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A 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

108Copy pinpoint108. A position similar to the US has been adopted in Austria B 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 Code 82. This law renders unenforceable all such provisions in contracts which provide a party with termination rights, due to the opening of insolvency proceedings C 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 valid 83.

D J.2.4 France

109Copy pinpoint109. 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 E 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; F ‘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. G 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/ H 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

110Copy pinpoint110. 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 D 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.

111Copy pinpoint111. 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

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A 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 B 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.

112Copy pinpoint112. The Federal Supreme Court based its decision on the purpose of the insolvency administrator’s right to opt for the performance/non- C 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. D 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.

113Copy pinpoint113. 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 G 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

114Copy pinpoint114. 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. C J.2.7 Republic of Korea

115Copy pinpoint115. 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 D 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 E 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 F 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 G 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. H

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A 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.

116Copy pinpoint116. 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.

117Copy pinpoint117. 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. H 101 Para 52.

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allied relevant factors. The Court then conducted a detailed examination A 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 B

118Copy pinpoint118. 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 C 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 D (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, E 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. … F 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 G 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” H

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A 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 B 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. C

119Copy pinpoint119. 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 D 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 E [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 F 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 G

106 “CCAA” 107 See Adrienne Ho, The Treatment of Ipso Facto Clauses in Canada, (2015) 61:1 McGill LJ 139. 108 “SCC” 109 H 2020 SCC 25

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the Insolvency Clause to deduct 10% of the contract price A (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.

120Copy pinpoint120. 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- E deprivation rule since “ipso facto provisions are aimed at protecting debtors; the anti-deprivation rule, by contrast, protects creditors”110.

121Copy pinpoint121. 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 F 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. G

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. H

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A J.2.9 Australia

122Copy pinpoint122. 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 B 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”.

123Copy pinpoint123. 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 D 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.

124Copy pinpoint124. However, according to the Explanatory Memorandum to the E 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 F 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 reason 114.

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J.2.10 Singapore A

125Copy pinpoint125. 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 B 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 (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; F (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 G (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. H

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A section 440 does not apply retroactively, and only applies to contracts entered into after 30 July 2020117.

126Copy pinpoint126. 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 B 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) 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 D (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.

127Copy pinpoint127. 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 F 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 G 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 H February 2021.

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modern-day commercial transactions in this domain. It therefore advised A 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 B

128Copy pinpoint128. 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 F ‘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 G 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. H

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A (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 B 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 C 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 D a more conservative approach and strictly construe the legislative mandate. J.3 Position in India

129Copy pinpoint129. 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.

130Copy pinpoint130. 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. … G 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 H 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)

131Copy pinpoint131. 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”.

132Copy pinpoint132. 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. H

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A 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 B insertion of a new provision to the IBC.

133Copy pinpoint133. 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: C “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.”

134Copy pinpoint134. The legislative intent behind this amendment was discussed in the Report of the Insolvency Law Committee dated 20 February 2020. F 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 G 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 H da08e45b4.pdf> accessed on 18 February 2021.

GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS. 717 [DR. DHANANJAYA Y CHANDRACHUD, J.]

“Prohibition on Termination on Grounds of Insolvency A … 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 B 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. C 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 H

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A 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 B 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.” C (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 D 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 E Explanation by way of an amendment to Section 14(1).”

135Copy pinpoint135. 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. H

GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS. 719 [DR. DHANANJAYA Y CHANDRACHUD, J.]

136Copy pinpoint136. In order to fully appreciate the weight of this task upon us, it A 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’ B 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, C by one organ or part of the State, of functions that essentially belong to another…”

137Copy pinpoint137. 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: D

“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 E 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; F (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.” G

(emphasis supplied)

(1955) 2 SCR 225

124 (1973) 4 SCC 225 H

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138Copy pinpoint138. 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.

139Copy pinpoint139. 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.

140Copy pinpoint140. 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 E 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; F (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; G (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. H

GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS. 721 [DR. DHANANJAYA Y CHANDRACHUD, J.]

141Copy pinpoint141. 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.

142Copy pinpoint142. 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 D 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…”

143Copy pinpoint143. 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 G K.1 Analysis of the PPA

144Copy pinpoint144. 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 H

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A “[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 B Photovoltaic Grid Interactive power plants to produce the Electric Energy.”

145Copy pinpoint145. 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, C clarifies that the term ‘Commission’ refers to the GERC.

146Copy pinpoint146. 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 D Governmental Instrumentality.”

147Copy pinpoint147. 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 E 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. F

148Copy pinpoint148. 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 G 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: H

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“9.2. 1 Power Producer’s Default: The occurrence of any of the A following events at any time during the Tariff [sic term] of this Agreement shall constitute an Event of Default by Power Producer: xxx B 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.”

149Copy pinpoint149. 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.

150Copy pinpoint150. 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.

151Copy pinpoint151. At this juncture, it is important, at the risk of repetition, to note the concurrent findings of fact returned by the NCLT and the H

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A 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 B 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. …

C 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 D 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.’”

152Copy pinpoint152. 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

153Copy pinpoint153. 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

GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS. 725 [DR. DHANANJAYA Y CHANDRACHUD, J.]

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. C

154Copy pinpoint154. 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 D 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: E

“(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: H

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A 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 B 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.

155Copy pinpoint155. 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.

156Copy pinpoint156. 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— H

GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS. 727 [DR. DHANANJAYA Y CHANDRACHUD, J.]

(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 C 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. F (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 G 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 H

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A 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.”

157Copy pinpoint157. 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.

158Copy pinpoint158. 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 H 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.

159Copy pinpoint159. 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 C Section 14 included government licenses, grants, permits, quotas and concessions.

160Copy pinpoint160. 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.

161Copy pinpoint161. The inclusion of the Explanation to Section 14(1) and Section F 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 G 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 H

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A “...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 B 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) C

162Copy pinpoint162. 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 D 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. E (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 H going concern in accordance with Part II;

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Explanation.—For the removal of doubts, it is hereby clarified A that a resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger;”

163Copy pinpoint163. Although various provisions of the IBC indicate that the objective of the statute is to ensure that the corporate debtor remains a B ‘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 C 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.

164Copy pinpoint164. In this case, the PPA has been terminated solely on the ground of insolvency, which gives the NCLT jurisdiction under Section 60(5)(c) D 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 E 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: F “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 G 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, (11 th edn., Sweet and Maxwell 1962). H

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A 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 B 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)

165Copy pinpoint165. 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 C 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).

166Copy pinpoint166. 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.

GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS. 733 [DR. DHANANJAYA Y CHANDRACHUD, J.]

K.3 Dialogical Remedies A

167Copy pinpoint167. 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.

168Copy pinpoint168. In the past, this Court has adopted such dialogical remedies B – 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 C 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 D 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 E 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 F 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 G UOI may take further action after due consideration of such report.”

130 (2018) 14 SCC 360. H

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169Copy pinpoint169. 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 B 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’. C

170Copy pinpoint170. 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 D 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. E 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 F path between abdication and usurpation132. L NCLAT’s decision on the issue of liquidation

171Copy pinpoint171. 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 G 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 H Apex Courts of Brazil, India and South Africa (PULP, Pretoria 2013) 375, 393.

GUJARAT URJA VIKAS NIGAM LTD. v. MR. AMIT GUPTA & ORS. 735 [DR. DHANANJAYA Y CHANDRACHUD, J.]

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

172Copy pinpoint172. 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

173Copy pinpoint173. In conclusion, we hold that: G (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; H

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A (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 B (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.

174Copy pinpoint174. Pending application(s), if any, stand disposed of. C

Ankit Gyan Appeal dismissed.