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Protection Of Interests Of Suppliers Of Goods And Services To Corporate Debtor Under Corporate Insolvency Resolution Process

Anoop Kumar K.A
29 March 2020 4:50 AM GMT
Protection Of Interests Of Suppliers Of Goods And Services To Corporate Debtor Under Corporate Insolvency Resolution Process
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Scope of the Study:

The Insolvency and Bankruptcy Code, 2016 (Hereinafter referred to as "the Code") required the Resolution Professional to manage operations of the corporate debtor as a going concern during corporate insolvency resolution process[1] (Hereinafter referred to as "CIRP"). Receipt of supply of goods and services is imperative to maintain the corporate debtor as a going concern during CIRP. The business risk taken by such suppliers should be adequately protected. This study is to understand the legal protection available to suppliers of goods and services to a corporate debtor under CIRP.

Statutory Provisions.

Under Sec. 14 (2) of the code, it is provided that during Moratorium, "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".

Sec 14 (2) has been futher amended by the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (Effective from 28-12-2019, wherein Sub-section 2A has been added to Sec. 14(2). Sec. 14(2)(A) provides that "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."

The term "essential supplies" has been defined under Regulation 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016, (Hereinafter referred to as "IRPCP Regulations, 2016") which reads that:

Regulation 32: Essential supplies. The essential goods and services referred to in section 14(2) shall mean- (1) electricity; (2) water; (3) telecommunication services; and (4) information technology services, to the extent these are not a direct input to the output produced or supplied by the corporate debtor.

Illustration- Water supplied to a corporate debtor will be essential supplies for drinking and sanitation purposes, and not for generation of hydro-electricity.

Before the Amendment Act came into effect i.e., before 28-12-2019, Section 14(2) of the Code, when read with the Regulation 32 of the IRPCP Regulations, 2016 mandated uninterrupted supply of goods and services mentioned in Regulation 32, to the extent they are not a direct input to the output produced or supplied by the corporate debtor, during moratorium.

However, if goods and services mentioned in Regulation 32 of the IRPCP Regulations, 2016 constitute direct input to the output produced or supplied by the corporate debtor, they will not be considered as essential supplies. All other supplies to the corporate debtor during moratorium also will not be considered as essential supplies.

Whereas, after the Amendment Act, Under Section 14(2A) of the Code, 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. Sub-section 2A also provided that if the corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified, the supplier cannot be mandated to continue the supply. On the other hand, the definition of "essential supplies" has been defined under Regulation 32 of the IRPCP Regulations, 2016 as amended upto 12.02.2020 remains the same.

The Code and the IRPCP Regulations, 2016 give primacy to amounts due to such suppliers of essential goods and services as such amounts are considered as part of the insolvency resolution process costs. Under Sec. 5 (13) (c) of the Code insolvency resolution process costs includes "any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern". Under Sec. 5 (13) (e) of the Code insolvency resolution process costs includes "any other costs as may be specified by the Board". The Regulation 31 stipulates that "Insolvency resolution process costs" under Section 5(13)(e) shall mean- (a) amounts due to suppliers of essential goods and services under Regulation 32"

The scope of Sec. 5(13)(C) of the code is much wider than the scope of Regulation 31 of the IRPCP Regulations, 2016. Under Sec. 5(13)(C), any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern. Therefore, under Sec. 5(13)(c), the supplier is entitled for amounts due to essential goods and services supplied to the corporate debtor upon demand by the Insolvency Resolution Professional/Resolution Professional to preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, during the period of moratorium. Whereas the Regulation 31 of the IRPCP Regulations, 2016 is limited to the extent of payment of amounts due to essential supplies as has been defined under Regulation 32 of the IRPCP Regulations, 2016.

Judicial Precedents.

1) Dakshin Gujarat VIJ Company Limited v. ABG Shipyard Limited, Company[2]

The question as to whether the order of 'Moratorium' will cover the current charges payable by the 'Corporate Debtor' for supply of water, electricity etc. or not came up before the NCLT in the matter of Dakshin Gujarat VIJ Company Limited v. ABG Shipyard Limited.

In this case, the Interim Resolution Redressal Person failed to pay the current dues towards supply of electricity during the period of 'Moratorium to Dakshin Gujarat VIJ Company Limited. On the contrary, the Interim Resolution Redressal Person claimed that in view of Regulations 31 & 32 of IRPCP Regulations, 2016, the Discom is duty bound to supply the essential goods and services, including the electricity, water etc.

The NCLT, after considering the provisions of Sec. 14(2) of the Code and Regulations 31 & 32 of IRPCP Regulations, 2016, made following observations about essential supplies and payment of their amounts :

  • The amount due towards supply of essential goods and services, including electricity, water, telecommunication services and information technology services, if they are not a direct input to the output produced or supplied by the 'Corporate Debtor', require to be included towards 'Insolvency Resolution Process Costs' as per sub-section 13(e) of Section 5.

  • Essential goods or services, including electricity, water, telecommunication services and information technology services, if they are not a direct input to the output produced or supplied by the 'Corporate Debtor', cannot be terminated or suspended or interrupted during the 'Moratorium' period.

  • Under the Code and the IRPCP Regulations, 2016, 'I&B Code' and Regulations, there is no prohibition has been made or bar imposed towards payment of current charges of essential services. Such payment is not covered by the order of 'Moratorium'. Regulation 31 cannot override the substantive provisions of Section 14; therefore, if any cost is incurred towards supply of the essential services during the period of 'Moratorium', it may be accounted towards 'Insolvency Resolution Process Costs', but law does not stipulate that the suppliers of essential goods including, the electricity or water to be supplied free of cost, till completion of the period of 'Moratorium'. Payment if made towards essential goods to ensure that the Company remains on-going as made in the present case for the month of December, 2017, such amount can be accounted towards 'Insolvency Resolution Process Costs', but it does not mean that supply of essential goods such as electricity to be supplied free of cost and the 'Corporate Debtor' is not liable to pay the amount till the completion of the period of 'Moratorium'. If the 'Corporate Debtor' has no fund even to pay for supply of essential goods and services, in such case, the 'Resolution Professional' cannot keep the Company on-going just to put additional cost towards supply of electricity, water etc. In case the 'Corporate Debtor' (Company) is non-functional due to paucity of fund, and has become sick the question of keeping it on going does not arise.

It should be note that in this case, the NCLT had no occasion to consider the effect of Sec. 5(13)(C) of the Code in payment of costs incurred by the resolution professional in running the business of the corporate debtor as a going concern.

2. Dakshin Gujarat Vij Company Limited, Applicant In the matter of Andhra Bank Vs. Oracle Home Textile Ltd[3].

This matter was also relating to continuation of supply of electricity of corporate debtor during moratorium. In this matter the Court, inter alia, held that u/s. 25 of the Insolvency Code, Duties of Resolution Professional are prescribed according to which Resolution Professional is required to undertake the action for raising interim finance so that the business activity of the Corporate Debtor can be restored. Any cost incurred by the Resolution Professional in running the business of the Corporate Debtor as a going concern is to be treated as "Insolvency Resolution Process Cost" as provided under Section 5(13)(c) of the Code. It was held that the expenditure incurred to run the business of a Debtor Company is, therefore, to be borne by the Committee of Creditors.

Conclusion

Under Section 14(2), read with the Regulation 32 of the IRPCP Regulations, 2016 mandate uninterrupted supply of goods and services mentioned in Regulation 32, to the extent they are not a direct input to the output produced or supplied by the corporate debtor, during moratorium. This is a stator mandate. The suppliers are entitled for regular payment for such goods and services.

Under Section 14(2A) of the Code, 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. This has increased the scope of 'essential supplies' in line with the purpose of the Code to keep the Corporate Debtor as a running concern during moratorium. However, under Section 14(2A), if the corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified, the supplier cannot be mandated to continue the supply, in which case the supplier can terminate, suspend or interrupt then the supply of such goods or services during the period of moratorium. The suppliers are entitled for regular payment for such goods and services supplied under Section 14(2A).

Even though Section 14(2) and Section 14(2A) effectively covers supply of all essential goods and services to the corporate debtor during moratorium, a fundamental question may still arise whether certain goods or services supplied are essential supplies or not. Though this is largely a question of facts, such suppliers can take protection under Section 5(13)(c) of the Code wherein any cost incurred by the Resolution Professional in running the business of the Corporate Debtor as a going concern is to be treated as "Insolvency Resolution Process Cost".

The law has given preferential treatment to suppliers of goods and services to a corporate debtor during moratorium, and periodic payment of their amounts are ensured. They also have the right to stop supplies during moratorium, primarily, if their payments are due. Such protection only will build confidence among suppliers to supply- goods and services to a corporate debtor during moratorium and so that the purpose of the Code to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern during moratorium can be achieved.

Views Are Personal Only.

[1] Insolvency and Bankruptcy Code, 2016, Sec. 20, 23 and 25

[2] NCALT, Appeal (AT) (Insolvency) No. 334 of 2017

[3] NCLT, M.A. 1308/2018, Order dated 08.01.2019 and MA 1292/2019 in C.P.(IB)-1842/(MB)/2018, Order dated 07.05.2019

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