2020 (10) TMI 916 - AT - Insolvency and Bankruptcy

Liquidation order - Section 60(5) read with Section 52(5) of the Insolvency and Bankruptcy Code, 2016 - applicability of moratorium - termination of PPA or not. Whether the moratorium declared under Section 14 of IBC applies to the PPA along with other immovable and moveable properties of the corporate debtor? - HELD THAT - The IBC, 2016 is in the nature of beneficial legislation which strives to protect the national wealth that is included in the corporate business, partnership firms and individuals by providing economically sound and legally robust mechanism for reorganization and insolvency resolution. Hence, action under various provisions of IBC must be driven by such a spirit in legally sound manner - the PPA entered into between the power producer and the purchaser of power provides a long-term and steady stream of revenue accrual from the power project which forms the basis for repayment of any credit sourced by the power producer and provides necessary comfort to the financial creditor to give such credit. This is the economics behind such projects and this economic value of the project of the corporate debtor the IBC seeks to maximize during the resolution process. The solar power project, which generates and supplies solar power turns into an economic entity with the help of an instrument such as PPA, thereby converting the physical entity i.e. solar power plant into an economically useful entity for production of solar power. As explained above, the physical entity of the power plant when the becomes an economic project when a financial creditor provides capital after deriving comfort and assurance from the steady flow revenue by sale of solar power - the proposition that the solar power plant and the PPA related to the plant form one integrated economic asset appears to be a rational one. Therefore this asset needs to be kept intact and preserved during the process of corporate resolution and liquidation so that the liabilities of creditors and other stakeholders can be taken care of. Whether the contractual provisions of the PPA permit either of the contracting parties to terminate the PPA in view of the liquidation process of the corporate debtor which is underway under IBC? - HELD THAT - Quite clearly the process of liquidation in the present case is going on and therefore, the liquidator should have full access to all assets of the corporate debtor to take meaningful steps for revival of the corporate debtor as going concern. In the present case, since the power producer has not suspended the supply of solar power and is willing to do the same, it stands to reason that the solar power project should be allowed to function as a going concern, so that revival of the power project as suggested under Section 230 of the Companies Act becomes possible - keeping in view the objective of the Insolvency and Bankruptcy Code, 2016 which relates to maximization of the value of assets for resolution of the corporate person, it stands to reason that the Solar Power Plant i.e. physical assets realizes its full economic value only if it functions in conjunction with the PPA. The steady and assured revenue stream resulting from the existence of the PPA is the sine qua non for the long-term economic and financial viability of the solar power project since it provides comfort and security to the financial creditors who feel encouraged to provide credit for the project. Therefore, the physical entity of the Solar Power Project working in conjunction with the PPA becomes necessary for maximization of the value of assets. This is especially true since the power producer is willing to generate and supply power and also in a position to do so to the GUVNL. Hence, the termination of PPA does not appear to be justified. Appeal dismissed.

Summary

Issues Involved:
1. Whether the moratorium declared under Section 14 of IBC applies to the PPA along with other immovable and moveable properties of the corporate debtor.
2. Whether the contractual provisions of the PPA permit either of the contracting parties to terminate the PPA in view of the liquidation process of the corporate debtor which is underway under IBC.

Issue-wise Detailed Analysis:

Issue 1: Moratorium under Section 14 of IBC

The primary question is whether the moratorium under Section 14 of the IBC applies to the Power Purchase Agreement (PPA) along with other assets of the corporate debtor. Section 14(1)(b) of the IBC prohibits transferring, encumbering, alienating, or disposing of any of the corporate debtor’s assets or any legal right or beneficial interest therein. The PPA is considered a beneficial interest of the corporate debtor in the Solar Power Project. Terminating the PPA would directly impact the value of the corporate debtor's assets, which is contrary to the moratorium's intent to preserve the debtor’s estate during insolvency proceedings. The tribunal emphasized that the PPA, as an economic instrument, forms an integrated asset with the solar power plant, thus, should be preserved to maximize asset value during liquidation.

Issue 2: Contractual Provisions of the PPA and Liquidation Process

The second issue involves whether the PPA can be terminated due to the liquidation process under the IBC. GUVNL argued that under clause 9.2.1(e) of the PPA, they are entitled to terminate the agreement due to the corporate debtor’s insolvency proceedings. However, the tribunal noted that the corporate debtor continued to fulfill its obligations under the PPA by generating and supplying power, thus no breach of contract occurred. The tribunal highlighted that the PPA ensures a steady revenue stream crucial for the financial viability of the solar power project. Terminating the PPA would undermine the objective of the IBC to maximize asset value and ensure the corporate debtor remains a going concern during liquidation.

Additional Considerations:

The tribunal referenced the objectives of the IBC, which include maximizing asset value and balancing stakeholder interests. The PPA provides long-term revenue, essential for repaying creditors and maintaining the project’s economic viability. The tribunal also cited previous judgments, such as the Astonfield case, which established that PPAs are integral to maintaining the corporate debtor as a going concern during insolvency proceedings.

Conclusion:

The tribunal concluded that the PPA and the solar power plant form an integrated economic asset that should be preserved during liquidation to maximize asset value. Terminating the PPA would not align with the IBC's objectives. Therefore, the tribunal upheld the Adjudicating Authority’s order preventing the termination of the PPA, ensuring the corporate debtor’s assets are preserved and their value maximized during liquidation. The appeal was dismissed with no order as to costs.