Business Laws

The fate of PPAs under IBC decided

M Ramesh | Updated on May 03, 2021

The Supreme Court has ensured the continuance of power purchase agreements (PPA) between the power generators and the buyers

In a finding that should come as a relief to lenders, the Supreme Court of India has ensured the continuance of power purchase agreements (PPA) between the power generators and the buyers – basically, setting to rest the uncertainty regarding the status of power generators undergoing insolvency proceedings.

In the case of Gujarat Urja Vikas Nigam Ltd (GUVNL) Vs Amit Gupta, the principal question before the Supreme Court was whether the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) had the jurisdiction under the Insolvency and Bankruptcy Code (IBC), 2016, in disputes involving PPAs. Another point was whether the IBC could regulate the right of GUVNL to terminate the PPA.

‘Going concern’

At the heart of the issue is what happens to the PPA if a power generator is dragged into insolvency proceedings. The Supreme Court has essentially said that you cannot terminate a PPA and also take the generator to the NCLT for recovery of dues. This is because the moment a power buyer terminates a PPA under a clause in the agreement, the power generator ceases to be a going concern.

Now, that is a problem, because under the IBC, the corporate debtor is treated as a going concern; if it is declared insolvent, the creditors have no say and the matter passes to the liquidator. In fact, in the past, in several cases (Reid & Taylor, Bharati Defence, Gujarat NRE Coke) the NCLT had asked the liquidator to sell the companies as going concerns. So, if a power purchaser, such as an electricity distribution company (discom) – like GUVNL – terminates the PPA, the power generator finds himself in a legal grey area.

In the present case, the Supreme Court appraised the jurisdictions of the NCLT and the NCLAT under the IBC and held that they did indeed have the jurisdiction to adjudicate on PPA. It also said that the jurisdiction of the NCLT/NCLAT overrode that of the respective State electricity regulatory commission – it would be the tribunals that would decide on the applicability of the PPAs. Unless, of course, the reason for the termination of the PPA is something other than insolvency, in which case, the other statutory bodies would have precedence over the IBC. The apex court observed that if a PPA is terminated, then the power generator would no longer be a going concern and as such, the continuation of the PPA was important for the CIRP proceedings.

Writing in India Business Law Journal, Abhirup Dasgupta and Bhawana Sharma, lawyers with HSA Advocates, note that since the judgment ensures that the continuity of PPAs brings “considerable relief to lenders of power generators that are currently undergoing insolvency proceedings.” Therefore, the lenders can expect to get more value through insolvency resolution, of course, assuming that the power generator continues to supply power and earn revenues.

Published on May 02, 2021

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