2025 (3) TMI 13 - AT - IBC

NCLAT prevents electricity supply termination to corporate debtor during CIRP under Section 14(2) IBC

Maharashtra State Electricity Distribution Company Ltd. & Anr. Versus Ravi Sethia Resolution Professional of Morarjee Textiles Ltd.

NCLAT upheld the Adjudicating Authority's order preventing termination of electricity supply to corporate debtor during CIRP. The tribunal held that ... Obligation to pay for electricity consumed during the CIRP period - Termination of electricity supply to the corporate debtor during the Corporate Insolvency Resolution Process (CIRP) under Section 14(2) of the Insolvency and Bankruptcy Code (IBC) - HELD THAT:- Section 14(2A) was inserted by Act 1 of 2020 w.e.f. 28.12.2019. Sub-section (2A) contemplates that where the interim resolution professional or resolution professional considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern when 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 dues arising from such supply during the moratorium period. The goods or services which are critical to protect and preserve the value of the corporate debtor is thus dependent on the decision taken by the IRP and the resolution professional. Sub-section (2) and (2A) uses two expressions i.e. ‘essential goods or supply’ (which may be specified). The essential supply thus has need to be specified by the Board as per Regulation and Regulation 32 of the CIRP Regulations specified the ‘essential supplies’. Thus, essential supplies have to be treated in a manner and to the extent as provided in Regulation 32. It is thus clear that the electricity which is not a direct input to the output produced is essential supply within the meaning of Section 14(2) read with Regulation 32 of the CIRP Regulations and it is clearly covered by the protection extended by legislature under Section 14(2). The Hon’ble Supreme Court again in Madanlal Fakir Chand Dudhediya vs. Shree Changdeo Sugar Mills Ltd. and Ors. [1962 (3) TMI 33 - SUPREME COURT] had held that first rule of construction is that the words used in the section must be given their plain grammatical meaning and the two sub- sections must be read as parts of an integral whole and an attempt should be made in construing them to reconcile them. The fact that payment to essential supplies can be made as per the decision of the resolution professional even during currency of the CIRP when the costs is incurred by the resolution professional. The statutory scheme, however, as contained in Section 14(2) prohibits the supplier of essential goods from terminating/ discontinuing the supply during moratorium period. As per statutory scheme, the corporate debtor is entitled to receive the essential goods and services during moratorium and even the payment is not made of essential goods and services that shall form part of the CIRP costs. The above Discussion Paper highlights the issue of operational difficulty with regard to supply of electricity under Section 14(2) read with Regulation 32. The illustration which is now sought to be amended, amending the regulation now contemplate that if the corporate debtor operates a manufacturing facility that may be treated as critical service by the insolvency professional for which current dues for such services must be paid. In M/s Power Mech Projects Ltd. vs. Essar Power (Jharkhand) Ltd. & Anr. [2025 (2) TMI 217 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI - LB] the effect and consequences of Discussion Paper considered. It is already held that the Discussion Paper has no effect on statutory scheme operating in the field and Discussion Paper only can be basis for amending regulation. The Discussion Paper, thus highlights the issues and the amendment in statutory scheme, if any, may take place only when the regulation are amended and notified. The resolution professional, as assured to the appellant, need to take steps to clear the electricity dues, however, non-payment of electricity dues cannot be a ground to discontinue the electricity which is a clear mandate by Section 14(2). The IBBI has already taken notice of the operational issues and having proposed Regulation 32 of the CIRP Regulations, need to expedite its process and amendment, if any, which may be carried out at an early date to mitigate the hardship of the supplier of essential services. Conclusion - i) The order of the Adjudicating Authority directing Appellant not to discontinue the electricity connection necessary for running the manufacturing facilities of the corporate debtor is not interfered with. ii) The resolution professional shall endeavour to pay the electricity dues as assured by it through various letters to the Appellant by taking steps including raising interim finance, if any. iii) IBBI in furtherance of its Discussion Paper dated 04.02.2025 which proposes amendment in Regulation 32 may expedite its steps regarding amendment, if any, which amendment may redress several operational issues as noticed by the IBBI itself. Appeal disposed off - Let Registry communicate the copy of this order to Insolvency and Bankruptcy Board of India (IBBI). ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:1. Whether the electricity supply to the corporate debtor, Morarjee Textile Limited, can be terminated during the Corporate Insolvency Resolution Process (CIRP) under Section 14(2) of the Insolvency and Bankruptcy Code (IBC).2. Whether the corporate debtor is obligated to pay for electricity consumed during the CIRP period under Section 14(2A) of the IBC.3. The interpretation and application of the terms 'essential supply' and 'critical supply' under Sections 14(2) and 14(2A) of the IBC, respectively.ISSUE-WISE DETAILED ANALYSIS1. Termination of Electricity Supply under Section 14(2)Relevant legal framework and precedents: Section 14(2) of the IBC mandates that the supply of essential goods or services to the corporate debtor shall not be terminated during the moratorium period. Regulation 32 of the CIRP Regulations specifies electricity as an essential supply unless it is a direct input to the output produced by the corporate debtor.Court's interpretation and reasoning: The Tribunal interpreted that electricity supply is an essential service under Section 14(2) as it is not a direct input to the output produced by the corporate debtor. The Tribunal emphasized that the statutory scheme obliges the electricity supplier to continue the supply during the moratorium period.Key evidence and findings: The Resolution Professional (RP) relied on Section 14(2) to argue that electricity is an essential service and cannot be disconnected. The Tribunal found no evidence that electricity was a direct input to the output produced by the corporate debtor.Application of law to facts: Given the statutory protection under Section 14(2), the Tribunal concluded that the electricity supply should not be terminated, aligning with the legislative intent to keep the corporate debtor as a going concern.Treatment of competing arguments: The Appellant argued that the corporate debtor should pay for electricity during the CIRP, but the Tribunal focused on the statutory obligation to continue supply under Section 14(2).Conclusions: The Tribunal upheld the Adjudicating Authority's direction to not disconnect electricity during the CIRP, as it is an essential service under Section 14(2).2. Payment for Electricity during CIRP under Section 14(2A)Relevant legal framework and precedents: Section 14(2A) of the IBC allows the RP to determine if a supply is critical to preserve the value of the corporate debtor, requiring payment during the CIRP. The Tribunal referenced previous judgments distinguishing between essential and critical supplies.Court's interpretation and reasoning: The Tribunal noted that the RP did not rely on Section 14(2A) to classify electricity as a critical supply requiring payment. Instead, the RP relied on Section 14(2), which does not mandate payment during the CIRP.Key evidence and findings: The RP's communications indicated reliance on Section 14(2) rather than 14(2A), and partial payments were made to the Appellant.Application of law to facts: The Tribunal differentiated between the protection offered under Section 14(2) and the payment obligations under Section 14(2A), concluding that the RP's reliance on Section 14(2) did not obligate immediate payment.Treatment of competing arguments: The Appellant's argument for payment based on Section 14(2A) was not applicable as the RP did not classify electricity as a critical supply under this section.Conclusions: The Tribunal found no obligation for immediate payment under Section 14(2) but acknowledged the RP's assurance to settle dues.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The statutory scheme, however, as contained in Section 14(2) prohibits the supplier of essential goods from terminating/ discontinuing the supply during moratorium period.'Core principles established: The Tribunal reinforced the distinction between essential and critical supplies, emphasizing the statutory protection for essential supplies under Section 14(2) without immediate payment obligations.Final determinations on each issue:1. The Tribunal upheld the direction to maintain electricity supply during the CIRP as an essential service under Section 14(2), without immediate payment obligations.2. The RP's reliance on Section 14(2) rather than 14(2A) was appropriate, as electricity was not classified as a critical supply requiring payment during the CIRP.3. The Tribunal encouraged the RP to clear electricity dues as assured, while acknowledging the statutory protection for essential services.