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NCLAT: Discoms can’t cancel PPA amid corporate insolvency process

The NCLAT agreed that the proposition that a power plant and its PPA “form one integrated economic asset” appeared to a rational one, and therefore the value of this asset must be protected by the moratorium rules under IBC.

Written by Aashish Aryan | New Delhi | Updated: October 22, 2020 10:05:21 am
maharashtra electricity bill, maharashtra Power bill, maharashtra power bill in lockdown.covid lockdown power bills, indian expressThe ruling by the NCLAT came in the CIRP process of Lanco Infratech, which is undergoing liquidation. (Representative image: Reuters)

In a ruling that is likely to come as a breather for power companies undergoing liquidation or insolvency under the Insolvency and Bankruptcy Code (IBC), the National Company Law Appellate Tribunal (NCLAT) has said that power distribution companies or discoms can not terminate, during the corporate insolvency resolution process (CIRP), the power purchase agreements (PPA) they had signed with power generation companies

Upholding an order passed by the Hyderabad bench of the National Company Law Tribunal (NCLT), the NCLAT agreed that the proposition that a power plant and its PPA “form one integrated economic asset” appeared to a rational one, and therefore the value of this asset must be protected by the moratorium rules under IBC.

“This asset (PPA) 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,” a two member bench of the NCLAT led by Justice Jarat Kumar Jain said in their judgment on October 20.

The ruling by the NCLAT came in the CIRP process of Lanco Infratech, which is undergoing liquidation. The company had in on April 29, 2010, signed a power purchase agreement with Gujarat Urja Vikas Nigam Limited (GUVNL) for selling power generated from its 5 mega-watt solar photovoltaic plant situated at Bhadrada village of Patan district in Gujarat.

Having defaulted on payment of Rs 63 crore loan given by Yes Bank, Lanco Infratech was taken to insolvency but could not find a buyer. The company was subsequently ordered to be liquidated. During the CIRP process, however, GUVNL moved to terminate the PPA it had signed with Lanco Infratech, after giving the due notice of 30 days.

Yes Bank, the main financial creditor of the company, however, objected to GUVNL’s PPA termination notice, arguing that it would lead to decimation of the value of the power plant even in liquidation.

The Hyderabad bench of NCLT, while agreeing with Yes Bank’s submissions, said that power plants, such as the one present at Patan, and PPA signed by discoms with these companies, were to be considered “one integrated economic asset”.

An order of moratorium, would therefore be applicable even in the cases of a PPA, which therefore can not be terminated midway into the corporate insolvency resolution process.

The ruling is likely to come as a breather for several power plants, including 15 coal-based thermal power plans with total PPA tie-up worth nearly 12,000 MW, which are currently undergoing insolvency. Of these 15, as many as six have signed PPA with discoms for their full capacity, while the other nine have inadequate or lesser than capacity PPAs signed.

As of January 2020, the power sector had total non-performing assets worth up to Rs 2 lakh crore. The NCLAT judgment will help power companies that are currently in various stages of CIRP, the director general of Association of Power Producers Ashok Khurana, said.

“The project or the (power) plant without the PPA has very minimal value. So, if the PPA is cancelled when you are taken to NCLT , the plant value reduces significantly . Without the PPA and coal linkage, cash flow of project becomes ‘nil’. It is like a telecom company company whose spectrum is taken away. What is left in the telecom company if there is no spectrum,” Khurana said.

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