Power purchasing agreement cannot be terminated if power company goes into insolvency

Can a Power Purchasing Agreement (PPA) signed by a distribution company be terminated once the power generation company goes into insolvency?

The National Company Law Appellant Tribunal (NCLAT) in a recent order in the Gujarat Urja Vikas Nigam Ltd (GUVNL) Vs Yes Bank and Savan Godiawala, liquidator of Lanco Infratech Limited, has said that the termination of power purchasing agreement does not appear to be justified as the physical entity of a power project working in conjunction with the PPA becomes necessary for maximization of the value of assets.

“The Solar Power Plant, that is, physical assets realizes its full economic value only if it functions in conjunction with the PPA. The steady and assured revenue stream resulting from the existence of the PPA is the sine’ qua non for the long-term economic and financial viability of the solar power project since it provides comfort and security to the financial creditors who feel encouraged to provide credit for the project,” said the appellate tribunal in its order.

Facts of the matter

The case is related to Gujarat Urja Vikas Nigam Ltd (GUVNL)’s power purchase   agreement with the solar power plant of Lanco Infratech Ltd.  The solar power plant, which is an asset in the liquidation proceedings, is functioning and supplying power to Gujarat Urja Vikas Nigam Ltd in accordance with the power purchasing agreement entered on 29 April 2010.

Lanco Infratech had availed a loan of Rs 63.50 crore from Yes Bank Limited through a loan agreement on 4 August 2010.

In order to avail the loan from Yes Bank, Lanco Infratech had under the terms and conditions of the loan agreement, has an exclusive charge by way of hypothecation of movable fixed assets and current assets, including receivables (present and future) pertaining to a 5 MW grid connected solar photovoltaic power generating plant situated at Bhadrada Village, Sami Tehsil, Patan District, Gujarat, and mortgage of land and immovable assets (present and future) pertaining to Bhadrada project.

After the liquidation order of Lanco Infratech under the the corporate insolvency resolution process, Yes Bank initiated the proceedings and took possession of the secured asset under SARFAESI Act.

The solar power plant, which is an asset in the liquidation proceedings, is functioning and supplying power to Gujarat Urja Vikas Nigam Ltd in accordance with PPA entered into between the Lanco Infrtech and GUVNL.

Gujarat Urja Vikas Nigam’s argument

GUVNL had terminated the PPA with the solar power project after liquidation order of Lanco Infratech. It had argued at the NCLT that “an event as enumerated under Clause 9.2.1 (e) has occurred in the present case and the Yes Bank Ltd has admitted to breach of PPA. Clause 9.2.1(e) read with Clause 9.3 of the PPA provides for termination of PPA on account of the corporate debtor’s (power producer in this case) default and empowers the GUVNL to terminate the PPA.”

GUVNL had also raised the question of jurisdiction of the NCLT in adjudicating the issues raised by either of the parties of the power purchasing agreement and contended that under clauses 6.6 and 10.4 of the PPA, the Gujarat Electricity Regulatory Commission is the appropriate forum to adjudicate all issues under the PPA and the jurisdiction under IBC is limited to matters specified and covered under Section 14 of the IBC.

GUVNL had also contended that it is within its right to issue termination notice for the PPA, which was done after first issuing the notice for default on 23 July 2019 and after a passage of 30 days, issuing the termination notice on 30 August 2019. GUVNL has also stated that the liquidation of assets of the corporate debtor is taking place under Section 52(1)(b) of the IBC rather than under clause 12.9 of the PPA (which relates to financial default). It has also taken the stand that the liquidator is only liquidating the assets of the corporate debtor and is not taking action to continue the business of the corporate debtor and that the objective of maximisation of value of the assets of the corporate debtor does not imply that contracts entered into by the corporate debtor be necessarily continued.

Yes Bank’s argument

Yes Bank Limited argued before the NCLT that the PPA was terminated by GUVNL without considering the fact that the secured asset is an independent, viable power generating asset and if PPA is allowed to be terminated, it will be an obstacle for the secured creditors in exercising their rights under section 52(1)(b) of the IBC.

It is also claimed that GUVNL was posing a hindrance in the sale of the secured asset by the act of termination of the PPA with malafide intention as the corporate debtor has not defaulted on the supply of solar power as required under PPA despite initiation of Corporate Insolvency Resolution Process (CIRP). “It is generating power and will be a viable asset, if the existence of PPA is ensured, which will help in maximizing the value of the asset which is a basic requirement in insolvency proceedings,” argued Yes Bank.

NCLAT’s observation

The appellate tribunal argued that the PPA entered into between the power producer and the purchaser of power provides a long-term and steady stream of revenue accrual from the power project which forms the basis for repayment of any credit sourced by the power producer and provides necessary comfort to the financial creditor to give such credit. “This is the economics behind such projects and this economic value of the project of the corporate debtor the IBC seeks to maximize during the resolution process,” it said.

The appellate tribunal also cited the Delhi NCLT order in the Astonfield Solar (Gujarat) Private Ltd v Gujarat Urja Vikas Nigam Limited case by wherein the Adjudicating Authority has concluded that a PPA is an instrument for the purpose of Section 238 of IBC and consequently, any terms of the PPA in direct contravention of the IBC could not be enforced.

In the Astonfield case, the PPA was terminated on the sole ground of the initiation of the CIRP against the corporate debtor (which was an event of default under the PPA) and the failure of the power producer to rectify such default within 30 days from having received a notice of such default. The NCLT was of the view that giving effect to such termination of the PPA would reduce the statutory period that was available for completion of the CIRP from 330 days to 30 days.

The NCLAT further argued that the law requires the liquidator to take custody and control of all the assets, property, effects and actionable claims of the corporate debtor, carry on the business of the corporate debtor for its beneficial liquidation as prescribed under Section 35 of the IBC.

The NCLAT rejected GUVNL’s plea by concluding: “…the process of liquidation in the present case is going on and therefore, the liquidator should have full access to all assets of the corporate debtor to take meaningful steps for revival of the corporate debtor as going concern. In the present case, since the power producer has not suspended the supply of solar power and is willing to do the same, it stands to reason that the solar power project should be allowed to function as a going concern, so that revival of the power project as suggested under Section 230 of the Companies Act becomes possible.”