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Critical Analysis of 'Essential Goods and Services' under the Insolvency and Bankruptcy Code, 2016

March 26, 2019

[Kritika Poddar is a graduate of Gujarat National Law University and is currently practicing in the Calcutta High Court.]

 

The Insolvency and Bankruptcy Code, 2016 (Code) was introduced to consolidate the legal framework of insolvency and bankruptcy. A significant provision of the Code is section 14 (Moratorium Period). The Moratorium Period is declared by the adjudicating authority[1] after admitting the application for initiating corporate insolvency process against the corporate debtor[2]. It is a period wherein all judicial proceedings against the corporate debtor are suspended and no new judicial proceedings can be instituted. The rationale behind this provision is to maximise the value of the corporate debtor so that there are no hindrances in the liquidation or revival of the company, as the case may be.

 

To ensure that the insolvency process is conducted without any obstructions,  section 14(2) of the Code provides that “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”.

 

What constitutes “essential goods and services” is envisaged under regulation 32 of the Insolvency and Bankruptcy (Insolvency Resolution Process for Corporate Persons), Regulations, 2016 (CIRP Regulations). Regulation 32 of the CIRP Regulations states that “the essential goods and services referred to in section 14(2) of the Code shall mean:

 

  1. electricity;

  2. water,

  3. telecommunication services; and

  4. information technology services, to the extent these are not a direct input to the output produced or supplied by the corporate debtor.”

 

The issue pertaining to this provision is that it compels the supplier of the above-mentioned essential goods and services to keep supplying such goods and services knowing that the costs incurred in providing such goods and services may never be realised from the corporate debtor. This is because section 53 of the Code, popularly known as the ‘waterfall provision’, lays down the priority in which the proceeds from sale of the liquidation assets will be distributed. The first and foremost costs that need to be paid in full are the insolvency resolution process costs and the liquidation costs. If the tribunal orders that the costs incurred by the supplier of the essential goods and services will form part of the insolvency resolution process costs and liquidation costs, then, in all probability, the supplier will be paid back in full when the company liquidates. The question of interest on these delayed payments is up to the  discretion of the tribunal.

 

In Uttarakhand Power Corporation Ltd. v. M/s. ANG Industries Ltd.,[3] the appellants disconnected the electricity supply to the respondents on the ground of non-payment of current dues. However, the application for restoration of electricity filed by the insolvency resolution professional was accepted by the adjudicating authority. The appellate tribunal held that as far as current charges were concerned, the appellant was entitled to the electricity supply charges from the date of restoration of electricity, and the insolvency resolution professional was required to pay the charges on a monthly basis. If the respondent failed to pay the amount within the stipulated period or in two consecutive months, then it would be open to the appellant to give notice and disconnect the electricity supply of the respondent.

 

Section 56 of the Electricity Act, 2003 (Electricity Act) gives the licensee/generating company the right to disconnect electricity supply by giving a 15-day notice to any person who neglects to pay any charge for electricity or any other sum due from him. Thus, section 14(2) of the Code is repugnant to section 56 of the Electricity Act. This issue was addressed in ABG Shipyard Ltd v. ICICI Bank Ltd. & Ors., where the tribunal while citing the Supreme Court judgment KSL and Industries Limited v. Arihant Threads Limited and Ors.[4] said that when there are two enactments laid down by Parliament and if there is any provision in such Acts which is repugnant to another, then “the latter of the two would prevail on the principle that the legislature was aware that it has enacted the earlier Act and yet chose to enact the subsequent Act with a non obstante clause”.

 

Section 238 of the Code states that “the provisions of this Code shall have effect, notwithstanding anything inconsistent in any other law for the time being in force or any instrument having effect by virtue of any such law”. In view of this provision, the tribunal held that “the provisions of the Electricity Act have no effect in case they are inconsistent with the provisions of the Code”. The tribunal also cited Ashoka Marketing Ltd. and Anr. v. Punjab National Bank and Ors. and explained that section 56 of the Electricity Act applies to the whole of India except the State of Jammu and Kashmir. Even the highest dignitaries have to face interruption of electricity charges in case the dues are not paid. However, the Code gives exemption for the corporate debtors undergoing the insolvency resolution process for a particular period. Thus, section 14(2) of the Code must prevail over section 56 of the Electricity Act. The tribunal further held that the electricity authorities are not entitled to disconnect the power supply to the corporate debtor albeit the electricity company can claim the power consumption charges as an “operational creditor” from the assets of the corporate debtor on par with other operational creditors based on the priority given under the Code and the relevant rules and regulations thereunder.

 

In light of these two orders by the tribunal, it is unclear as to how the dues of the supplier of essential goods and services will be paid. In the former case, the tribunal ordered that the costs of the essential service provider will form part of the insolvency resolution costs. However, in the latter case, the tribunal ordered that the dues of the essential service provider will be at par with those of the operational creditor, meaning thereby that it is uncertain if these dues will ever be paid in full.

 

Supply of electricity, telecommunication services, water and information technology are the four basic requirements that are needed to operate any entity irrespective of its field of operations. However, in addition to these four basic goods and services, supply of goods and services that will enable the corporate debtor to continue with its daily operations are essential.  This is essential as the whole purpose of the moratorium period is to apprise the possibility of the future survival of the entity. For example, if a tyre manufacturing company is the corporate debtor in question, raw materials such as various kinds of rubbers, steel cords, nylon and cotton fabric are all essential to continue the production of tyres and thus keep the corporate debtor as a “going concern”. Supply of merely the four goods and services stated in regulation 32 of the CIRP Regulations will not suffice to keep the corporate debtor as a “going concern”.

 

In Canara Bank v. Deccan Chronicle Holdings Limited,[5] the corporate debtor i.e. Deccan Chronicles Holdings Limited was in the business of publishing newspapers and periodicals. The tribunal observed that print media is an important sector. The tribunal also went on to hold that water, electricity, printing ink, printing plates, printing blankets and solvents will come under the purview of the exemption granted to essential services under section 14(2) of the Code as these are vital for the functioning of the corporate debtor.

 

However, the order does not explain why additional goods and services have been covered under the ambit of “essential goods and services” under section 14(2) of the Code. Regulation 32 of the CIRP Regulations uses the expression “the essential goods and services referred to in section 14(2) shall mean”, meaning thereby that the definition is exhaustive. The use of the word “mean” indicates that the definition is a hard-and-fast definition and no other meaning can be assigned to the expression that is put down in definition. The tribunal does not have the power to include additional goods and services under the ambit of section 14(2) of the Code. However, on the other hand, what constitutes “essential goods and services” will vary depending on the nature of activities that are undertaken by the corporate debtor in question. If the rationale of the provision is to keep the corporate debtor as “a going concern”, it is not possible to restrict the ambit of “essential goods and services” to the four categories mentioned in section 14(2) of the Code.

 

[1]The Code, Section 13.

[2]Ibid, Section 7.

[3]Uttarakhand Power Corporation Ltd. v. M/s. ANG Industries Ltd., NCLAT, New Delhi, Company Appeal (AT) (Insolvency) No. 298 of 2017).

[4]KSL and Industries Limited v. Arihant Threads Limited and Ors., (2015) 1 SCC 166.

[5]Canara Bank v. Deccan Chronicle Holdings Limited, Hyderabad Bench of the NCLT, 2017.

 

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