POWER SUPPLY NOT TO BE DISCONNECTED DURING MORATORIUM PERIOD

[Mr. M. GOVINDARAJAN]

Admission of corporate insolvency resolution process

The Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides for the initiation of corporate insolvency resolution process by a financial creditor, an operational credit against a corporate debtor and also initiating this process by the corporate applicant itself.  The Code prescribes the procedure for filing an application before the Adjudicating Authority in the prescribed form and in the prescribed manner.

The Adjudicating Authority on considering the application is either to reject the application, if the application is found to be incomplete or admit the application, if the application is found correct in all aspects.  The Adjudicating Authority, after admission of the application shall, by an order-

• declare a moratorium;
• cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims; and
• appoint an interim resolution professional.

Moratorium

Section 14 provides for the moratorium.  Section 14(1) provides that subject to the provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following-

• the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
• transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
• any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
• the recovery of any property by owner or less or where such property is occupied by or in the possession of the corporate debtor.

Section 14(2) 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.

Section 14(3) provides that the provisions of section 14(1) shall not be applicable to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

Section 14(4) provides that the order of moratorium shall have the effect from the date of such order till the completion of corporate insolvency resolution process.

The proviso to this section provides that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan or passes an order for liquidation of corporate debtor, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

Supplies of essential goods or services

Regulation 32 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 defines the expression ‘essential supplies’ as-

• electricity;
• water;
• telecommunication services; and
• information technology services

to the extent these are not a direct input to the output produced or supplied by the corporate debtor.

Water supplied to a corporate debtor will be essential supplies for drinking and sanitation purposes and not for generation of hydro-electricity.

Electricity – an essential supply

As per Regulation 32 electricity is an essential supply of service to the extent this is not a direct input to the output produced or supplied by the corporate debtor. 

The issue to be discussed in this article is whether electricity services can be disconnected for nonpayment of consumption charges during the moratorium period or not with reference to decided case law.

In ‘ABG Shipyard Limited V. ICICI Bank Limited’ – 2017 (12) TMI 1196 - NATIONAL COMPANY LAW TRIBUNAL, AHMEDABAD the resolution professional, in the case of corporate insolvency resolution process filed by ICICI Bank against ABC Shipyard Limited, filed an application seeking an order to set aside the notice dated 28.09.2017 issued by Dakshin Gujarat Vij. Co. Limited.  The Authority issued to the notice stating that the electricity supply shall be disconnected if the outstanding are not paid.

The Resolution Professional submitted the following before the Adjudicating Authority-

• Section 14(2) of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) 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 the moratorium period.
• The Adjudicating Authority passed order of moratorium on 01.08.2017 under section 13 of the Code till the completion of insolvency resolution process.
• Electricity is one of the essential services as enumerated under regulation 32 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
•  Section 238 of the Code gives overriding effect to the provisions of the code.
• If any creditor violates the provisions of section 14 of the code, the creditor is punishable under section 74(2) of the Code.
• If the electricity is disconnected the electricity supply to the Surat Unit of the corporate debtor 200 employees working in that unit would lose their livelihood.

The electricity company submitted the following before the Adjudicating Authority-

• The applicant failed to pay the electricity bills due to them.
• Therefore the electric company issued notice under section 56 of the Electricity Act, 2003 to make payment within 15 days from the date of issue of notice in which it is stated that if the applicant failed to make payment of the bill for consumption of electricity charges the connections are liable to be disconnected without further notice as per section 56 of the Electricity Act.
• The provisions of the Electricity Act, Rules and Regulations framed there under are having overriding effect over the provisions of the Code.
• Section 56 of the Act gives powers to the electricity company to disconnect the power supply in case of failure of payment of payment of consumption charges.
• The contract, made between the corporate debtor and the electricity company in which the corporate debtor is to pay the electricity charges as determined by the electricity company, is enforceable.
• Even the power supply provided to a sick company is to be disconnected if there is a failure to pay the consumption charges.
• It is not stated in the Code the Electricity Company should supply the electricity without compliance of corresponding obligation of the consumer to pay the bills for current consumption charges as per the contract.
• The Electricity Act is a special act and it is a complete Code.
• Therefore the provisions contained in section 14(2) of the Code are not applicable to the Electricity Act.
• It is not stated that in section 238 of the code that the provisions contained under the Electricity Act, 2003 more particularly section 56 thereof will have no effect or that the provisions of section 238 of the Code will prevail over the Electricity Act, 2003 or shall having overriding effect over it.

The Adjudicating Authority considered the submissions of both the parties.  The  Authority analyzed the provisions contained in the Code and Electricity Act.  By declaring moratorium, a protection is given to the corporate debtor during the corporate insolvency resolution process from recovering any kind of debt due by the corporate debtor even at the stage of execution in any court of law, Tribunal, Arbitral Panel or other authority.

The words ‘other authority’ used in section 14(1) of the Code necessarily include the electricity authorities, may be the licensee or the distributor.  Therefore the moratorium order passed by the Adjudicating Authority gives protection from all other authorities including the electricity authority.  The object of section 14(2) is that there shall not be any impediment to the resolution professional in keeping the corporate debtor as a going concern in respect of essential goods or services.  If there is any interruption of supply in goods or services, it may not be possible for the resolution professional to manage the operations of the corporate debtor as  a ‘going concern’.

ABC Shipyard Limited is a going concern.  If the electric supply is interrupted, on the ground of nonpayment of electricity consumption charges, the business of the corporate debtor will come to a standstill.  Therefore section 56 of Electricity Act is repugnant to section 14(2) of the Code.  The Adjudicating Authority held that keeping in view the object and purpose underlying both the Electricity Act and the Code the provisions of section 14(2) have to be construed as overriding the section 56 of the Electricity Act, 2003.

The Adjudicating Authority held that the electricity authorities are not entitled to disconnect the power supply to the corporate debtor, ABC Shipyard Limited, invoking section 56 of the Electricity Act, 2003.  This will not amount to absolving the applicant or the corporate debtor from paying the electricity consumption charges.  The Electricity company can claim the consumption charges as an ‘operational creditor’ from the assets of the corporate debtor on par with the other operational creditors based on priorities given in the Code and the Rules and Regulations.