IBC’s position on supply of essential goods and services

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Dear Editor,

Section 14(2) of the Insolvency and Bankruptcy Code, 2016 (IBC), states that the “supply of essential goods or services to a corporate debtor shall not be suspended during the moratorium period”. The purpose behind this is to enable the insolvent party to successfully restructure itself and ensure the continuance of it as a going concern.

The Supreme Court in Innoventive Industries Limited v ICICI Bank Limited observed, “A moratorium is provided, which gives the debtor a breathing spell in which he is to seek to reorganize his business.”

This implies that contracts for supply of such essential goods or services cannot be terminated if a moratorium has been granted in favour of the corporate debtor. However, the IBC remains silent on the scenario when the supply of such goods/services had already been terminated before a moratorium was granted in favour of the corporate debtor. Parties may do so by an enabling clause in the contract.

It is a common practice to include versions of “termination on insolvency” clauses that enable a party to terminate a contract before the actual order of insolvency, for example, on the first default. However, the benches of the National Company Law Tribunal (NCLT) across the country in various orders, while granting moratorium, mention that the supply of essential goods or services to the corporate debtor is not to be terminated, if their supply is ongoing.

General reference can be made in this regard to orders by the Allahabad bench of NCLT in M/S Raman Ispat Pvt Ltd, Jodpl Private Limited and LML Limited, as well as the order by the Kolkata bench of the NCLT in Vivid Colors Pvt Ltd v Jenson & Nicholson (India) Ltd and the order by the Chandigarh bench of the NCLT in Surbhi Body Products Limited v Meyer Apparel Limited.

Conflict arises in the case of Uttarakhand Power Corporation Ltd v ANG Industries Ltd, where the appellant who was supplying electricity to the corporate debtor had disconnected supply three days before the NCLT’s order granting moratorium. Electricity comes within the meaning of essential goods as provided under regulation 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. In the case, the insolvency resolution professional moved the adjudicating authority for restoration of electricity, which was allowed. The appellant complied with the order of the adjudicating authority, restoring the supply of electricity.

While the appellant challenged the order before the National Company Law Appellate Tribunal (NCLAT), it chose not to challenge the direction to restore electricity and only challenged it on the terms of payment of dues. Even the bench headed by the NCLAT chairperson failed to notice that the order of the NCLT bench to restore the electricity supply, which had already been disconnected before granting moratorium, was not consistent with the general practice followed by the other benches of the NCLT.

The general practice, as already pointed out above, is that the supply of essential goods or services is not to be terminated only when it is already continuing. In the case, the appellant had already disconnected the supply of power prior to the grant of moratorium.

This causes ambiguity in the IBC’s position with respect to situations where the supply had already been disconnected before the grant of moratorium. While the difference in approach might seem to be trivial, it can make a difference as the transactions involved in many cases protect the supplier from potential losses. On the other hand, it might also adversely affect the corporate debtor in the successful resolution of its insolvency.

Sachin Santuka
Second year BBA LLB student
National Law University Odisha
Cuttack

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