2024 (8) TMI 325 - HC - Insolvency and Bankruptcy

TANGEDCO electricity disconnection upheld despite insolvency proceedings as operational creditors retain constitutional property rights

The National Sewing Thread Co. Ltd. Versus The Superintending Engineer TANGEDCO, The Assistant Electrical Engineer TANGEDCO

The Madras HC dismissed a petition seeking to quash TANGEDCO's demand notice for electricity arrears and restore connection. The petitioner's electricity ... Seeking to quash the demand notice of the respondents (TANGEDCO) for arrears of unpaid electricity charges - direction to the respondents to provide the electricity connection - electricity connection disconnected for non-payment of current consumption charges, prior to the commencement of insolvency proceedings - Regulation 17 of the Electricity Supply Code. IBC & Scope for Misuse - Is the petitioner liable to pay the arrears of electricity charges which has arisen prior to the commencement of the insolvency proceedings, and will it survive after the successful completion of the resolution process? - HELD THAT:- Having understood the scheme of the IBC, it is now time to navigate through the authoritative pronouncements of the Hon’ble Supreme Court. It is neither about the creation of two broad categories of creditors – the financial creditors and the operational creditors by the IBC, nor about the differential criterion which IBC has employed to define the character of both these categories of creditors, whose alleged inequality of status the Supreme Court has rejected on its way to uphold the constitutionality of the IBC in the Swiss Ribbons Case [2019 (1) TMI 1508 - SUPREME COURT]. It is about the protection and the assurance the IBC offers to the operational creditors and the role of the Adjudicating Authority. This exercise is both inevitable and mandatory since this Court has to ensure that the petitioner, with or without the collaboration of its financial creditor, has not been converted the IBC into mechanism to deny the respondent of their dues by a shrewd manipulation of the process it provides. Operational Creditors & Right to Property - HELD THAT:- The object of the IBC evidently is to minimize the loss of various categories of creditors even as it attempts to salvage the corporate debtor from its commercial extinction. Appreciable it is, but it may not be let to gloss over the fact that every claim of the operational creditors involves a right to their property under Article 300 A of the Constitution, which the Supreme Court now reads it as a facet of human right and as integral to the right to life under Article 21 of the Constitution vide the ratio in Lalaram Vs Jaipur Development Authority [2015 (12) TMI 1866 - SUPREME COURT] read alongside the ratio in Tukaram Kana Joshi Vs MIDC [2012 (11) TMI 1234 - SUPREME COURT], and approved in VIDYA DEVI VERSUS THE STATE OF HIMACHAL PRADESH & ORS. [2020 (1) TMI 1691 - SUPREME COURT]. This is the major premise. Ordinarily, a person with a claim has the right of action to enforce the claim before a neutral arbiter, be it the Court or a tribunal, both of which are positioned equidistantly from opposing claims. This is the minor premise. IBC & Neutral Tribunal - HELD THAT:- It could now be derived that where a substantive right to property is in peril, the right of action before a neutral tribunal springs into action for obtaining justice in the cause. This is fundamental to Constitutional jurisprudence - the scheme of IBC provides for a two-tier mechanism for approval of a resolution plan – first by the CoC and next by the Adjudicating Authority. Now, unless the Adjudicating Authority is treated as a neutral tribunal for the operational creditors to defend and secure its right to property which they have in their claims against any perceived unfair and inequitable treatment meted out to them by the CoC, even if the CoC has acted bonafide, there is a lurking danger of IBC straying into the zone of unconstitutionality for breaching the dictum of the Constitution Bench in the Madras bar Association case [2010 (5) TMI 393 - SUPREME COURT]. What then is the role which the Adjudicating Authority is expected to play? - HELD THAT:- From the Essar Steel case to the Rainbow Papers case [2022 (9) TMI 317 - SUPREME COURT] and other decisions, the Adjudicating Authority has been told that its duty is limited to satisfying itself of the due compliance of Sec.30(2) requirement by the CoC when the latter approved the resolution plan. The Essar Steel in particular has held that the Adjudicating Authority shall not substitute its sense of fairness and equity to replace the commercial wisdom of the CoC. The Rajagopalan effect, it must be stated, does not stop with bringing in clarity in understanding the expression ‘commercial wisdom’ of the CoC, but also has interfered to realign the understanding of the duty of the Adjudicating Authority. Therefore, even though the Adjudicating Authority may not sit in appeal over the commercial wisdom of the CoC, still it is required to exercise a jurisdiction, akin to a revisional jurisdiction, to ascertain the correctness of what has been done before and by the CoC. Finality of the Resolution Plan & the CST - HELD THAT:- In the case of disclosed creditors, CST will definitely apply, if any of the aggrieved creditors did not opt to challenge the resolution plan as approved under Sec.31 before the Appellate Authority, the NCLAT. So far as the undisclosed creditors are concerned if CST is applied, they become instant victims of the callousness of the IRP and the RP as well as the deliberate silence of the suspended board in not revealing them - the corporate debtors themselves must be classified into two: The MSME corporate debtor who had the opportunity to participate in the resolution process effectively to the extent of presenting a resolution plan; and (b) non MSME corporate debtor. What the Petitioner may anticipate? - HELD THAT:- Fraud has to be unearthed through inferences from attending circumstances. It is hence, mandatory not to eschew the attending circumstances from judicial purview while evaluating the bonafides of a resolution plan, more significantly the fairness expected of it as there is an obligation on the CoC to protect the interests of the operational creditors. While the legislative intent to save the corporate debtor as a going concern may be appreciable, should it be at the cost of others, more so when IBC offers adequate space for engineering manipulation? The larger question therefore, is why should the Parliament bend backwards to protect one corporate debtor at the risk of exposing the public interest to peril? The present case, a case-study merely, illustrates how IBC could be manipulated to defeat the interests of the undisclosed creditors of the corporate debtor. This petition is dismissed and given the nature of questions it raised, there will no order as to costs. Issues Involved:1. Whether the petitioner is liable to pay arrears of electricity charges post-CIRP.2. The role and obligations of the Committee of Creditors (CoC) under the IBC.3. The duty of the Interim Resolution Professional (IRP) and Resolution Professional (RP) in disclosing liabilities.4. The application of the Clean Slate Theory (CST) in the context of undisclosed creditors.5. The role of the Adjudicating Authority in approving resolution plans.6. The potential for misuse of the IBC.Detailed Analysis:1. Liability for Electricity Arrears Post-CIRP:The petitioner, a public limited company registered under the MSME Act, faced a Corporate Insolvency Resolution Process (CIRP) due to financial distress. TANGEDCO issued a demand notice for unpaid electricity charges, which the petitioner contested, claiming that the CIRP extinguished all outstanding dues not included in the resolution plan. TANGEDCO argued that its claim was valid as it was governed by the Electricity Act, 2003, and the Electricity Supply Code, which mandated payment of arrears for new service connections.2. Role and Obligations of the CoC:The CoC, primarily composed of financial creditors, has the authority to approve resolution plans. The court emphasized that the CoC must act with complete information and fairness towards operational creditors. The CoC's commercial wisdom is paramount, but it must comply with Section 30(2) of the IBC, ensuring operational creditors receive at least the liquidation value of their claims. The court highlighted that the CoC's duty extends beyond self-interest, requiring them to act as trustees for operational creditors.3. Duty of the IRP and RP in Disclosing Liabilities:The IRP and RP are responsible for preparing accurate statements of assets and liabilities and an Information Memorandum. They must exercise due diligence in identifying all creditors, including undisclosed ones. The court criticized the lack of professionalism and due diligence by some IRPs and RPs, stressing their central role in the resolution process. The suspended board of the corporate debtor is also obligated to assist in full disclosure.4. Application of the Clean Slate Theory (CST):The CST posits that once a resolution plan is approved, all pre-existing claims against the corporate debtor are extinguished. However, the court clarified that CST should not protect fraudulent or undisclosed liabilities. If the same promoters continue post-resolution, undisclosed creditors' claims survive against them. The CST applies to protect third-party resolution applicants from future claims but does not shield the erstwhile promoters from their obligations.5. Role of the Adjudicating Authority:The Adjudicating Authority (NCLT) must ensure that the resolution plan meets the requirements of Section 30(2) of the IBC. The court emphasized that the NCLT is not a mere rubber stamp and must exercise a revisional jurisdiction to verify the completeness and fairness of the resolution plan. The NCLT can refuse approval if the plan is based on incomplete information or fails to treat operational creditors fairly.6. Potential for Misuse of the IBC:The court expressed concerns about the misuse of the IBC by stakeholders, including debtors, creditors, and resolution professionals. It highlighted instances of collusion and manipulation within the CIRP process. The court called for a thorough review of the IBC's functioning to prevent such abuses and ensure the statute's integrity and effectiveness.Conclusion:The petition was dismissed, and the court highlighted the need for legislative review and correction to prevent the IBC from being manipulated to the detriment of operational creditors and public interest. The judgment emphasized the importance of fairness, transparency, and due diligence in the CIRP process.