Power Purchase Agreements and Discom Insolvency

A power purchase agreement cannot be terminated merely because the generator supplying it has entered a corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016, since the Supreme Court held in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta that such termination defeats the Code's object of keeping the corporate debtor alive. A genuine, pre-existing performance default is treated differently. Tariff and licence disputes stay with the Electricity Regulatory Commission under the Electricity Act, 2003, while disputes arising solely from the insolvency fall to the National Company Law Tribunal under Section 60(5)(c). This post covers both directions of failure, an insolvent generator and a defaulting distribution company.

Why Does a Power Purchase Agreement Resist Ordinary Supply Contract Analysis?

Three features do the damage. The tenor is long, so a power purchase agreement (PPA) is almost always the corporate debtor's most valuable asset or its largest liability, never a marginal contract. The tariff is determined or approved by a statutory commission rather than agreed freely, so the parties cannot renegotiate their way out of distress. And the buyer is usually a state distribution licensee whose capacity to pay turns on state finances and political tariff decisions rather than on ordinary commercial performance.

The result is that familiar questions produce misleading answers. A termination right that would be unremarkable in a vendor contract can extinguish a generator. A recovery strategy built around a demand notice runs into a debtor that is a state instrumentality. A resolution plan that assumes the acquirer simply inherits the contract as written has to reckon with a regulator that never signed it but controls its price.

Gujarat Urja and the Boundaries of the Ipso Facto Rule

Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta [(2021) 7 SCC 209], decided on 8 March 2021, is the anchor authority, and it is convenient that it happens to be a PPA case. The corporate debtor was a solar generator whose PPA with the state distribution utility was in substance its only revenue-earning contract. The utility issued a termination notice relying on a clause treating the commencement of insolvency as an event of default. The Supreme Court held that the National Company Law Tribunal (NCLT) had jurisdiction under section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (the Code) to decide the dispute, because it arose solely from and related to the insolvency of the corporate debtor, and it sustained the restraint on termination.

Two strands of the reasoning should be kept apart when advising. The first is the ipso facto point: a contract is not to be terminated on the sole ground that a corporate insolvency resolution process (CIRP) has commenced, where termination would defeat the Code's object of keeping the debtor alive. The second, and the one counsel more often has to argue, is jurisdictional. Section 60(5)(c) is a residuary provision, and the Court was clear that it does not confer a general commercial jurisdiction on the tribunal. The nexus between the dispute and the insolvency has to be genuine.

The Limit Drawn in TCS v. Vishal Ghisulal Jain

Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain [(2022) 2 SCC 583], decided on 23 November 2021, supplies the corrective. A facilities agreement had been terminated for deficient service rather than for insolvency. The tribunals below stayed the termination on the footing that the corporate debtor was in CIRP. The Supreme Court set that aside, holding that the residuary jurisdiction under section 60(5)(c) cannot be invoked where termination rests on grounds unrelated to the insolvency, and faulting the tribunals for making no factual finding that termination would in fact jeopardise the debtor's survival.

Taken together the two decisions yield a workable test. A distribution licensee that wants out of a PPA during a generator's CIRP must be able to point to a real, contemporaneously documented performance failure, and should expect the resolution professional to argue that termination would be fatal. A generator resisting termination should be assembling survival evidence rather than relying on the contractual argument alone, because that is the finding the tribunal has to make.

Two Regulators and One Tribunal

The Electricity Act, 2003 confers on the Central and State Electricity Regulatory Commissions the power to determine tariff and to adjudicate disputes between generating companies and licensees. The Code confers on the NCLT jurisdiction over questions arising out of or in relation to the insolvency of a corporate debtor. Where a PPA dispute is genuinely about tariff, about a regulatory approval, or about the terms of a licence, it belongs before the Commission and the tribunal ought not to take it on. Where it is about whether the contract may be ended because the counterparty is insolvent, it belongs to the NCLT. Framing the relief sought is therefore the first drafting decision, not an afterthought, because a forum objection sustained six months into a 330 day process is expensive in the only currency the Code cares about.

Mapping Both Directions of Failure

The two scenarios are not mirror images. A generator in CIRP is inside a statutory process with defined timelines and a professional in control. A defaulting discom is outside any insolvency process and will almost certainly stay outside it. The table sets out where each issue lands.

When the Distribution Company Is the Defaulter

Can a Discom Be Taken to the NCLT at All?

The threshold question is whether the discom is a corporate person within section 3(7) of the Code. Most state distribution utilities were corporatised during the reform programme and exist as companies incorporated under the Companies Act, usually as government companies wholly held by the state. A government company is still a company, and section 3(7) contains no exclusion for state ownership. The Ministry of Power has stated publicly that insolvency proceedings may be initiated against state-owned distribution and generation companies that default. Where a state's distribution function still sits in a statutory board or a government department rather than a company, the answer changes and the Code does not reach it, so establishing the counterparty's actual legal form is a diligence step rather than an assumption.

That is the legal answer. The practical answer is that applications against distribution licensees seldom reach admission, because payment tends to arrive once admission starts to look likely and the matter is then withdrawn. Counsel should present the filing to the board for what it is: a credible lever that accelerates settlement, not a route to a resolution plan for a public utility. It also has to be weighed against the commercial reality that the generator will be selling to the same buyer for the next two decades, and against the Commission's own machinery for a failing licensee under sections 19 to 24 of the Electricity Act, 2003, which deal with revocation of a licence and the sale or vesting of the utility.

The Late Payment Surcharge Rules as the Route That Actually Recovers Money

The Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, notified by the Ministry of Power on 3 June 2022, are the mechanism that moves cash. Outstanding amounts carry a late payment surcharge from the due date at a base rate, escalating by half a percentage point for each successive month of default and capped at three percentage points above the base rate. Legacy dues were converted into equated instalments payable on a defined monthly schedule. The enforcement lever is the regulation of power supply: sustained default curtails the licensee's access, with the generating company obliged to supply only a reduced proportion of contracted power and free to sell the balance through the power exchanges. Later amendments have addressed restoration of access once outstanding dues are cleared.

For a generator carrying heavy receivables the monitoring discipline follows from the rules themselves. Invoice on time and in the prescribed form, because the surcharge clock runs from a due date that depends on it. Track each month of default separately, since the rate escalates monthly rather than in a block. Never allow a part payment to be received without an express written allocation between principal and surcharge. And put the regulation of power supply trigger into the board reporting pack, because it is the one mechanism in the framework that imposes a cost on the buyer instead of on the seller.

How a Resolution Plan Treats Tariff, Licences and the Codified Clean Slate

A resolution applicant acquiring a generator wants to know whether it inherits the PPA and at what price. The plan binds all stakeholders once approved under section 31, and the contract continues on its existing terms in the hands of the reconstituted company. The tariff was never a term the parties could rewrite between themselves, so an applicant that has priced its bid on the assumption of a renegotiated tariff has assumed something the regulatory framework does not permit without a fresh approach to the Commission.

Two provisions inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2026 and in force since 26 May 2026 shift the calculus. Section 31(5) protects licences, permits, registrations and grants from suspension or termination following approval of a plan, which matters directly to a generator whose connectivity, open access and statutory clearances are worth as much as the plant. Section 31(6) extinguishes all claims against the corporate debtor and its assets on approval, putting the clean slate principle in the statute. A distribution licensee holding unquantified counterclaims for liquidated damages, deemed generation or availability shortfall has to value and lodge them before approval, because afterwards they are simply gone.

The exposure that survives for an applicant sits elsewhere. PPAs routinely restrict changes in the shareholding of the generating company for a lock-in period and require the procurer's consent to any transfer of control. A resolution plan does precisely what those clauses were drafted to prevent. Whether the restriction survives the plan, and whether consent can be dispensed with, ought to be addressed expressly in the plan document rather than discovered later by a monitoring committee.

What Should a Distribution Licensee Do When Its Generator Enters CIRP?

A distribution licensee whose supplier has been admitted to CIRP has two immediate concerns, and they pull against each other. Securing supply argues for cooperation with the professional. Protecting the balance sheet argues for calling in security. Both have to be handled in the same fortnight.

On supply, section 14(2) of the Code assists indirectly by protecting the supply of essential goods and services to the corporate debtor, which keeps the plant's own inputs flowing. What the licensee needs on top of that is a written interim protocol with the resolution professional covering scheduling, metering, invoicing, payment mechanics during the process and the treatment of post-admission dues as insolvency resolution process costs. An oral understanding with an interim professional who may shortly be replaced is not a control.

On security, the identity of the obligor decides everything. A guarantee or undertaking given by the corporate debtor cannot be enforced against it during the moratorium. A performance bank guarantee issued by a bank on the generator's instruction is the bank's own independent obligation and falls outside section 14, so it may be invoked subject to the established fraud and irretrievable injustice exceptions. A licensee whose payment security came from the generator's parent, or from an escrow funded by the generator, should establish precisely where each instrument sits before doing anything else. The interaction between an urgent invocation and any escalation or notice pre-conditions in the contract's dispute clause is worth checking at the same time, and is discussed in this note on drafting and enforcing multi-tier dispute resolution clauses.

Frequently Asked Questions

Can a discom terminate a PPA because the generator has entered CIRP?

Not on that ground alone. Gujarat Urja establishes that a termination resting solely on the commencement of insolvency will be restrained where it would defeat the object of keeping the corporate debtor alive. If you have a genuine, documented performance default that predates the admission order, the position is different, and the reasoning in the TCS decision means the tribunal must make an actual finding about the effect on survival before it interferes.

Can we file an insolvency application against a state distribution company for unpaid dues?

If it is incorporated as a company, yes in principle, because a government company remains a corporate person under section 3(7) of the Code. Check the counterparty's legal form first, since some states still route distribution through a board or a department, which the Code does not reach. Treat the filing as commercial leverage that usually produces payment before admission rather than as a genuine restructuring route, and factor in that you will be selling to the same buyer for years afterwards.

Does the NCLT or the Electricity Regulatory Commission decide a PPA dispute during a CIRP?

It depends on what the dispute is really about. Tariff determination, regulatory approvals and licence conditions belong to the Commission under the Electricity Act, 2003. A dispute that arises solely from the insolvency, such as an attempted termination triggered by the CIRP, falls within the NCLT's residuary jurisdiction under section 60(5)(c). Decide the characterisation before drafting the prayer, because the same facts can support either framing and only one of them will survive a jurisdictional objection.

Does a resolution applicant take over the PPA at a renegotiated tariff?

No. The contract continues on existing terms, and the tariff is a regulated term that neither party can alter bilaterally. Any change requires an approach to the appropriate Commission on its merits. Price your bid on the existing tariff and treat a revision as an upside you may not get.

Can we invoke the generator's performance guarantee after the admission order?

If it is a bank guarantee, ordinarily yes, because the bank's obligation is independent of the corporate debtor and sits outside the section 14 moratorium, subject to the recognised fraud and irretrievable injustice exceptions. If the instrument is an undertaking from the corporate debtor itself, or security over the debtor's own assets, the moratorium bites. Read the instrument before instructing anyone to invoke.

What happens to our liquidated damages counterclaim against a generator in CIRP?

It has to be quantified and filed with the resolution professional, including where it is contingent or disputed. Section 31(6) of the Code, in force since 26 May 2026, extinguishes claims against the corporate debtor on approval of a resolution plan, so a counterclaim that was never lodged does not survive into the acquirer's hands. Do not hold it back as a negotiating card for the post-approval period.

What happens to a generator's connectivity and open access approvals when a resolution plan is approved?

Section 31(5) of the Insolvency and Bankruptcy Code, 2016, in force since 26 May 2026, protects licences, permits, registrations, quotas, concessions, clearances and grants held by the corporate debtor from suspension or termination on the ground of insolvency once a resolution plan is approved under section 31. For a generator, this covers connectivity and open access approvals along with statutory clearances that keep the plant operating, so an incoming resolution applicant does not have to re-apply for them merely because the previous entity went through insolvency.

Can a distribution licensee stop scheduling power from a generator that has entered CIRP?

Not unilaterally on that ground. Section 14(2) of the Code protects the supply of essential goods and services to the corporate debtor during the moratorium, and a resolution professional will normally keep the plant running to preserve its value as a going concern. A licensee wanting continuity and payment clarity should agree a written interim protocol with the resolution professional covering scheduling, metering, invoicing and the treatment of post-admission dues as insolvency resolution process costs, rather than curtail supply informally.

How is the late payment surcharge calculated when a discom defaults on payments to a generator?

Under the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, notified on 3 June 2022, overdue amounts accrue a surcharge from the due date at a base rate that escalates by half a percentage point for every additional month of default, capped at three percentage points above the base rate. Generators should track each month of default separately, since the escalation compounds monthly, and ensure that any part payment received is expressly allocated between principal and surcharge in writing.

What is the regulation of power supply mechanism and when does it apply against a discom?

The regulation of power supply mechanism, provided in the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, allows a generating company to curtail supply once a distribution licensee's outstanding dues cross the threshold set under the rules, requiring the generator to supply only a reduced proportion of the contracted capacity while selling the balance through the power exchanges. It is the one enforcement lever in the framework that imposes a cost directly on the defaulting buyer rather than on the generator, and later amendments provide for restoring full supply once the dues are cleared.

Does a shareholding lock-in clause in a PPA survive a resolution plan that transfers control of the generator?

The Insolvency and Bankruptcy Code, 2016 does not automatically override a change-of-control or shareholding lock-in restriction in a power purchase agreement, so a plan that transfers control to a new resolution applicant can still engage the procurer's consent requirement written into the contract. Whether the restriction survives approval, and whether consent can be dispensed with, should be addressed expressly in the resolution plan document itself rather than left for a monitoring committee to resolve after approval.

Within what time must a distribution company lodge its claim against a generator undergoing CIRP?

A claim, including a contingent or disputed one such as liquidated damages for a shortfall in availability, must be lodged with the resolution professional within the period specified in the public announcement made under the Insolvency and Bankruptcy Code, 2016, which the CIRP Regulations ordinarily set at fourteen days from the insolvency commencement date, though the resolution professional may accept a late claim before the resolution plan is approved. A claim never lodged is extinguished on approval of the plan under section 31(6) and cannot be revived afterward.

Can a generator ask the Electricity Regulatory Commission to revoke a defaulting discom's licence instead of pursuing insolvency?

Sections 19 to 24 of the Electricity Act, 2003 give the appropriate State Electricity Regulatory Commission its own machinery for a distribution licensee that persistently defaults or fails to perform, including revocation of the licence and provision for the sale or vesting of its undertaking in another entity. This regulatory route runs independently of the Insolvency and Bankruptcy Code, 2016 and is generally the more realistic remedy against a state-owned distribution utility, since an insolvency filing against such an entity rarely proceeds to admission.

What payment security arrangements are commonly used to protect a generator against a defaulting discom, as distinct from a bank guarantee?

Beyond a conventional bank guarantee, PPAs with distribution licensees often build in a dedicated payment security mechanism such as a letter of credit that the discom must maintain and replenish, or a tripartite escrow arrangement directing a portion of the discom's own revenue toward the generator's dues ahead of other creditors. These instruments operate independently of any insolvency process affecting either party and give the generator a claim against the bank or escrow agent rather than against the discom directly, which is why generators should confirm which mechanism, if any, backs a given PPA before a payment dispute arises.

See also: Can In-House Counsel Appear Before the NCLT Without an Advocate?.