Gujarat Urja Vikas Nigam Limited vs Mr. Amit Gupta & Ors.

Interpretation of Statutes – Textually similar language in different enactments has to be construed in the context and scheme of the statute 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 – 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 – Insolvency and Bankruptcy Code – sec. 60(5) – Companies Act, 1956 – 446(2).

Ipso Facto Clause – Validity of – Discussed

Dismissing the appeal, this Court

HELD: Jurisdiction of the NCLT/NCLAT over contractual disputes

1. 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. 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 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 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 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 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. [Para 57, 66 & 67][666-D-F; 671-B-C; 672-B-H]

2. 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. 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. [Para 69 & 72][673-E-F; 675-A-C]

Jurisdiction of NCLT and GERC

3. 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 PPA is an instrument within the meaning of section 238 of the IBC. 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. 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. [Para 77 & 78][677-A-B; 678-F-H; 679-A-B]

4. 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 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. This Court 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. [Para 87][686-C-F]

Validity of ipso facto clauses

5. Before analyzing 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 Commission on International Trade Law released its Legislative Guide on Insolvency Law in 2004. 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. As India develops into a responsive member of the international community, our laws cannot afford to be inward-looking. In 2005, the Report of the Expert Committee on Company Law headed by J.J. Irani noted the requirement of reforms in the Indian insolvency regime, specifically citing the lessons from the recently published UNCITRAL Guide. 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. [Paras 88, 130 & 131][686-F-H; A, C-E; 714-E-F; 715-D-E]

6. 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 Policy. 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 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. 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). [Para 132 & 133][715-E-H; 716-A-C]

7. 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);

(ii) and 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. [Para 135][718-E-H]

8. In performing duties as members of the judicial branch in this case, this Court must tread a fine line between providing a just decision while not entering into the domain of the legislature. It has been already noted above 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, 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. Consequently, this Court holds 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. [Paras 138, 139 & 143][720-A-D; 721-F]

Appellant’s right to terminate the PPA in the present case

9. 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. 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. [Para 148 & 149][722-F-H; 723-D-F]

Validity of the termination of PPA

10. As discussed above, 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. 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 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. 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 on the operation of such clauses if they are part of a valid contract under the Contract Act. [Paras 153 & 154] [724-G-H; 725-A-E; 726-B-C]

11. At the same time, this Court 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. 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 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. [Paras 155 & 163][726-C-G; 731-B-C]

12. 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 Statutes 129, has emphasized that a provision should be given an harmonious interpretation which comports with the intention of the Legislature. Given that the terms used in Section 60(5)(c) are of wide import, as recognized in a consistent line of authority, this Court holds 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 the corporate debtor‘s sole contract (as was the case in this matter’s unique factual matrix). [Paras 164 & 165][731-D-F; 732-C-F]

13. The terms of 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. 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 usurpation. [Paras 166 & 170][732-G-H; 734-C-F]

NCLAT’s decision on the issue of liquidation

14. 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 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. This Court holds that the NCLAT exceeded its jurisdiction by considering the issue of liquidation. In the absence of any liquidation proceedings initiated against the Corporate Debtor, this Court is 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. [Para 171][734-F-G; 735-A-C] Union of India vs R. Gandhi, President, Madras Bar Association (2010) 11 SCC 1 : [2010] (6) SCR 857; Rai Sahib Ram Jawaya Kapur vs State of Punjab (1955)

2 SCR 225; Kesavananda Bharati vs State of Kerala (1973) 4 SCC 225 : [1973] (0) Suppl. SCR 1 – followed. Sudharshan Chits (I) Ltd. vs O Sukumaran Pillar (1984)

4 SCC 657 : [1985] (1) SCR 511; Thampanoor Ravi vs Charupara Ravi (1999) 8 SCC 74 : [1999] (2) Suppl. SCR 419; Dhirendra Chandra Pal vs Associated Bank of Tripura Ltd. AIR 1955 SC 213 : [1955] SCR 1098; D.R. Kohli vs Atul Products Ltd. (1985) 2 SCC 77 : [1985] (2) SCR 832; P Mohanraj vs Shah Brothers Ispat Pvt. Ltd. Civil Appeal No. 10355 of 2018 decided on 1 March 2021 – relied on.

Municipal Corporation vs Abhilash Lal (2020) 13 SCC

234 : [2019] (14) SCR 659; Embassy Property

Developments (Private) Limited vs State of Karnataka (2020) 13 SCC 308 : [2019] (17) SCR 559 –

distinguished.

Johri Lal Soni vs Bhanwari Bai (1977) 4 SCC 59 : [1978] (1) SCR 231; Swiss Ribbons Private Limited vs Union of India (2019) 4 SCC 17 : [2019] (3) SCR 535; Ashoka Marketing vs PNB 1990 (4) SCC 406 : [1990]

(3) SCR 649; Renusagar Power Co. Ltd. vs General Electric Company (1984) 4 SCC 679 : [1985] (1) SCR 432; Mansukhlal Dhanraj Jain vs Eknath Vithal Ogale (1995) 2 SCC 665 : [1995] (1) SCR 996; Doypack System (P) Ltd. vs Union of India (1988) 2 SCC 299 : [1988] (2) SCR 62; Madras Petrochem Limitted. vs BIFR (2016) 4 SCC 1 : [2016] (11) SCR 419; Innoventive Industries vs ICICI Bank (2018) 1 SCC 407 : [2017]

(8) SCR 33; Arcelor Mittal (India) (Private) Limited. vs Satish Kumar Gupta (2019) 2 SCC 1 : [2018] (12) SCR 362; Committee of Creditors of Essar Steel India Limited vs Satish Kumar Gupta (2020) 8 SCC 531 : [2019] (16) SCR 275; Remdeo Chauhan vs Bani Kant Das (2010)

14 SCC 209 : [2010] (15) SCR 957; A. Deivendran vs State of T.N. (1997) 11 SCC 720 : [1997] (4) Suppl. SCR 591; Chandos Construction Ltd. vs Deloitte

Restructuring Inc. 2020 SCC 25; Northern Securities Company vs United States 1904 SCC OnLine US SC

63 : 24 S.Ct. 436; S. Sukumar vs The Secretary, Institute of Chartered Accountants of India (2018) 14 SCC 360 : [2018] (2) SCR 442 – referred to.

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); Belmont Park Investments Pty Ltd and others vs BNY Corporate Trustee Services Ltd and another (Revenue and Customs Comrs and another intervening) [2011] 3 W.L.R. 521; Fibria Celulose S/A v Pan Ocean Co Ltd vs Fibria Celulose S/A Chancery Division [2014] Bus. L.R. 1041 – referred to.