IBC and utility services: NCLAT clarifies "essential supply" protections for corporate debtors, Read Judgment

"Electricity is included as essential supply with rider to the extent these are not a direct input to the output produced or supplied by the corporate debtor." With this remark, the NCLAT examined whether electricity supply to a corporate debtor under insolvency could be disconnected due to non-payment during the moratorium period.

The case arose from Maharashtra State Electricity Distribution Company Ltd.'s challenge to the NCLT Mumbai’s order, which directed the restoration and continuation of electricity supply to Morarjee Textile Limited during the Corporate Insolvency Resolution Process (CIRP). The Tribunal examined past precedents, statutory provisions, and financial commitments made by the Resolution Professional before delivering its verdict on the dispute.

Maharashtra State Electricity Distribution Company Ltd. & Anr. challenged the NCLT, Mumbai’s order dated 24.10.2024 in IA No. 4168 of 2024, filed by the Resolution Professional of Morarjee Textile Limited.

The Corporate Debtor’s electricity bill of ₹4,78,27,140/- for January 2024 remained unpaid. CIRP was initiated on 09.02.2024, and the Appellant filed its claim. Due to non-payment, electricity was disconnected on 26.06.2024 and again on 28.08.2024. The Resolution Professional, citing Section 14(2) of Insolvency and Bankruptcy Code (IBC), sought restoration. NCLT initially ordered reconnection on 03.09.2024, but dues remained unpaid except for ₹50 lakhs. On 15.10.2024, NCLT ruled that electricity must continue during CIRP, allowing IA No. 4168 of 2024, leading to this appeal.

The Appellant argued that under Section 14(2A) of the IBC, the Corporate Debtor must pay current electricity bills during CIRP. However, the NCLT directed restoration of supply without mandating payment of dues. Despite acknowledging its liabilities and assuring payments, the Corporate Debtor failed to clear outstanding bills. The IBC does not prohibit payment for essential services during CIRP. The latest financial statements show ₹4,166.19 lakhs in power and fuel expenses, proving the Corporate Debtor’s ability to pay. Additionally, the Respondent has filed a Contempt Application against the Appellant for alleged non-compliance with the impugned order.

Contentions of the Respondent:

The Respondent argued that electricity is an essential supply under Section 14(2) of the IBC and cannot be disconnected during the moratorium. Citing Regulation 32, the Appellant was obliged to continue supply, and as per Regulation 31, electricity dues during CIRP qualify as CIRP costs, payable in priority under IBC. The NCLT’s order aligns with IBC provisions. Partial payments have been made, with ₹2.55 crore allocated by the CoC and pending textile subsidies expected to cover further dues. The corporate debtor must remain a going concern, and the Appellant cannot demand immediate payment during CIRP.

The Court ruled that electricity supply to the corporate debtor qualifies as "essential supplies" under Section 14(2) of the IBC, 2016, since "electricity is included as essential supply with rider to the extent these are not a direct input to the output produced or supplied by the corporate debtor." As the textile industry relies on electricity for machinery and production but not as a direct input, the Court held that the supply is protected under Section 14(2).

Interpreting Section 14(2A), the Court stressed its role in maintaining the corporate debtor as a going concern. It stated, "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." The determination of critical supplies rests with the IRP or RP.

The Tribunal noted that the RP invoked Section 14(2) rather than Section 14(2A), citing past cases. In his letter dated 28.08.2024, the RP asserted, "the supply of essential goods or services to the Corporate Debtor shall not be terminated, suspended or interrupted during the moratorium period." Later, on 05.09.2024, he assured the electricity provider, "We assure you that we will pay our energy bills regularly within due date and additional 50 Lacs every month of pending arrears." The Tribunal emphasized that essential services must continue even if dues are pending.

Addressing concerns about moratorium misuse, the Tribunal referred to an IBBI Discussion Paper but clarified, "the Discussion Paper has no effect on statutory scheme operating in the field and only serves as a basis for amending regulations." Finally, upholding the Adjudicating Authority’s order, it ruled, "the Respondent MSEDCL not to disconnect the electricity connection necessary for running the manufacturing facilities of the Corporate Debtor and carrying out its business" and directed immediate reinstatement if already disconnected.

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