INTRODUCTION
In the complex landscape of insolvency and bankruptcy, the term “moratorium” holds a pivotal place. It signifies a temporary prohibition on various activities that could disrupt the resolution process of a financially distressed company. Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”)[1] in India outlines the protective shield of a moratorium, encompassing a wide range of legal proceedings and actions against the corporate debtor (“CD”). However, within this legal framework, there exists a critical exception – the uninterrupted supply of essential goods and services. In this blog, we delve into the significance of this exception and its recent expansions.
The moratorium is described as “a temporary stopping of an activity” in the Oxford Dictionary. [2] The CD’s protection under the moratorium is described in Section 14 of the IBC.[3] The moratorium covers the entire Corporate Insolvency Resolution Process(“CIRP”) period, and any lawsuits, legal actions, and recovery activities brought against the CD are put on hold throughout this time in order to give the CD time to resolve its legal status. On the other hand, section 14(2)[4] of the IBC stipulates that the CD’s supply of necessary products or services shall not be halted, suspended, or interrupted during the moratorium period.
ESSENTIAL GOODS AND SERVICES
“Electricity, water, telecommunications, and information technology services” are all considered “essential goods” under regulation 32 of the CIRP Regulations, to the extent that they do not directly contribute to the output produced or supplied by the CD.[5]
In 2020, the Insolvency and Bankruptcy Code[6] was updated. They added a new part, called “subsection 2A”[7], right after another part known as “section 14(2).”[8] This new part explains that if someone called the “Interim Resolution Professional” or the “Resolution Professional” believes that it’s necessary to provide goods or services to protect and save a struggling company and keep it running, then they can’t stop providing those things for a certain time. However, if the company doesn’t pay for those things during that time or if some specific conditions are met, they can stop.[9]
This change is significant because it expands what things are considered important for the company. The goal is to rescue the company and keep it operational, so the person in charge can decide what things are highly important. They can’t stop providing those crucial things during this special time, as long as the company is paying for them.
In Asset Reconstruction Co. India Ltd v Venkatarakrishnan,[10] the NCLAT noted that the energy Board was unable to cut off the energy because doing so would violate IB Code Section 14(2)[11]. The NCLAT additionally stated that the RP should not have paid any earlier period dues for the restoration of electricity and that the NCLT should have been informed of any disconnections while vacating the contested order.
In Dakshin Gujarat VIJ Company Ltd. Vs. M/s. ABG Shipyard Ltd. and Another[12], “the NCLAT was asked whether the moratorium under section 14[13] of the IBC would cover the present fees paid by the CD for the supply of services like water and electricity.” According to the NCLAT, there is no restriction or ban on paying current fees for basic services. This payment is not covered by the moratorium order.
The provision of free basic services, such as water and electricity, up until the conclusion of the moratorium is not mandated under the legislation.[14] The cost of the CIRP will include the sum that the RP paid for these services. The RP was instructed to cover the ongoing costs of the electricity delivery during the moratorium.
Regarding the situation where a debtor is so ill that he is unable to pay for basic necessities, the NCLAT stated that in such a situation, the RP should not keep the business operating since a lack of finances is irrefutable proof that there is nothing left that can be revived or saved.[15]
Similar opinions were expressed by the Insolvency Law Committee in its report from February 2020[16], which recommended that the IB Code be amended to include a clause allowing for ongoing payment of such important suppliers for supplies made during the moratorium period. The Committee further suggested that suppliers be given the right to stop, suspend, or interrupt these essential shipments in the event that such payments were not paid.[17]
In Shyam Pradhan & Another Vs. Ananda Chandra Swain[18], the insurance company attempted to have the insurance policy covering the CD terminated through the use of its agent due to the CD entering CIRP. While defending the CD’s insurance coverage, the AA said that the policy could not be cancelled because it is necessary for the CD’s continued existence. The NCLAT ordered the appellant to keep the insurance policy in effect and upheld the AA’s position that the CD should continue as a going concern during the CIRP. The NCLAT further ordered the IRP to make any payments due to the insurer during the CIRP in instalments.
In Gujarat Urja Vikas Nigam Ltd. Vs. Amit Gupta,[19] the NCLAT affirmed the AA’s ruling setting aside the authority’s termination of the CD’s power purchase agreement on the sole basis of the CD’s beginning of CIRP. The AA determined that any PPA provisions that directly violated the IBC could not be enforced in light of section 238 of the IBC[20]. The NCLAT maintained the AA’s ruling while acknowledging the necessity of the agreement’s continuation to maintain the CD as a going concern.
CONCLUSION:
In conclusion, the provision for the uninterrupted supply of essential goods and services during the moratorium period, as enshrined in Section 14(2) of the IBC[21], is a cornerstone in the insolvency proceedings. This vital safeguard ensures the continuity of essential services like electricity, water, telecommunications, and information technology services, critical for preserving the CD’s value and its status as a going concern. Recent amendments have further broadened the scope[22], giving the IRP or RP the authority to identify what constitutes critical supplies. While this provision upholds the sanctity of essential services, it also imposes a duty on the CD to honour its current dues. Ultimately, the careful balance struck by the IBC safeguards the interests of all stakeholders, emphasizing the importance of essential supply in the intricate web of insolvency resolution.
Author(s) Name: Adarsh Anand Amola (Indian Institute of Management, Rohtak)
References:
[1] Insolvency and Bankruptcy Code 2016, s 14”
[2]”Oxford Learners Dictionaries <https://www.oxfordlearnersdictionaries.com/definition/english/moratorium> accessed 14 November 2023”
[3]“Insolvency and Bankruptcy Code 2016, s 14”
[4] Insolvency and Bankruptcy Code 2016, s 14(2)
[5] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations 2016, reg 32
[6] Insolvency and Bankruptcy Code 2016
[7] Insolvency and Bankruptcy Code 2016, s 14(2A)
[8] Insolvency and Bankruptcy Code 2016, s 14(2)
[9] The Insolvency and Bankruptcy Code(Amendment) Act 2020, s 5(b)
[10] Asset Reconstruction (India) Ltd vs R.Venkatakrishnan & Anr [2019] NCLAT Company Appeal (AT) (Insolvency) No. 232 of [2019]
[11] Insolvency and Bankruptcy Code 2016, s 14(2)
[12] Dakshin Gujarat VIJ Company Ltd v M/s ABG Shipyard Ltd and Another Company [2017] NCLAT Appeal (AT) (Insolvency) No. 334 of [2017]
[13] Insolvency and Bankruptcy Code 2016, s 14
[14] Understanding the IBC Key Jurisprudence And Practical Considerations IBBI
[15] ibid.
[16] Report of The Insolvency Law Committee (2020)
[17] Akaant Kumar Mittal, Insolvency and Bankruptcy Code Law and Practice (1st edn, EBC 2021 )
[18] Shyam Pradhan & Another v Ananda Chandra Swain [2020] NCLATCompany Appeal (AT) (Insolvency) No. 15 of [2020]
[19] Gujarat Urja Vikas Nigam Ltd v. Amit Gupta [2019] NCLAT Company Appeal (AT) (Insolvency) No. 1045 of [2019]
[20] Insolvency and Bankruptcy Code 2016, s 238
[21] Insolvency and Bankruptcy Code 2016, s 14(2)
[22] Understanding the IBC Key Jurisprudence And Practical Considerations IBBI
