The New Delhi bench of the National Company Law Appellate Tribunal (NCLAT) has held that electricity being an essential supply cannot be disconnected during moratorium period under section 14 of the Insolvency and Bankruptcy Code, 2016 (Code) .
The Maharashtra State Electricity Distribution Company Ltd., the appellant, supplied an electricity connection to Morarjee Textile Limited, the corporate debtor. The appellant raised the electricity bill for January 2024 due to overdue electricity dues. Axis Bank Limited’s application resulted in the corporate debtor’s admission into the Corporate Insolvency Resolution Process (CIRP) a week later. The appellant filed its claims for unpaid power dues after the Interim Resolution Professional made a public notification.
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When the corporate debtor failed to pay the outstanding power obligation, the appellant subsequently cut off the electrical service. On the condition that the outstanding balance be paid, the power connection was restored. The supply was not discontinued. The Resolutional Professional then sent a letter indicating that, in accordance with section 14(2) of the code, the energy supply cannot be cut off during the CIRP period.
The Resolution Professional filed an Interlocutory Application (‘IA’), requesting a number of reliefs, including instructions to restore the electricity supply. The Adjudicating Authority issued an interim order on 03.09.2024, requiring the Appellant to restore the corporate debtor’s power service for a period of 15 days.
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In response to the aforementioned application, the appellant filed a reply. The application was accepted. This appeal has been filed because the contested order has angered the parties. In directing the appellant to restore the electricity, the adjudicating authority disregarded the mandate of Section 14(2-A), according to the appellant, although no directive was given about the payment of electrical dues during the CIRP period. It was also argued that there is no prohibition or bar imposed by the IBC towards payment of dues arising from essential services supply during CIRP period.
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In contrast, the respondents cited Regulation 32 of the CIRP Regulations to argue that the appellant was required to maintain the corporate debtor’s power since it was deemed an essential supply and could not be cut off during the moratorium period. According to Regulation 31, it was also stated that the power dues during the CIRP time are CIRP expenses. The appellant is entitled to CIRP costs in priority according to the IBC’s requirements, and the appellant cannot demand payment during the CIRP period.
The bench of Justice Ashok Bhushan (Judicial Member), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) while referring to Regulation 32 of the CIRP Regulations, observed that electricity qualifies to be an essential supply unless it is a direct input to output of the corporate debtor.
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Furthermore, it noted that there is no documentation proving that electricity is a direct input to the output generated or provided by the corporate debtor; as a result, the electricity supply in this instance must be regarded as an essential supply under section 14(2) read in conjunction with Regulation 32 of the CIRP Regulations.
It was viewed 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).
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The Tribunal observed that under section 14 of the code, providers of necessary products or services are not permitted to stop or reduce their delivery during the moratorium period. Even if payment for these services or items is not made during the CIRP’s period, the corporate debtor is still entitled to obtain necessary supplies. The cost of the CIRP will include the payment for these goods.
It further noted that, as promised to the appellant, the resolution professional must take action to collect the electrical debt; nevertheless, failure to do so cannot serve as justification for cutting off the electricity, as stipulated in Section 14(2).
While dismissing the appeal, the Tribunal concluded that the direction of the Adjudicating Authority based on Section 14(2) not to disconnect the electricity connection necessary for running the manufacturing facilities cannot be interfered with.
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