GUJARAT URJA VIKAS NIGAM LIMITED versus MR. AMIT GUPTA & ORS.
[2021] 13 S.C.R. 611, Supreme Court of India, 2021
Outcome: Dismissed (Dismissed)
Segment: Body
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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)
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
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.
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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 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
81 Felicity Toube QC, Joanne Rumley ‘A brave new world? Should the UK ban ipso
facto clauses in non-executory contracts?’ Insolvency Intelligence 2018
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/wp-content/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-and-
insolvency-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.
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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; 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 insolvency proceedings or the
opening of insolvency proceedings over the assets of the other contractual
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.
88 Ibid at 305.
89 “InsO”
90 “SanInsFoG”
91 “StaRUG”
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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 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
92 ‘Potential Invalidity of Insolvency-Related Termination Clauses under German
Insolvency Rules’ (Global Restructuring Watch, 17 September 2014) <https://
www.globalrestructuringwatch.com/2014/09/potential-invalidity-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).
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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.
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
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.
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%20Materials/4_Korean%20Corporate%
20Rehabilitation%20Proceedings%20and%20Cross-border%20Insolvency_....pdf>
accessed 24 February 2021.
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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, 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
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.
101 Para 52.
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allied relevant factors. The Court 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’
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”
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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 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 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
106 “CCAA”
107 See Adrienne Ho, The Treatment of Ipso Facto Clauses in Canada, (2015) 61:1
McGill LJ 139.
108 “SCC”
109 2020 SCC 25
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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 anti-deprivation 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 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.
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-upheld-by-supreme-court-of-canada>
accessed 18 February 2021.
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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”.
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.
112 “Amending Act”
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-ipso-facto-regime-is-now-live-are-
your-contractual-rights-affected> accessed 18 February 2021.
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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,
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.
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section 440 does not apply retroactively, and only applies to contracts
entered into after 30 July 2020117.
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 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
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.
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-and-dissolution-act> accessed on 18
February 2021.
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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, 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 anti-deprivation 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;
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.
GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS.
[DR. DHANANJAYA Y CHANDRACHUD, J.]
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(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 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
120 Available at <https://ibbi.gov.in/uploads/resources/May%202005,%20J.%20J.%20
Irani%20Report%20of%20the%20Expert%20 Committee%20on%20Company%20
Law.pdf> accessed 24 February 2021.
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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.
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 conditional
121 Pages 34-35, available at <https://vidhilegalpolicy.in/wp-content/uploads/2019/05/
IBC_Thejourneysofarandtheroadahead_Dec18.pdf> accessed on 18 February 2021.
GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS.
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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 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:
122 Available at <https://ibbi.gov.in/uploads/resources/c6cb71c9f69f66858830630
da08e45b4.pdf> accessed on 18 February 2021.
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“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,
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
GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS.
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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
(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.
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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:
“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)
123 (1955) 2 SCR 225
124 (1973) 4 SCC 225
GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS.
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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,
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.
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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 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.
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:
125 1904 SCC OnLine US SC 63 : 24 S.Ct. 436
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“[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 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:
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“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 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
GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS.
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NCLAT as to the PPA 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.
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
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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 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:
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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 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
Courtis 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:
“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—
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(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
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dues arising from such supply during the moratorium period or in
such circumstances as may be specified.
(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.
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
126 Para 8.4
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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 servicesshall not be terminated, suspended
or interrupted during the period of moratorium, except where such
corporate debtor has not paid
dues arising from suchsupply 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 acorporate 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:
127 Para 8.7
128 Civil Appeal No. 10355 of 2018 decided on 1 March 2021
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“...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 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;
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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 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 statutes, is to ascertain
129 Roy Wilson, Brian Galpin and Peter Benson Maxwell, On Interpretation of Statutes,
(11th edn., Sweet and Maxwell 1962).
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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 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.
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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:
“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.”
130 (2018) 14 SCC 360.
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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’.
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
131 Anne Meuwese and Marnix Snel, ‘Constitutional Dialogue’: An Overview, Utrecht
Law Review, vol. 9, issue 2, p. 128 [March, 2013].
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.
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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. 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.
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.
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;
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(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.
Ankit Gyan
Appeal dismissed.