2019 (8) TMI 1561 - Tri - Companies Law

Validity of default notices issued by respondent taking insolvency proceedings as Event of Default - restraint on respondent namely, Gujarat Urja Vikas Nigam Limited from terminating the Power Purchase Agreement dated 30th April 2010 - Whether Power Purchase Agreement (PPA) is an 'instrument' in the context of provisions of Section 238 of IBC? - HELD THAT - Since, the rights and liabilities of parties have been created in the Power Purchase Agreement and such an agreement is enforceable by law and the word 'instrument' inter alia, includes an 'agreement', the Power Purchase Agreement i.e., PPA is an Instrument' for the purpose of Section 238 of IBC 2016. Whether the clause 9.2.1(e) read with clause 9.3.1 of the Power Purchase Agreement dated 30.10.2010 is inconsistent with Section 238 of IBC 2016 or not? - HELD THAT - It is observed that the CIR process in the instant case was triggered on 20.11.2018, which was further extended by 90 days on 16.05.2019 and the default notices were issued by the Respondent Company on 01.05.2019. 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 - Further, by reading the clause 9.3.1 of the PPA and the impugned default notice dated 01.05.2019, it is clear that the Respondent Company has asked the Corporate Debtor to rectify the default mentioned in clause 9.2.1(e), which in turn, implies that, to prevent the termination of contract, the corporate Debtor had to terminate or complete the CIR process within 30 days, from the receipt of the notice - thus, the issuance of default notice dated 01.05.2019 has created a situation, which compels the Corporate Debtor to exit from the CIR process within 30 days, in order to save the PPA from getting terminated. The Power Purchase Agreement (PPA) is an 'instrument' for the applicability of Section 238 of IBC, 2016 and Clauses 9.2.1(e) read with 9.3.1 of the PPA under reference are inconsistent with the provisions of IBC, 2016. The PPA being an instrument within the ambit of Section 238 of IBC 2016, provisions of IBC 2016 and process initiated thereunder shall have overriding effect over the former. The impugned default notices dated 01.05.2019 are, therefore, set aside. Application allowed.

Summary

Issues Involved:
1. Whether the Power Purchase Agreement (PPA) is an 'instrument' in the context of provisions of Section 238 of IBC.
2. Whether clause 9.2.1(e) read with clause 9.3.1 of the Power Purchase Agreement dated 30.10.2010 is inconsistent with Section 238 of IBC 2016.

Detailed Analysis:

Issue 1: Whether the Power Purchase Agreement (PPA) is an 'instrument' in the context of provisions of Section 238 of IBC.
The tribunal examined the definition of 'instrument' under various legislative acts and dictionaries. Section 238 of the IBC states that "the provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law." The tribunal noted that the term 'instrument' is not defined under IBC 2016 but referred to Section 3(37) of the Code, which directs to definitions in other acts like the Indian Contract Act, 1872, and the Indian Stamp Act, 1899. According to Section 2(14) of the Indian Stamp Act, 1899, an 'instrument' includes every document by which any right or liability is created, transferred, limited, extended, extinguished, or recorded. The tribunal concluded that since the PPA creates enforceable rights and liabilities, it qualifies as an 'instrument' under Section 238 of IBC 2016.

Issue 2: Whether clause 9.2.1(e) read with clause 9.3.1 of the Power Purchase Agreement dated 30.10.2010 is inconsistent with Section 238 of IBC 2016.
The tribunal evaluated the clauses of the PPA in light of Section 238 of IBC 2016. Clause 9.2.1(e) of the PPA allows termination if the power producer becomes subject to insolvency proceedings. Clause 9.3.1 provides a 30-day period for remedying the default. The tribunal observed that the CIR process was initiated on 20.11.2018 and extended by 90 days on 16.05.2019. The default notices issued on 01.05.2019 demanded curing of defaults within 30 days, which conflicted with the statutory timelines of the CIR process under IBC 2016. The tribunal emphasized that any agreement cannot override the statutory provisions of IBC, which prescribe a 330-day timeline for CIR processes. Hence, it concluded that the PPA clauses are inconsistent with Section 238 of IBC 2016.

Conclusion:
The tribunal concluded that the PPA is an 'instrument' under Section 238 of IBC 2016, and the clauses 9.2.1(e) and 9.3.1 are inconsistent with the provisions of IBC 2016. Therefore, the provisions of IBC 2016 shall have an overriding effect over the PPA. The default notices dated 01.05.2019 were set aside. However, the tribunal clarified that if the Corporate Debtor goes into liquidation, the Respondent Company may terminate the PPA. The applications were allowed accordingly.