If Electricity Supply Is Essential To Preserve Corporate Debtor's Value, Dues Must Be Paid During CIRP: NCLAT Delhi

Background Facts

Lavasa Corporation Limited ("Corporate Debtor") entered into Distribution Franchisee Agreement ("DFA") with Maharashtra State electricity Distribution Company Limited ("MSEDCL/Respondent") on 15.03.2011. MSEDCL was to supply electricity at certain injection points from where the electricity was to further supply to consumers in the township through distribution infrastructure of the Corporate Debtor.

Thereafter, Adjudicating Authority admitted the Corporate Debtor into Corporate Insolvency Resolution Process ("CIRP") on 30.08.2018. Mr. Shailesh Verma ("Appellant") was appointed as Resolution Professional. DFA came to an end on 24.10.2019. In 2021, Respondent informed the Appellant that the DFA would not be renewed and Distribution Franchisee of Corporate Debtor will be taken over.

The Appellant had filed an I.A. before the Adjudicating Authority, seeking direction to the Respondent to continue supplying electricity. It was argued that continuance of Franchisee Infrastructure is essential to maintain the value of the Corporate Debtor for the incoming Resolution Applicant. Adjudicating Authority vide an order dated 21.01.2022 directed the Respondent to continue uninterrupted electricity supply to the Corporate Debtor. Further, Resolution Professional was directed to pay the Respondent the outstanding dues during the CIRP period within 90 days. The Appellant filed an appeal before the NCLAT.

Contentions Of Appellant

The Appellant submitted that a direction to pay electricity dues during CIRP cannot be passed. The dues can only be paid as per an approved Resolution Plan. Section 14(2) of IBC provides for interrupted supply of essential goods and services to the Corporate Debtor during the moratorium period, which provides an unconditional protection to the Corporate Debtor. The provision of Section 14(2) is distinguishable to provision of Section 14(2A).

Contentions Of Respondent

The Respondent argued that Resolution Professional himself formed the opinion that supply of electricity is essential for preserving the value of Corporate Debtor. Hence, Resolution Professional was liable to pay the electricity dues during the CIRP period. Section 14(2) which obliges for continuance of essential services, cannot be allowed to continue without payment during the CIRP period. Section 14(2) and Section 14(2A) have to be read together to find out the legislative intent that when an essential supply is critical for the Corporate Debtor, it can be continued subject to payment of dues.

Relevant Law

Section 14(2) and 14(2A) of IBC

"Section 14(1) Explanation.-For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period;

"Section 14(2): 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."

"Section 14(2A): Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified"

Decision Of NCLAT

The Bench observed that the Appellant's contention that payments of electricity dues have to be paid after approval of the Resolution Plan was in conflict with Section 14(1) Explanation and Section 14(2A). "When the Corporate Debtor has opined that supply of electricity is essential and is to be continued by the Respondent, it is also under obligation to make payment of electricity dues of the CIRP period and direction issued by the Adjudicating Authority to make the payment of outstanding dues, cannot be faulted."

The direction of Adjudicating Authority to continue the electricity supply was subject to payment of outstanding dues within 90 days. The Appellant cannot enjoy the benefit of direction of one part, that is, to continue the electric supply and deny the payment of electricity dues of the CIRP period.

No exception can be taken to direction of the Adjudicating Authority to make the payment of outstanding dues to the Respondent during the CIRP period within 90 days. In the event on non-payment of the dues, as per Section 14(2A), it shall always be open to Respondent to terminate/ suspend the supply of such services. The order of Adjudicating Authority was upheld and Appeal was dismissed.

Case Title: Shailesh Verma v Maharashtra State Electricity Distribution,

Case No.: Company Appeal (AT) (Insolvency) No. 383 of 2022

Counsel For Appellant: Mr. Sumesh Dhawan, Ms. Kriti Kalyani and Ms. Salonee Kulkarni, Advocates.

Counsel For Respondent: Mr. Satvik Varma, Sr. Advocate with Ms. Drishti Harpalani, Mr. Aakash Kothari and Ms. Ramni Taneja, Advocates for R-1. Mr. Akshay Sapre, Advocate for CoC.

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