Essential Goods and Services during Corporate Insolvency Resolution Process: Interpretation and Treatment

[By Jubin Jay and Kirti Vyas]

The authors are fifth year students of National Law University, Odisha

Introduction

A Corporate debtor is provided with a surviving mechanism during moratorium through the application of Section 14 of the Insolvency and Bankruptcy Code, 2016 (“the Code”). The moratorium period is declared by the adjudicating authority under Section 13 of the Code after admitting the application for initiating Corporate Insolvency Resolution Process (“CIRP”) against the corporate debtor during which, continuation of all the pending suits is suspended and institution of any new suit is prohibited. Among other things, moratorium is applicable to all the “essential contracts” of the Corporate Debtor. Section 14(2) of the Code states that when an order initiating the CIRP is passed, “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.”

The term “essential goods and services” has been defined under regulation 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) to mean 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. A mere reading of the definition highlights that it is restrictive in nature. However, the National Company Law Tribunal has in some cases sought to expand the scope of the term ‘essential’, which in turn has created a lot of confusion.

Another issue which arises from this restriction under section 14 of the Code is the manner of payment for such essential contracts being rendered by the suppliers of those particular contracts. The reason being that suppliers of essential goods and services are qualified to be mere operational creditors, and this being the case, they will never be able to recover their full payment through CIRP. The Courts have tried to deal with this situation time and again, and the position is mostly settled in this regard that such expenses incurred will be qualified as Insolvency Resolution Process cost. However, whether the payment has to be made during moratorium or not is still a point of contention.

What constitutes “Essential Goods and Services”?

ICICI Bank v. Innoventive Industries [i]

The Tribunal opined that on a bare reading of the CIRP Regulations, it appears that electricity, water and telecommunication services and information technology services are to be considered as essential as long as these services are not a required to the output produced or supplied by the corporate debtor. Further, “essential service” is a service for survival but not for doing business and earning profits without making payment for the services used. When a company is using it for making profits, then the company owes payment to the supplier for such non-essential services/goods utilized in manufacturing purpose.

The Tribunal in this case restricted the ambit of the definition to a large extent. However, soon after, the Tribunal in another case, deviated from its strict interpretation and expanded the scope of the definition, the latter interpretation being inconsistent with the definition as provided under the CIRP Regulations.

Canara Bank v. Deccan Chronicle Holdings Ltd.[ii]

In this case, the Tribunal held that printing ink, printing plates, printing blanker, solvents etc. will also come under the purview of exemption along with the heads as defined. The corporate debtor i.e. Deccan Chronicles Holdings Limited was in the business of publishing newspapers and periodicals. Including the above-mentioned products will be a direct input to the output product. However, the order does not even explain why additional goods and services have been covered under the ambit of essential goods and services. This created ambiguity on the position of law in this regard.

However, recently National Company Law Appellate Tribunal (“NCLAT”) has again differentially opined in the case of Dakshin Gujarat VIJ Company Limited v. ABG Shipyard Limited [iii] that “from subsection (2) of Section 14 of the ‘I&B Code’, it is also clear that essential goods or services, including electricity, water, telecommunication services and information technology services, if they are not a direct input to the output produced or supplied by the ‘Corporate Debtor’, cannot be terminated or suspended or interrupted during the ‘Moratorium’ period.”

The Insolvency Law Committee [iv] had advocated for expanding the scope of mandatory essential supplies covered under section 14(2) of the Code. Subsequently, the Committee had recommended that there should be a proviso added to Section 14(2) which states that “for continuation of supply of essential goods or services other than as specified by IBBI, the IRP/ RP shall make an application to the NCLT and the NCLT will make a decision in this respect based on the facts and circumstances of each case”. However, this recommendation was not adopted as an amendment to the Code.

Manner of Payment for such Essentials during Moratorium.

Regulation 31 read with Regulation 32 of the CIRP Regulations makes it aptly clear that any expense or amount due to the suppliers falling under Section 14(2) of the Code, during moratorium will be considered as insolvency resolution process cost and thereby will be given priority over other debts. However, the question remains as to whether these payments are to be made during the moratorium period or can they be paid later?

Dakshin Gujarat VIJ Company Limited v. ABG Shipyard Ltd.[v]

NCLAT mandated that payments for supply of goods and services is to be made during the moratorium period. Explanation provided by the Appellate body was that such payment is not covered by the order of moratorium. Law does not stipulate that such suppliers will continue to supply the essentials free of cost until the completion of the period of moratorium and that the corporate debtor is not liable to pay till such completion. Emphasising further on the point of regular payments, NCLAT noted that if the company does not even have funds to pay for the essentials to keep it a going entity, then it has become sick and the very question to keep it running does not arise.

Innoventive Industries Ltd. v. Maharashtra State Electricity Distribution Company Ltd.[vi]

In this case, NCLAT had passed an order requiring the resolution professional to pay electricity charges due to the State electricity company since the date of moratorium, on behalf of the corporate debtor. The Appellate body additionally ordered for the payment of monthly charges towards any further consumption, failing which, the State electricity company had the option to take appropriate steps.

In addition to the answer with regard to the payment of essential goods and services, NCLAT made a very significant observation that, even suppliers of essential goods and services can terminate their contract owing to the non-payment of dues during moratorium. This observation in all probability is to preserve the interest of such suppliers and it carves its space into the provision of Section 14(2) of the Code which had bound them for the period of moratorium, thus striking a balance between interests of debtor and the supplier.

However, no such specific orders were made by the tribunal with respect to the dues of such suppliers accruing prior to the commencement of CIRP. In the instant case, NCLAT instead held that it would be open to the supplier to submit a claim before resolution profession for the payment of such dues.

Conclusion

Through the operation of Section 14 of the Code enables the corporate debtor to preserve critical supplies to the business during CIRP. With courts still unsettled as to the scope of the definition, it is pertinent to note that the whole idea of the Section 14 in light of the Code is that the Resolution Profession has to make every effort to run the corporate debtor as a going concern. For that reason, a resolution professional may also negotiate for the continuation of other critical supplies during the corporate resolution process [vii].

 

Endnotes

[i] ICICI Bank Ltd. v M/s. Innoventive Industries Ltd., MA 157 in CP 01/I&BP/2016
[ii] Canara Bank v. Deccan Chronicle Holdings Ltd., CP No. IB/41/7/HDB/2017
[iii] Company Appeal (AT) (Insolvency) No. 334 of 2017. Decision date08.02.2018
[iv] Insolvency Law Committee, Report of the Insolvency Law Committee, available at http://www.mca.gov.in/Ministry/pdf/ILRReport2603_03042018.pdf
[v] Dakshin Gujarat VIJ Company Limited v. ABG Shipyard, Company Appeal (AT) (Insolvency) No. 334 of 2017
[vi] Innoventive Industries Ltd. v. Maharashtra State Electricity Distribution Company Ltd., Company Appeal (AT) (Insolvency) No. 156 of 2017 & I.A. No. 612 of 2017
[vii] Section 23(2) r/w Section 20 of the Insolvency and Bankruptcy Code, 2016.

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