promulgated by any
Governmental Instrumentality.‖
147 Article 4.1(iii) provides that the Corporate Debtor shall sell the power
produced by it to the appellant on first priority basis and is not allowed to sell to
any third party. Article 4.1(x) states that the Corporate Debtor shall continue to
hold at least 51% equity stake for the first two years after the Commercial
Operation Date and at least 26% for 3 years thereafter. Article 5.2 of the PPA, as
we have noted previously, clarifies that, in case the commissioning of the Plant is
PART K
120
delayed beyond 31 December 2011, the appellant shall pay the tariff as
determined by the GERC for Solar Projects effective on the date of
commissioning of the plant or the tariff provided under the clause, whichever is
lower.
148 Article 9.1 of the PPA clarifies that the PPA shall become effective upon
the execution and delivery thereof by the parties and shall remain in operation for
a period of 25 years. Article 9.2.1 enumerates the Events of Default by the
Corporate Debtor, within which Article 9.2.1(e) states that the Corporate Debtor
becoming voluntarily or involuntarily, the subject of a proceeding in any
bankruptcy or insolvency laws, constitutes an Event of Default. The exception to
this clause is triggered where dissolution of the Corporate Debtor is for the
purpose of a merger, consolidation or reorganization and where the resulting
entity has the financial standing to perform its obligations under PPA and
creditworthiness. Article 9.2.1(e) of the PPA is quoted below:
"9.2. 1 Power Producer‘s Default: The occurrence of any
of the following events at any time during the Tariff [sic term]
of
this Agreement shall constitute an Event of Default by
Power Producer:
xxx
e. If the Power Producer becomes voluntarily or
involuntarily the subject of proceeding under
any bankruptcy or insolvency laws or goes into
liquidation of [sic or] dissolution or has a receiver
appointed over it or liquidator is appointed,
pursuant to law, except where such dissolution of the Power
producer is for the purpose of a
merger, consolidated [sic consolidation] or reorganization and
where the resulting entity has the financial
standing to perform its obligations under this
Agreement and creditworthiness similar to the
Power Producer and expressly assumes all
PART K
121
obligations under this agreement and is in a
position to perform them.‖
149 In accordance with Article 9.3.1, the appellant, on the occurrence of an
Event of Default under Article 9.2.1, can issue a Default Notice which shall
specify in reasonable detail the Event of Default giving rise to the default notice,
and call upon the Corporate Debtor to remedy it. At the expiry of 30 days from
such notice, unless otherwise agreed, if the default has not been remedied, the
appellant can terminate the PPA. Further, the Corporate Debtor shall have the
liability to make payments towards compensation to the appellant which is
equivalent to three years‘ billing based on the first-year tariff considered on
normative PLF while determining the tariff by GERC, within 30 days from the
termination notice. In accordance with Article 10.4, when differences or disputes
between the parties are not settled through mutual negotiation within 60 days of
the dispute arising, it shall be adjudicated by the State Commission, in
accordance with Law.
150 In accordance with Article 12.9, assignment of the Corporate Debtor‘s
rights under the PPA is permissible, with the prior written consent of the other
party. The proviso to this Article makes it clear that any assignee shall expressly
assume the Corporate Debtor's obligations thereafter arising under the PPA, on
the furnishing of satisfactory documentation.
151 At this juncture, it is important, at the risk of repetition, to note the
concurrent findings of fact returned by the NCLT and the NCLAT as to the PPA
PART K
122
being the sole basis for the Corporate Debtor‘s existence. In its judgment dated
29 August 2019, the NCLT held as follows:
―6. That the Corporate Debtor is reportedly a Special Purpose
Vehicle (SPV) set up only for generation of solar power in the
State of Gujarat. The Respondent is the only purchaser of
power generated by the Corporate Debtor's Plant, therefore,
the PPA is very critical to the "going concern" status of the
Corporate Debtor.
…
30... That termination of PPA at this stage may have adverse
consequences on the status of the Corporate Debtor as
"going concern" and eventually, may jeopardise the entire
CIR Process.‖
In the impugned judgment, the NCLAT held as follows:
―'Gujarat Urja Vikas Nigam Ltd.' is the only purchaser of
electricity generated by 'Astonfield Solar (Gujrat) Pvt. Ltd.'
(Corporate Debtor). [T]he electricity line have been given only
to the 'Gujarat Urja Vikas Nigam Ltd.' and in terms of an
agreement, they are supposed to supply electricity to 'Gujarat
Urja Vikas Nigam Ltd.'‖
152 As the above excerpts indicate, but for the subsistence of the PPA, the
Corporate Debtor would no longer remain as a ‗going concern‘. Differently stated,
by virtue of the PPA with the appellant being the sheet-anchor of the Corporate
Debtor‘s business and consequently of the CIRP, its continuation assumes
enormous significance for the successful completion of the CIRP. The termination
of the PPA will have the consequence of cutting the legs out from under the
CIRP.
PART K
123
K.2 Validity of the termination of PPA
153 As discussed in Section ―J.3‖ of this judgement, the broader question of
the validity of ipso facto clauses has been the subject matter of sustained
legislative intervention in many jurisdictions. This is an intricate policy
determination, for it raises a series of questions about striking the appropriate
balance between contractual freedom on the one hand and corporate rescue on
the other. We are cognizant that any rule that we might craft, howsoever narrow,
could have a series of unintended second order effects, in terms of opening the
floodgates for intervention from the NCLT that might impinge upon contractual
freedom of the terminating party. Further, the comparative experience also
teaches us that, given that the invalidation of ipso facto clauses can unsettle the
interests that contractual relationships are founded upon, some jurisdictions that
have invalidated such clauses have done so in a cautious, prospective fashion.
This ensures that while the policy of the insolvency law is brought into tandem
with the global regimes, it does not affect the contractual rights of those parties
who could not have reasonably accounted for this change in position while
negotiating their contractual terms. Such an approach is an evidence and
recognition of the harmful effects on commercial stability that such encroachment
into contractual freedom can generate, even when done legislatively after careful
deliberation.
154 The question of the validity/invalidity of ipso facto clauses has been
discussed in a variety of documents over the years, such as: (a) UNCITRAL
Guide of 2004; (b) J.J. Irani Committee Report of 2005; (c) Vidhi‘s Report of
PART K
124
2018 critiquing the IBC; and (d) IBBI‘s Report of 2020, which acknowledges
the issue of ipso facto clauses in relation to government grants. All these
materials were available to the members of the various committees which
discussed the IBC. Further, suspension of contracts during insolvency was
specifically allowed under Section 22(3) of SICA, which was the erstwhile
statutory regime. Section 22 of the SICA provided for the suspension of legal
proceedings and contracts, of which sub-Section (3) was in the following
terms:
―(3) Where an inquiry under section 16 is pending or any scheme
referred to in section 17 is under preparation or during the period]
of consideration of any scheme under section 18 or where any
such scheme is sanctioned thereunder, for due implementation of
the scheme, the Board may by order declare with respect to the
sick industrial company concerned that the operation of all or any
of the contracts, assurances of property, agreements, settlements,
awards, standing orders or other instruments in force, to which
such sick industrial company is a party or which may be applicable
to such sick industrial company immediately before the date of
such order, shall remain suspended or that all or any of the rights,
privileges, obligations and liabilities accruing or arising thereunder
before the said date, shall remain suspended or shall be
enforceable with such adaptations and in such manner as may be
specified by the Board:
Provided that such declaration shall not be made for a period
exceeding two years which may be extended by one year at a
time so, however, that the total period shall not exceed seven
years in the aggregate.‖
Parliament would have been conscious of the provision which was adopted in the
SICA. Yet, no concrete position has been adopted in relation to the termination of
ipso facto clauses by the legislature under the IBC. In the absence of an express
prohibition by the legislature, it can be argued that there is no general embargo
PART K
125
on the operation of such clauses if they are part of a valid contract under the
Contract Act.
155 At the same time, we cannot lose sight of the fact that this Court is
apprised with a novel situation where the ‗going concern‘ status of a corporate
debtor will be negated by a termination of its sole contract, on the basis of an ipso
facto clause. It is pertinent to note that the IBC has been in effect from 5 August
2016, and has also been amended multiple times. Hence, if the ‗going concern‘
status of corporate debtors was being affected on a regular basis due to ipso
facto clauses (which are in vogue even in the present contracts similar to the
current PPA), then the legislature may, if it considered necessary, have
proceeded to legislate on an explicit position with regard to the operation of ipso
facto clauses. However, this Court in the present case is not required to resolve
the broad question of whether the invalidation/stay of ipso facto clauses in India,
generally, is legally permissible. This is a matter which raises complex issues of
legal policy and a balancing between distinct and conflicting values. Reform will
have to take place through the legislative process. The stages through which
legislative reform must take place -absolute or incremental – is a matter for
legislative change. Our task is limited to the issue of deciding whether the NCLT
correctly exercised the jurisdiction vested in it, in the facts of this case, to stay the
termination of the PPA. In the absence of an explicit stand taken by the
legislature, this Court‘s intervention in this matter would be guided by
ascertaining the legislative intention from the provisions of the IBC.
156 Section 14 of the IBC reads as follows:
PART K
126
―Moratorium.--(1) Subject to provisions of Sub-sections (2)
and (3), on the insolvency commencement date, the
Adjudicating Authority shall by order declare moratorium for
prohibiting all of the following, namely--
(a) the institution of suits or continuation of pending suits
or proceedings against the corporate debtor including
execution of any judgment, decree or order in any court of
law, tribunal, arbitration panel or other authority;
(b) transferring, encumbering, alienating or disposing of
by the corporate debtor any of its assets or any legal right or
beneficial interest therein;
(c) any action to foreclose, recover or enforce any
security interest created by the corporate debtor in respect of
its property including any action under the Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (54 of 2002);
(d) the recovery of any property by an owner or lessor
where such property is occupied by or in the possession of
the corporate debtor.
Explanation.--For the purposes of this Sub-section, it is
hereby clarified that notwithstanding anything contained in
any other law for the time being in force, a license, permit,
registration, quota, concession, clearances or a similar grant
or right given by the Central Government, State Government,
local authority, sectoral regulator or any other authority
constituted under any other law for the time being in force,
shall not be suspended or terminated on the grounds of
insolvency, subject to the condition that there is no default in
payment of current dues arising for the use or continuation of
the license, permit, registration, quota, concession,
clearances or a similar grant or right during the moratorium
period.
(2) The supply of essential goods or services to the corporate
debtor as may be specified shall not be terminated or
suspended or interrupted during moratorium period.
(2-A) Where the interim resolution professional or resolution
professional, as the case may be, considers the supply of
goods or services critical to protect and preserve the value of
the corporate debtor and manage the operations of such
corporate debtor as a going concern, then the supply of such
goods or services shall not be terminated, suspended or
interrupted during the period of moratorium, except where
such corporate debtor has not paid dues arising from such
supply during the moratorium period or in such circumstances
as may be specified.
PART K
127
(3) The provisions of Sub-section (1) shall not apply to--
(a) such transactions, agreements or other arrangements
as may be notified by the Central Government in consultation
with any financial sector regulator or any other authority;
(b) a surety in a contract of guarantee to a corporate
debtor.
(4) The order of moratorium shall have effect from the date of
such order till the completion of the corporate insolvency
resolution process:
Provided that where at any time during the corporate
insolvency resolution process period, if the Adjudicating
Authority approves the resolution plan Under Sub-section (1)
of Section 31 or passes an order for liquidation of corporate
debtor Under Section 33, the moratorium shall cease to have
effect from the date of such approval or liquidation order, as
the case may be.‖
157 Section 14 of the IBC lists the conditions under which a moratorium can be
imposed by the NCLT in terms of sub-sections (a) to (d). It further clarifies that a
license, permit, quota, concession, grant or right given by a government cannot
be suspended or terminated on the grounds of insolvency, subject to certain
exceptions. This clarification was added by way of an Explanation to Section
14(1) with effect from 28 December 2019. The Report of the Insolvency Law
Committee dated 20 February 2020, as discussed above, noted that without such
government grants ―the business of the corporate debtor would lose its value and
it would not be possible to keep the corporate debtor running as a going concern
during the CIRP period, or to resolve the corporate debtor as a going concern‖126
.
The Report further stated that the termination of such grants during CIRP on
account of ipso facto clauses or non-payment of dues is in contravention of the
purpose behind imposition of moratorium itself.
126 Para 8.4
PART K
128
158 While recommending the inclusion of an explanation, the Report of the
Insolvency Law Committee stated that while it was of the view that termination or
suspension of such grants is prevented by Section 14, it recommended adding
the Explanation ―to avoid any scope for ambiguity and in exercise of abundant
caution‖127, and to ensure that the legislative intent should be made explicit by
introduction of the explanation by way of an amendment to Section 14(1). The
Insolvency Law Committee (in its discussion in the February 2020 Report) took
the position that Section 14 even in its unamended form, contained an interdict
on the invalidation of government grants, though the language of Section 14 did
not make this position explicit.
159 In contrast, this Court‘s judgment in Embassy Property (supra),
concluded that the non-renewal of a mining lease was not within the ambit of
Section 14. The Explanation to Section 14(1) was added by Parliament to make
the position clear, on whether the moratorium under Section 14 included
government licenses, grants, permits, quotas and concessions.
160 Section 14(2) provides that supply of essential goods or services, as may
be specified, cannot be terminated, suspended or interrupted during the
moratorium. Section 14(2A) was added with effect from 28 December 2019. It
provides that, where the IRP or RP considers the supply of goods or services
critical to protect and preserve the value of the corporate debtor and manage its
operations as a going concern, then the supply of such goods or services shall
not be terminated, suspended or interrupted during the period of moratorium,
127 Para 8.7
PART K
129
except where such corporate debtor has not paid dues arising from such supply
during the moratorium period or in such circumstances as may be specified. The
order of moratorium has effect till the culmination of insolvency resolution
process.
161 The inclusion of the Explanation to Section 14(1) and Section 14(2A)
indicates that Parliament has been amending the IBC to ensure that the status of
a corporate debtor as a ‗going concern‘ is not hampered on account of varied
situations, which may not have been in contemplation at the time of enacting the
IBC. It will be relevant to note that in a recent three judge Bench decision of this
Court in P Mohanraj vs Shah Brothers Ispat Pvt. Ltd.
128, Justice Rohinton Fali
Nariman, speaking for the Court, expounded upon the object of Section 14 in the
following terms:
―...the object of a moratorium provision such as Section 14 is
to see that there is no depletion of a corporate debtor's assets
during the insolvency resolution process so that it can be
kept running as a going concern during this time, thus
maximising value for all stakeholders. The idea is that it
facilitates the continued operation of the business of the
corporate debtor to allow it breathing space to organise its
affairs so that a new management may ultimately take over
and bring the corporate debtor out of financial sickness, thus
benefitting all stakeholders, which would include workmen of
the corporate debtor.‖
(emphasis supplied)
162 Further, the scheme of the IBC, inter alia, in terms of Sections 20(2)(e),
25(1) and definition of resolution plan shows that it aims to preserve the
128 Civil Appeal No. 10355 of 2018 decided on 1 March 2021
PART K
130
corporate debtor as a ‗going concern‘. The relevant portion of Section 20 is
extracted below:
―20. Management of operations of corporate debtor as a
going concern
(1) The interim resolution professional shall make every
endeavour to protect and preserve the value of the property
of the corporate debtor and manage the operations of the
corporate debtor as a going concern.
(2) For the purposes of sub-section (1), the interim resolution
professional shall have the authority—
…….
to take all such actions as are necessary to keep the
corporate debtor as a going concern.‖
It is also relevant to note that Section 25(1) provides:
―Section 25 - Duties of resolution professional
(1) It shall be the duty of the resolution professional to
preserve and protect the assets of the corporate debtor,
including the continued business operations of the corporate
debtor.‖
Resolution plan is defined under Section 5(26) of the IBC as follows:
―(26) "resolution plan" means a plan proposed by 3[resolution
applicant] for insolvency resolution of the corporate debtor as
a going concern in accordance with Part II;
Explanation.--For the removal of doubts, it is hereby clarified
that a resolution plan may include provisions for the
restructuring of the corporate debtor, including by way of
merger, amalgamation and demerger;‖
163 Although various provisions of the IBC indicate that the objective of the
statute is to ensure that the corporate debtor remains a ‗going concern‘, there
must be a specific textual hook for the NCLT to exercise its jurisdiction. The
PART K
131
NCLT cannot derive its powers from the ‗spirit‘ or ‗object‘ of the IBC. Section
60(5)(c) of the IBC vests the NCLT with wide powers since it can entertain and
dispose of any question of fact or law arising out or in relation to the insolvency
resolution process. We hasten to add, however, that the NCLT‘s residuary
jurisdiction, though wide, is nonetheless defined by the text of the IBC.
Specifically, the NCLT cannot do what the IBC consciously did not provide it the
power to do.
164 In this case, the PPA has been terminated solely on the ground of
insolvency, which gives the NCLT jurisdiction under Section 60(5)(c) to
adjudicate this matter and invalidate the termination of the PPA as it is the forum
vested with the responsibility of ensuring the continuation of the insolvency
resolution process, which requires preservation of the Corporate Debtor as a
going concern. In view of the centrality of the PPA to the CIRP in the unique
factual matrix of this case, this Court must adopt an interpretation of the NCLT‘s
residuary jurisdiction which comports with the broader goals of the IBC. Sir P.B.
Maxwell in his commentary, On Interpretation of Statutes129, has emphasized that
a provision should be given an harmonious interpretation which comports with the
intention of the Legislature. The commentary provides:
"The rule of strict construction, however, whenever invoked,
comes attended with qualifications and other rules no less
important, and it is by the light which each contributes that the
meaning must be determined. Among them is the rule that
that sense of the words is to be adopted which best
harmonises with the context and promotes in the fullest
manner the policy and object of the legislature. The
paramount object, in construing penal as well as other
129 Roy Wilson, Brian Galpin and Peter Benson Maxwell, On Interpretation of Statutes, (11th edn., Sweet and
Maxwell 1962).
PART K
132
statutes, is to ascertain the legislative intent and the rule
of strict construction is not violated by permitting the
words to have their full meaning, or the more extensive
of two meanings, when best effectuating the intention.
They are indeed frequently taken in the widest sense,
sometimes even in a sense more wide than etymologically
belongs or is popularly attached to them, in order to carry out
effectually the legislative intent, or, to use Sir Edward Cole's
words, to suppress the mischief and advance the remedy.‖
(emphasis supplied)
165 Given that the terms used in Section 60(5)(c) are of wide import, as
recognized in a consistent line of authority, we hold that the NCLT was
empowered to restrain the appellant from terminating the PPA. However, our
decision is premised upon a recognition of the centrality of the PPA in the present
case to the success of the CIRP, in the factual matrix of this case, since it is the
sole contract for the sale of electricity which was entered into by the Corporate
Debtor. In doing so, we reiterate that the NCLT would have been empowered to
set aside the termination of the PPA in this case because the termination took
place solely on the ground of insolvency. The jurisdiction of the NCLT under
Section 60(5)(c) of the IBC cannot be invoked in matters where a termination
may take place on grounds unrelated to the insolvency of the corporate debtor.
Even more crucially, it cannot even be invoked in the event of a legitimate
termination of a contract based on an ipso facto clause like Article 9.2.1(e)
herein, if such termination will not have the effect of making certain the death of
the corporate debtor. As such, in all future cases, NCLT would have to be wary of
setting aside valid contractual terminations which would merely dilute the value of
the corporate debtor, and not push it to its corporate death by virtue of it being
PART K
133
the corporate debtor‘s sole contract (as was the case in this matter‘s unique
factual matrix).
166 The terms of our intervention in the present case are limited. Judicial
intervention should not create a fertile ground for the revival of the regime under
section 22 of SICA which provided for suspension of wide-ranging contracts.
Section 22 of the SICA cannot be brought in through the back door. The basis of
our intervention in this case arises from the fact that if we allow the termination of
the PPA which is the sole contract of the Corporate Debtor, governing the supply
of electricity which it generates, it will pull the rug out from under the CIRP,
making the corporate death of the Corporate Debtor a foregone conclusion.
K.3 Dialogical Remedies
167 As indicated above in section ―J.3‖ of this judgment, we would like to take
this opportunity to note the desirability of Parliament providing its legislative vision
on the broader validity of ipso facto clauses. We have outlined some of the
complex considerations in paragraph 138.
168 In the past, this Court has adopted such dialogical remedies – where the
Court engages in a dialogue in its judgments with the other two organs of
government so that each organ can best perform its constitutionally assigned
role. To illustrate, in its judgement in S. Sukumar vs The Secretary, Institute of
Chartered Accountants of India130
, a two judge Bench of this Court, speaking
through Justice Adarsh Kumar Goel, held as follows:
130 (2018) 14 SCC 360.
PART K
134
―53.1.The Union of India may constitute a three member
Committee of experts to look into the question whether and to
what extent the statutory framework to enforce the letter and
spirit of Sections 25 and 29 of the CA Act and the statutory
Code of Conduct for the CAs requires revisit so as to
appropriately discipline and regulate MAFs. The Committee
may also consider the need for an appropriate legislation on
the pattern of Sarbanes Oxley Act, 2002 and Dodd Frank
Wall Street Reform and Consumer Protection Act, 2010 in US
or any other appropriate mechanism for oversight of
profession of the auditors. Question whether on account of
conflict of interest of auditors with consultants, the auditors'
profession may need an exclusive oversight body may be
examined. The Committee may examine the Study Group
and the Expert Group Reports referred to above, apart from
any other material. It may also consider steps for effective
enforcement of the provisions of the FDI policy and the
FEMA Regulations referred to above. It may identify the
remedial measures which may then be considered by
appropriate authorities. The Committee may call for
suggestions from all concerned. Such Committee may be
constituted within two months. Report of the Committee may
be submitted within three months thereafter. The UOI may
take further action after due consideration of such report.‖
169 Conscious as we are of the fact that this case is about statutory and not
constitutional interpretation, we think it would be apposite to quote the following
observations by Anne Meuwese and Marnix Snel131:
―The core of constitutional dialogue between the judiciary and
the legislature is that they engage in a conversation about
constitutional meaning, in which both actors (should) listen in
order to learn from each other‘s perspectives, which can then
lead to modifying their own views accordingly... In this way,
‗dialogue‘ represents the ‗middle way between judicial
supremacy on the one hand, and legislative supremacy on
the other‘.
131 Anne Meuwese and Marnix Snel, ‗Constitutional Dialogue‘: An Overview, Utrecht Law Review, vol. 9, issue 2,
p. 128 [March, 2013].
PART L
135
170 The Court is at its heart, an institution which responds to concrete cases
brought before it. It is not within its province to engraft into law its views as to
what constitutes good policy. This is a matter falling within the legislature‘s remit.
Equally, when presented with a novel question on which the legislature has not
yet made up its mind, we do not think this Court can sit with folded hands and
simply pass the buck onto the Legislature. In such an event, the Court can adopt
an interpretation – a workable formula – that furthers the broad goals of the
concerned legislation, while leaving it up to the legislature to formulate a
comprehensive and well-considered solution to the underlying problem. To aid
the legislature in this exercise, this Court can put forth its best thinking as to the
relevant considerations at play, the position of law obtaining in other relevant
jurisdictions and the possible pitfalls that may have to be avoided. It is through
the instrumentality of an inter-institutional dialogue that the doctrine of separation
of powers can be operationalized in a nuanced fashion. It is in this way that the
Court can tread the middle path between abdication and usurpation132
.
L NCLAT’s decision on the issue of liquidation
171 NCLT in paragraph 35 of its order dated 29 August 2019 upheld the right
of the appellant to terminate the PPA, in case a liquidation process is initiated
against the Corporate Debtor. The appellant had neither challenged this issue in
its appeal before NCLAT nor was it raised by any other party. However, the
NCLAT deleted the observations made by the NCLT in paragraph 35, thereby
holding that the appellant cannot terminate the PPA even if the Corporate Debtor
132 This phrase is taken from - O Ferraz, ‗Between Usurpation and Abdication? The Right to Health in the Courts
of Brazil and South Africa‘ in Oscar Vilhena Vieira, Upendra Baxi, Frans Viljoen (eds), Transformative
Constitutionalism: Comparing the Apex Courts of Brazil, India and South Africa (PULP, Pretoria 2013) 375, 393.
PART L
136
goes into liquidation. Since no pleadings or prayers were made in relation to
paragraph 35 of NCLT‘s order, NCLAT could not have considered this issue as a
subject matter of the appeal. We hold that the NCLAT exceeded its jurisdiction by
considering the issue of liquidation. In the absence of any liquidation proceedings
initiated against the Corporate Debtor, we are not required to consider the issue
of whether the appellant would be entitled to terminate the contract in such a
context. Such a discussion would be academic in nature, and beyond the scope
of this appeal.
PART M
137
M Appellant’s liability to pay for the electricity injected by the Corporate
Debtor
172 The appellant had served a notice of termination to the Corporate Debtor
with effect from 7 June 2019, though the termination could not be carried out due
to the operation of interim protection which had been granted to the respondents
by the NCLT. It was contended on behalf of the appellant that it cannot be made
to suffer on the ground of erroneous injunctions granted by the NCLT and
NCLAT, due to which it had to pay a higher tariff because it could not terminate
the PPA with the Corporate Debtor and procure electricity at a cheaper tariff from
another power producer. 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 7 June 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. Hence,
this contention of the appellant has been rendered otiose.
PART N
138
N Conclusion
173 In conclusion, we hold that:
(i) The NCLT/NCLAT could have exercised jurisdiction under section 60(5)(c)
of the IBC to stay the termination of the PPA by the appellant, since the
appellant sought to terminate the PPA under Article 9.2.1(e) only on
account of the CIRP being initiated against the Corporate Debtor;
(ii) The NCLT/NCLAT correctly stayed the termination of the PPA by the
appellant, since allowing it to terminate the PPA would certainly result in
the corporate death of the Corporate Debtor due to the PPA being its sole
contract; and
(iii) We leave open the broader question of the validity/invalidity of ipso facto
clauses in contracts for legislative intervention.
Consequently, for the above reasons we find no merit in this appeal and it is
accordingly dismissed.
174 Pending application(s), if any, stand disposed of.
…….………….…………………...........................J.
[Dr Dhananjaya Y Chandrachud]
…….…………………………...............................J.
[M. R. Shah]
New Delhi;
March 8, 2021.
