NCLAT Rules Pre-CIRP Dues Must Be Paid As Per Resolution Plan; Voluntary Payments Post-CIRP To Be Appropriated Towards CIRP Dues

The National Company Law Appellate Tribunal (NCLAT) bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra, Member (Technical) has held that pre-CIRP dues of the Corporate Debtor must be settled in accordance with the approved resolution plan, and any voluntary payments made by the Corporate Debtor after the commencement of CIRP must be appropriated towards CIRP dues. The Tribunal observed insisting on a different manner of payment than what is specified in the resolution plan, would amount to an infraction of the resolution plan and cannot be countenanced.

Factual Matrix:

On 18.05.2017, M/s Shirdi Industries Ltd. (the Corporate Debtor, herein, Respondent No. 1) was admitted into Corporate Insolvency Resolution Process (CIRP), triggering a moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC).

As of the insolvency commencement date, the Corporate Debtor owed Rs 1.76 crores to Uttarakhand Power Corporation Ltd. (UPCL, herein, the Appellant), for April and May 2017 electricity bills, which accrued during the pre-CIRP period. The Corporate Debtor paid the outstanding dues of Rs 1.76 crores on 19.05.2017 and 19.06.2017 after the CIRP had commenced.

The Resolution Plan submitted by the Successful Resolution Applicant (SRA), Rakesh Kumar Agarwal (herein, Respondent No. 2), the Managing Director of the Corporate Debtor, was approved by the Committee of Creditors (CoC) on 25.10.2017 and later confirmed by the Adjudicating Authority on 12.12.2017.

The Appellant did not file any claim with the Resolution Professional during the CIRP for the outstanding pre-CIRP electricity dues. The approved Resolution Plan provided for the payment of UPCL's pre-CIRP dues in 8 instalments from June 2022 to March 2024.

On 31.10.2020, the Corporate Debtor informed the Appellant that the Rs 1.89 crores paid towards pre-CIRP dues should be adjusted against current electricity bills for September and October 2020. UPCL disconnected the electricity supply of the Corporate Debtor on 05.11.2020 due to non-payment of the September 2020 bill.

On 24.11.2020, the Corporate Debtor filed IA No. 2187 of 2020, seeking adjustment of pre-CIRP payments against current dues. The Adjudicating Authority, by interim orders dated 03.12.2020 and 04.02.2021, directed UPCL not to disconnect electricity and ordered the Corporate Debtor to pay future electricity dues by the due date.

By the impugned order dated 21.02.2024, the Adjudicating Authority ordered that pre-CIRP dues be paid as per the approved Resolution Plan. Any payments made after the insolvency commencement date were to be adjusted toward the dues for services availed during the CIRP period. Both parties were directed to reconcile their dues, and the Corporate Debtor was required to make payment within 30 days.

Aggrieved by the impugned order, UPCL filed three appeals under Section 61 of IBC, seeking to:

• Set aside the impugned order;
• Direct the Corporate Debtor to pay the outstanding electricity dues of Rs 7.29 crores as of 05.03.2024; and
• Permit UPCL to disconnect electricity supply due to the Corporate Debtor's wilful default in paying arrears.

Arguments:

By the Counsel for Appellants:

• The Corporate Debtor had been charged electricity dues like other consumers, and since no waiver was granted in the resolution plan, the Debtor should not adjust its pre-CIRP dues against current dues.
• Despite having paid pre-CIRP dues voluntarily in May-June 2017, the Corporate Debtor was still in default for the electricity bill dated 05.03.2024, which amounted to ₹7.29 crores, including Late Payment Surcharges. Regulations 31 & 32 of the CIRP Regulation, 2016, electricity dues constitute part of CIRP costs which are to be paid as and when bills are raised.
• The Appellant contended for permission to disconnect the electricity supply due to wilful default and non-payment of arrears.

By the Counsel for Respondents:

• Since the pre-CIRP dues had already been paid voluntarily in May-June 2017, these payments should be adjusted against future/current electricity dues during the CIRP period.
• Section 238 of the IBC overrides any conflicting commercial covenants.
• Section 14(b) of the IBC enforces a moratorium on such payments during the CIRP.

Observations:

The moot issue before the Tribunal was whether the Appellant was entitled to the payment of its pre-CIRP dues from the Respondent in a manner different from that of payment provided for in the resolution plan. The Tribunal upheld that the resolution plan was binding on all stakeholders, including the Appellant. It was noted that the Respondent had adhered to the payment schedule set out in the plan. With regard to the issue, the Tribunal stated that:

“ If the payment of pre-CIRP dues is insisted upon being made in any manner which is not specified and factored in the resolution plan, that would amount to be an infraction of the resolution plan and cannot be countenanced”

Further, the Tribunal held that:

“...once moratorium had been declared, it was not open to the Corporate Debtor to appropriate any amount from its account not even to clear pre-CIRP dues as it did not fall within the definition of the “insolvency resolution process costs” as defined under Section 5(13) of the IBC.”

The Tribunal observed that even though the electricity dues for the pre-CIRP period were voluntarily paid by the Corporate Debtor, the payment was made after the commencement of the CIRP. As such, Section 14 of the IBC would have applied, and no pre-CIRP payments could have been made from the Corporate Debtor's assets during the CIRP. Therefore, the pre-CIRP dues were to be dealt with in the manner provided in the Resolution Plan, viz., to be recovered in 8 instalments from June 2022 to March 2024.

It was further observed that since the pre-CIRP dues were treated as assets of the Corporate Debtor and were paid by the Respondent after the insolvency proceedings had commenced, appropriating this payment by adjusting it against current CIRP dues was a reasonable course of action. Had the voluntary payment not been reappropriated towards the Corporate Debtor's assets, it would have amounted to preferential treatment of the Appellant and attracted Section 43 of the IBC, thereby vitiating the entire resolution process.

The Tribunal held that the Appellant was entitled to the payment of its pre-CIRP dues from the Respondent in the manner provided in the resolution plan. The Appellant and Respondent were directed to reconcile their dues within 2 weeks. The Respondent was ordered to pay the outstanding electricity dues within 30 days.

Thus, the Appeals were dismissed.

Case Title: Uttarakhand Power Corporation Ltd. vs. M/s Shirdi Industries Ltd. & Anr.

Case Number: Company Appeal (AT) (Insolvency) No. 799 of 2024 with Company Appeal (AT) (Insolvency) No. 803 of 2024 with Company Appeal (AT) (Insolvency) No. 832 of 2024

Counsel for Appellant: Mr. Yakesh Anand, Ms. Sonam Anand, Mr. Akshay Thakur, Advocates.

Counsel for Respondents: Mr. Pranjit Bhattacharya, Ms. Raj Sarit Khare, Advocates.

Date: 19.09.2024

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