Madras High Court Urges Parliament To Assess Efficiency Of IBC And Consider Recovery Percentage From Successful Resolution Processes

Background Facts:

National Sewing Thread Co. Ltd. (Petitioner), a public limited company registered under the MSME Act, 2006, was under Corporate Insolvency Resolution Process ('CIRP') under Section 7 of IBC due to its failure to service the loan obtained from the Indian Overseas Bank ('IOB').

From June 2019, the petitioner had also failed to pay the electricity charges due to Tamil Nadu Generation and Distribution Corporation Limited ('TANGEDCO'). On 19.01.2022, TANGEDCO issued a Demand Notice claiming Rs. 32 Lakhs as unpaid electricity charges.

The petitioner contended that since the Committee of Creditors ('CoC') under its commercial wisdom passed the Resolution Plan which also received the NCLT approval, all the outstanding claims or liabilities, not covered by the Plan are extinguished.

The petitioner filed the writ of certiorari and mandamus to quash the Demand Notice issued by TANGEDCO and to further direct it to provide the electricity connection.

Observations by the High Court:

The Madras High Court urged the Parliament to assess the efficiency of the IBC and questioned whether the Parliament has considered the general recovery percentage achieved from a successful corporate debtor resolution process.

The High Court remarked:

“While the legislative intent to keep the corporate debtor as a going concern is appreciated, it should not come at the expense of others, especially given the potential for manipulation within the IBC framework.”

The High Court observed that the issue is not what constitutes a statutory liability, but rather why the corporate debtor's liability should be distributed socially when the debtor likely did not share its profits with society during prosperous times, aside from legally mandated Corporate Social Responsibility.

It provided an example wherein the electricity-distribution licensees incur losses under the waterfall mechanism due to their classification as operational creditors and observed that these losses will ultimately be borne by other consumers. It noted that the broader question is why Parliament should protect one corporate debtor at the risk of endangering public interest.

The Court placed reliance on the perspective on the IBC's review by Shri. V. Ramasubramanian J., a former Supreme Court Judge as well as Shri. Anant Merathia's book titled “Defaulter's Paradise Lost” which is also a crucial read on the functioning of IBC.

The Court dismissed the Writ Petition and observed that the petitioner cannot avoid its obligation to pay the dues of TANGEDCO since such a case would illustrates how the IBC can be manipulated to the detriment of undisclosed creditors of the corporate debtor.

In conclusion, it observed the Parliament shall consider such points with potential legislative corrections needed to prevent the long-term impact of the IBC from being disastrous or counterproductive.

Case Title: National Sewing Thread Co. Ltd. vs Superintending Engineer, TANGEDCO and Anr.

Citation: 2024 LiveLaw (Mad) 236

Case No.: W.P. No.29845 of 2022 and WMP.No.29233 of 2022

Counsel for Petitioner: Mr. E. Omprakash, Senior Counsel assisted by Mr.Imayavaramban for M/s.Ramalingam & Associates

Counsel for Respondents: Ms.Keerthana R.Shenoi for Mr.V.Venkata Seshaiya, Standing Counsel for TANGEDCO

Date of Judgment: 07^th June, 2024

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