NCLAT on the Treatment of Power Purchase Agreements in Liquidation

[Apoorva Soni is a III year B.A. LL.B. (Hons.) student at National University of Study and Research in Law, Ranchi]

The National Company Law Appellate Tribunal (“NCLAT”), by its decision in the matter of Gujarat Urja Vikas Nigam Ltd (GUVNL) v. Yes Bank Ltd  dated October 20, 2020, held that a company could not terminate a Power Purchase Agreement (“PPA”) executed with a corporate debtor during the latter’s liquidation under the Insolvency and Bankruptcy Code, 2016 (“IBC”). This decision has important implications for contract enforcement with regard to bankruptcy; therefore, examining the same becomes vital.

Factual Background

A PPA was executed between Lanco Infratech Limited (“Corporate Debtor”) and GUVNL. Under the PPA, the Corporate Debtor was to generate and supply solar power to GUVNL through its solar power plant situated in Gujarat. The Corporate Debtor had availed credit from Yes Bank (“Financial Creditor”). Under the said loan agreement, the Financial Creditor had an exclusive charge by way of (i) hypothecation of movable fixed assets and current assets, including receivables (present and future) pertaining to the solar power plant and (ii) mortgage of land and immovable assets (present and future) pertaining to the solar power plant.

Subsequently, the National Company Law Tribunal (“NCLT”) ordered the initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor which culminated in the commencement of the liquidation process. Yes Bank, through a liquidation order, sought to realize the solar power plant as a secured asset pursuant to section 52 of IBC, and the possession was transferred to Yes Bank in accordance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”). The dispute arose when on August 30, 2019, GUVNL sought to terminate the PPA under a provision which stated that the PPA could be terminated where the power producer is subjected to any proceeding under any bankruptcy or insolvency laws or goes into liquidation, except where the resulting entity has the financial standing to perform its obligations and assumes the same. Discontented by this move, Yes Bank approached the NCLT arguing that such termination would impede the secured creditors from exercising their rights under section 52(1)(b) of IBC. The NCLT vide its order dated May 6, 2020, held that GUVNL could not terminate the PPA during the liquidation process and set aside the notice of termination. GUVNL challenged the decision of the NCLT before the NCLAT.


Two critical issues were examined in the dispute: whether the moratorium declared under section 14 of IBC applies to the PPA along with other immovable and moveable properties of the Corporate Debtor; and whether the contractual provisions of the PPA allow either of the parties to terminate the PPA in view of the liquidation process of the Corporate Debtor.

Firstly, the NCLAT reiterated the objective of IBC by focusing on its preamble which emphasizes the maximization of value of assets and balancing the interest of all stakeholders.

Secondly, the NCLAT held that no breach of contract could be attributed in the present matter since there was no default in the power supply at any point. In the present case, since the power producer has not suspended its services and neither intends to do so, it is cogent to state that the solar power plant should be allowed to function as a going concern to enforce its revival as suggested under section 230 of the Companies Act.

Thirdly,Yes Bank argued that Clause 9 of the PPA has to be read harmoniously with Clause 12.9 of the PPA, which lays down that in the event of any default by the power producer under the financing document, the interests, rights, and obligations of the power producer can be transferred to a third party thereby securing the existence of the PPA. The  implied objective of the clause was to make sure that the solar power plant remains functioning and adds value. Here, it was held that the PPA could not be seen as divorced and separated from the physical entity of the solar power plant. It is only through the existence of the PPA that the physical entity i.e., the solar power plant, realizes its economic value. Both the PPA and the solar power plant have to function in conjunction with each other to be a viable unit. The PPA’s existence is a sine qua non to the long-term economic and financial viability of the physical asset. It is only through this integration that an economic asset exists. If the PPA is terminated, then the Financial Creditor would not be able to realise the value that it is owed, which defeats the inherent purpose of the liquidation process.

Fourthly, the tribunal examined the reference made to the NCLT’s order in Astonfield Solar (Gujarat) Private Ltd v. Gujarat Urja Vikas Nigam Limited (MANU/NC/5731/2019) wherein it was concluded that a PPA is an “instrument” for the purpose of section 238 of IBC and consequently, any terms of the PPA contravening the mandate of IBC cannot be enforced. In an appeal made against this order, it was held that the subsistence of the PPA during the liquidation process is pivotal since the liquidator during such process has to ensure that the corporate debtor remains a going concern and the termination of PPA would be inconsistent with the said objective. In Y. Shivram Prasad v. S. Dhanapal, it was held that upon failure of compromise or arrangement with the creditors, the liquidator must take requisite steps to sell the business of the corporate debtor as going concern in its totality. A similar ratio was reiterated in the matters of Meghal Homes Pvt. Ltd. v. Shree Niwas Girni K.K. Samiti and Swiss Ribbons Pvt. Ltd.  v. Union of India where the liquidator was directed to carry on the business of the corporate debtor for its beneficial liquidation as prescribed under section 35 of the IBC.


To conclude, the NCLAT held that the PPA could not be terminated during the liquidation process. However, the ratio should not be interpreted in a wide manner as doing so would unduly restrict companies from terminating PPAs which may open up a pandora’s box and lead to a slippery slope. The background in the instant manner provided for such a decision to be given, but an interpretation of the widest amplitude may disregard a party’s autonomy even when the party is not concerned with the contract in dispute.

The ruling raises some important questions. First, how does one enforce the present ruling? Does this mean that court will rule on termination on a case-to-case basis? If yes, what does that indicate when it comes to the rule of law and contract enforcement? Clarity on these questions become essential. Various details still remain obscure while discussing the grounds of terminating PPAs when IBC is involved as it may incorporate various complexities. It will be interesting to see how the jurisprudence on the issue evolves through time.

Apoorva Soni

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1 comment

  • This decision, should definitely be reversed. I think the appeal has already been filed. It is inconceivable for termination of contract to attract Section 14.


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