SC refuses to stay NCLAT order that discoms can’t terminate PPAs during insolvency process

A bench led by Justice LN Rao while refusing to grant any relief to electricity distribution and trading company — Gujarat Urja Vikas Nigam (GUVNL) — said it will finally decide the matter in the second week of September.

The Supreme Court on Monday refused to stay the National Company Law Appellate Tribunal’s (NCLAT’s) decision that ruled that power distribution companies cannot terminate their power purchase agreement (PPA) with insolvent generating companies during the corporate insolvency resolution process (CIRP).

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A bench led by Justice LN Rao while refusing to grant any relief to electricity distribution and trading company — Gujarat Urja Vikas Nigam (GUVNL) — said it will finally decide the matter in the second week of September.
The NCLAT had dismissed the GUVNL’s appeal against the Hyderabad bench of the National Company Law Tribunal’s order holding that the termination of its PPA with debt-laden Lanco Infratech did not appear to be justified as the going concern status of such insolvent companies have to be maintained during the entire resolution process.

Upholding the NCLT’s order, the NCLAT said asset classification of a power project includes the generation plant and its PPA and the same should be looked together and not in isolation.

The ruling had come in the CIRP process of Lanco Infratech that is facing liquidation as it had failed to clear its dues, including Rs 63 crore to Yes Bank. NCLT had admitted the insolvency plea of IDBI Bank against Lanco Infratech in August 2017.

The issue relates to the PPA of April 2010 for purchase of power by GUVNL from Lanco’s solar power project, the asset in liquidation. As Lanco went into liquidation and liquidator was appointed, GUVNL had issued default notice to the former for terminating the PPA, the appeal stated. The termination notice, which was set aside by the NCLT in May last year, was upheld by the NCLAT relying on the another case filed by GUVNL vs Amit Gupta, GUVNL said in its appeal, adding that the appeal in the Amit Gupta case is pending before the SC.

Stating that the NCLAT has failed to appreciate that termination is the commercial decision of GUVNL to enforce its right under the PPA, senior counsel CU Singh, appearing for GUVNL, argued that the NCLAT had ignored the fact that there was no provision in the IBC to extinguish or adversely affect its right to terminate the PPA.
Opposing the appeal, senior counsel MG Ramachandran disputed the amount sought by GUVNL, saying that no bills were raised on the basis of the state energy account.

The NCLT and NCLAT had set aside the termination notice on grounds that it would be perverse to the objective of maximisation of the value of the asset under the IBC, it said, adding that there is no specific provision in the Code which prohibits the termination of the PPA and in the absence of such provision, it cannot be held that the termination is contrary to the Code.

GUVNL stated that having exercised its right under the PPA, it cannot be forced to continue the PPA or sacrifice its contractual rights. “The alleged benefit to Lanco in continuing the PPA cannot be a reason to force the state-owned firm to continue the PPA. If Lanco feels that a PPA is necessary or beneficial, it can enter into agreement with any other entity. There is no bar, legal or technical, for Lanco or any other purchaser of power project to enter into an agreement with any consumer/licensee or entity for supply of power from the power project,” the appeal filed through counsel Hemantika Wahi stated.