Pre-CIRP Dues Cannot Be Recovered After Admission Of Corporate Debtor Into Insolvency: NCLAT

Brief Facts

The present appeal has been filed by the Central Transmission Utility of India Limited (earlier Power Grid Corporation of India) against an order passed by NCLT Hyderabad.

KSK Mahanadi Power Company Limited (hereinafter called the 'Corporate Debtor or CD') is a company engaged in business of power generation. The Corporate Debtor was admitted into Corporate Insolvency Resolution Process (hereinafter called the 'CIRP') on 03.10.2019.

The Corporate Debtor, along with other generators in the state of Chhattisgarh and Chhattisgarh Power Trading Company Limited had entered into a Bulk Power Transmission Agreement dated 24.02.2010 with Power Grid Corporation of India Limited (PGCIL) During the CIRP of Corporate Debtor, PGCIL issued notice for cessation on 31.12.2019 terminating the TSA on account of default. PGCIL accepted the clarification given by the Corporate Debtor and the PGCIL cessation notice became infructuous.

The PGCIL vide letter dated 03.01.2020 issued notice of Power Regulation for quantum of 500 MW. The Central Electricity Regulatory Commission (CERC) vide its record of proceedings dated 21.01.2010 in Petition No. 113/MP/2020 directed PGCIL not to regulate the power supply as long as Corporate Debtor makes the payment of Rs. 100 crores and maintains outstanding dues of more than 45 days to PGCIL at less than Rs. 122 crores.

As a consequence, the Corporate Debtor remitted Rs. 100 crores as payment towards outstanding amounts with the payments of regular bills and power regulation notice was lifted.

The Corporate Debtor had made a security deposit for an amount of Rs. 108.44 crores with PGCIL in accordance with its obligations. On 28.03.2020, PGCIL sent an email to the Corporate Debtor stating that it has unilaterally encashed the payment security mechanism maintained by the Corporate Debtor for an amount of Rs. 108.44 crores and adjusted the amount towards transmission charges outstanding.

Contentions:

The appellant submitted that there is no dispute to the effect that the Corporate Debtor is liable to pay transmission charges to the Appellant. Admittedly, the amount of Rs. 108.44 Crores was deposited by the Corporate Debtor as payment security mechanism and the same is for transmission charges dues payable by the Appellant as CTU, which were accordingly appropriated towards said dues and the said amount of Rs. 108.44 Crores was accordingly adjusted.

It was further submitted that in terms of the regulatory regime under the Electricity Act, 2003 and CERC Regulations, the amount of Rs. 108.44 crores is first to be adjusted against old dues. Thus, the adjustment of security deposit cannot be limited to the post-CIRP dues and the impugned order is contrary to regulatory regime under the Electricity Act.

Per contra, the respondents submitted that once CIRP is initiated against the Corporate Debtor, a moratorium under Section 14 of the Code comes into effect, which restricts recovery of money from the Corporate Debtor.

It was further submitted that the Appellant had filed its claim to the tune of Rs. 356.41 crores out of which an amount of Rs. 98.75 crores had been admitted by the Resolution Professional, while remaining amount was paid by the Corporate Debtor before admitting the claims.

It was further submitted that despite such admission of the claim by Resolution Professional, the Appellant enforced the security deposit of Rs. 108.44 crores and adjusted it towards pre-CIRP dues, which is in violation of Section 14 of the IBC, 2016.

Issue Before Tribunal

Whether a deposit lying with a third party can be adjusted against pre-CIRP dues by it during the moratorium which comes into effect immediately on admission of Corporate Debtor in CIRP, during the pendency of the said CIRP.

Decision of The Tribunal:

The tribunal referred to section 14 of the code and noted that per Section 14(1)(c), there is prohibition for any action to foreclose, recover or enforce any security interest created by the Corporate Debtor. Subsection (2) envisages that the Corporate Debtor will continue to run as a going concern and that supply of essential goods or services to the Corporate Debtor shall not be terminated or suspended or interrupted during the CIRP.

The tribunal further noted that whereas Sub-section (2A) provides that the supply of essential goods or services shall continue except where Corporate Debtor does not pay the dues arising from such supply during the moratorium period.

In Embassy Property Developments Pvt. Ltd. v. State of Karnataka, 2019 the Supreme Court while analysing the scope of jurisdiction of the NCLT under section 60, has held that a decision taken by the government or a statutory authority in relation to a matter which is in the realm of public law, cannot, by any stretch of imagination, be brought within the fold of the phrase "arising out of or in relation to the insolvency resolution" appearing in Clause (c) of Sub-section (5) of section 60 of the code.

The court further observed that “the moment the dues to the Government are crystalized and what remains is only payment, the claim of the Government will have to be adjudicated and paid only in a manner prescribed in the resolution plan as approved by the Adjudicating Authority, namely the NCLT.”

The above observation of the court fortifies the case of the respondent instead of the appellant. It was observed that once a liability is fastened on the Corporate Debtor by any statutory authority, the dues payable to the Government will come within the meaning of the expression of Operational Debt and the claim of the Government will have to be adjudicated and paid only in the manner prescribed in the resolution plan, as approved by the Adjudicating Authority. Apparently, the pre-CIRP dues have to be paid in a manner prescribed in the resolution plan.

Further, in Municipal Corporation of Greater Mumbai v. Abhilash Lal and Others, 2019 the Supreme Court has held that this court is of opinion that Section 238 could be of importance when the properties and assets are of a debtor and not when a third party like the MCGM is involved

While distinguishing the above case, it was observed that “in the aforesaid case, the Court has held that Section 238 will be of importance when the properties and assets of the Corporate Debtor are involved and not when the assets of the 3rd party like MCGM is involved. The present case is regarding security deposit, which till it is adjusted, remains the property of the Corporate Debtor.”

In ABG Shipyard Liquidator v. Central Board of Indirect Taxes & Customs, (2023) the Supreme Court has held that “Section 14 of the IBC prescribes a moratorium on the initiation of CIRP proceedings and its effects. One of the purposes of the moratorium is to keep the assets of the Corporate Debtor together during the insolvency resolution process and to facilitate orderly completion of the processes envisaged under the statute.”

In Paschimanchal Vidyut Vitran Nigam Ltd. v. HAS Traders & Others,2019, the Hon'ble Supreme Court has held that IBC will prevail over provisions of the Electricity Act, 2003, despite the latter containing two specific provisions which open with non-obstante clauses (Sections 173 and 174).

In light of the above discussion, it is clear that “the appellant could not have adjusted the security deposit given by the corporate debtor towards its pre-CIRP dues after the admission of the corporate debtor into the insolvency. Such an action is strictly prohibited by section 14 of the code.” Accordingly, the present appeal was dismissed.

Case Title: Central Transmission Utility of India Ltd. Versus Mr. Summit Binani and Anr.

Case Number: TA (AT) NO. 174/2021 (Company Appeal (AT) (Ins.) No. 1011/2020)

Date Of Judgment: 27/11/2024

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