Essential Goods And Services Under IBC What Does It Essentially Mean?
Section 14(2) of the Code prohibits the termination, suspension and interruption of supply of "essential goods or services" to the operations of the corporate debtor during the 'moratorium' period under the Code
One of the key tenets of the Insolvency and Bankruptcy Code, 2016 (Code) is preservation of the corporate debtor as a going concern until completion of the insolvency resolution process (CIRP) initiated against it. This is intended to preserve value of the assets of the corporate debtor and facilitate a successful resolution. In furtherance of this goal, Section 14(2) of the Code prohibits the termination, suspension and interruption of supply of "essential goods or services" to the operations of the corporate debtor during the 'moratorium' period under the Code, i.e. from the date of commencement of the insolvency resolution process until its conclusion.
Regulation 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) classifies four supplies as "essential goods and services", namely electricity, water, telecommunication services and information technology services. However, the supply of these items would not be considered "essential" if it is provided in large quantities as a direct input to the output produced or supplied by the corporate debtor1 or is used by the corporate debtor to make a profit.2 For instance, water supplied to a corporate debtor would be considered an essential supply for drinking and sanitation purposes, but not for generation of hydro-electricity.3
While this list suggests that the Code only prohibits disruption of these four supplies, in practice, insolvency tribunals have stepped beyond this list and expanded the meaning of "essential goods and services". Illustratively, in Canara Bank v. Deccan Chronicle Holdings Limited4, the tribunal held printing ink, printing plates, printing blanket, solvents etc. as "essential" goods for operation of a corporate debtor engaged in the business of publishing newspapers. The order was upheld by the National Company Law Appellate Tribunal (NCLAT) in appeal.5
Similarly, in Aircel Ltd v Union of India,6 the insolvency tribunal held that the Department of Telecommunication cannot terminate the telecom license granted to the corporate debtor during the moratorium, since the license was intrinsic to the corporate debtor's business and akin to an "essential good or service". These cases indicate that tribunals may step beyond the narrow purview of Section 14(2) and undertake a subjective examination of the business of the corporate debtor, to prohibit disruption of supplies considered crucial for maintenance of the debtor's operations during the CIRP.
Notably, the Insolvency and Bankruptcy Board of India (IBBI) as well as the Insolvency Law Committee have recognized that the list provided in the CIRP Regulations may not be sufficient to maintain the corporate debtor as a going concern7 and that key suppliers may demand "ransom payments" for continuing supply.8 Bearing this in mind, the Code has been amended to introduce Section 14(2A), which empowers the insolvency resolution professional (RP) to determine which supplies should be considered "critical" to protect and preserve the value of the corporate debtor and manage its operations. Such supplies cannot be terminated, suspended or interrupted during the moratorium, unless the corporate debtor is unable to make payments for supplies received during the moratorium. Fortunately, the amendment does not prescribe which supplies would be considered "critical" and leaves the RP with discretion in this regard; and it is likely that the previous interpretation of essential supplies by insolvency tribunals will guide RPs in making this determination under Section 14(2A) in the future. A draft proposal issued by the IBBI in November 2019 (prior to the aforesaid amendment of Section 14(2A)) suggested that the RP be required to file an application with the insolvency tribunal seeking declaration of a particular good or service as being "essential for continuing the corporate debtor as a going concern".9
As with other areas of the Code, the issue of which goods and services are "essential" to the corporate debtor has witnessed considerable judicial scrutiny. Despite deviations in certain instances as mentioned above, tribunals generally look at the list set out under Regulation 32 to assess whether a particular supply can be considered an "essential good or service". In numerous instances, insolvency tribunals have intervened to restore the supply of electricity to the corporate debtor.10 Where electricity was disconnected under the Electricity Act, 2003 due to default in payments, the tribunal held that the section was repugnant to Section 14 of the Code and ordered restoration.11 On the other hand, the RP's petition for continuation of the supply of gas to the corporate debtor has been dismissed by the insolvency tribunal on the grounds that gas does not find place in the exhaustive definition of an essential supply.12
Further, even where the essential supply is included within the scope of "essential goods and services" specified under the CIRP Regulations, tribunals will examine whether the corporate debtor is leveraging this supply for its business. Where the corporate debtor generated an e lectricity bill of over INR 35 lakh during the moratorium and defaulted on payment, the tribunal held that electricity was not being used for lighting or domestic purpose, but rather towards its medical diagnostic service – thus being a direct input towards the output produced by the debtor. The RP's application seeking continuation of electricity supply despite default in payments was accordingly dismissed.13
Judicial discourse on other essential goods and services, viz., information technology services, water and telecommunication services is less extensive. The scope of information technology services can be gathered from Inasra Technologies Private Limited v Karthigeyan Srinivasan14, where the corporate debtor's data saved in cloud storage was deleted by the service provider due to non-payment of fee. The tribunal held that cloud storage was an essential service under Regulation 32 of the CIRP Regulations and cannot be terminated during the CIRP.
In order to incentivize continued supply of essential services, amounts due to such suppliers have been made a part of the "insolvency resolution process costs",15 which are paid in priority to all other dues of the corporate debtor. In addition, insolvency tribunals have also ensured that corporate debtors pay current dues for supplies received during the CIRP. In Dakshin Gujarat VIJ Company Ltd v ABG Shipyard Ltd16, the NCLAT noted that the law does not stipulate supply of essential goods free of cost till the end of moratorium and the corporate debtor is required to make payment of current charges for services rendered. In fact, the NCLAT has also permitted the termination of essential supplies like electricity where the corporate debtor is unable to pay dues accruing during the CIRP.17 In practice, therefore, tribunals have provided relief to suppliers of the essential goods and services where the corporate debtor fails to make current payments. By way of further protection, the Parliament has expressly incorporated this intent under the newly introduced Section 14(2A) in respect of other critical supplies. Where critical suppliers are required to continue provision of goods and services at the behest of the RP, they have been permitted to suspend, terminate or interrupt such supply upon failure of the corporate debtor to make payments for supply received during the CIRP. This focus on payment of current dues ensures that key suppliers do not have to wait till completion of CIRP or failing which, until liquidation of the corporate debtor.
Unfortunately, the onset of the COVID-19 pandemic has brought forward new challenges on this front. Stressed corporate debtors are likely to struggle with payment of current dues to key suppliers. In turn, key suppliers may face difficulties in keeping up supply, especially small and medium enterprises. It remains to be seen how courts will balance the conflicting interests of these stakeholders, given the unprecedented times.
1 Reg. 32, CIRP Regulations 2 Insolvency and Bankruptcy Board of India, Discussion Paper on Corporate Insolvency Resolution Process, 3 November 2019 p. 2 3 Id. 4 NCLT Hyderabad order dated 19 July 2017. 5 Canara Bank v Deccan Chronicle Holdings Limited, NCLAT order dated 14 September 2017. 6 NCLT Mumbai order dated 27 November 2019. 7 Supra note 2; Ministry of Corporate Affairs, Report of the Insolvency Law Committee (February 2020) . 8 Id., Report of the Insolvency Law Committee. 9 Supra note 2. 10 Asset Reconstruction Company (India) Ltd v R Venkatakrishnan, NCLAT order dated 23 July 2019; Uttarakhand Power Corporation Ltd v ANG Industries Ltd, NCLAT order dated 24 January 2018; Innoventive Industries Ltd v Maharashtra State Electricity Distribution Company Ltd, NCLAT order dated 6 October 2017. 11 ABG Shipyard Ltd v ICICI Bank Ltd, NCLT Ahmedabad order dated 27 November 2017. 12 G Ramachandran v Oil and Natural Gas Corporation Ltd, NCLT Chennai order dated 15 May 2019. 13 Sundaresh Bhat v Chhattisgarh State Power Distribution Company Ltd, NCLT Mumbai order dated 24 January 2018. See also, Dakshin Gujarat Vij Co Ltd v Jitendra Kumar Yadav, NCLT Mumbai order dated 8 January 2019. 14 NCLT Chennai order dated 4 November 2019. 15 Regulation 31 of the CIRP Regulations. 16 NCLAT order dated 8 February 2018. 17 Uttarakhand Power Corporation Ltd v ANG Industries Ltd Company Appeal (NCLAT order dated 24 January 2018).
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.
Partner, Khaitan & Co LLP
Ashwin is a Partner in the Delhi office of Khaitan & Co LLP. Prior to joining Khaitan, Ashwin worked at Skadden, Arps, Slate, Meagher and Flom LLP for 4 years in their New York and London offices in the restructuring practice. He focuses on corporate and commercial transactions such as corporate restructurings, offerings of debt securities, financing transactions, mergers and acquisitions, and joint ventures. Ashwin is a registered insolvency professional and also assisted the Bankruptcy Law Reforms Committee in drafting of the Insolvency and Bankruptcy Bill, 2015 in the capacity of a peer reviewer. He is presently advising on several leading restructuring transactions and has previously advised GMAC on its restructuring, Nokia Siemens on its stalking horse Section 363 bid for Nortel Network’s assets and Temasek on its acquisition of Crompton Greaves Consumer Electricals Limited.
Principal Associate, Khaitan & Co LLP
Charu is a Principal Associate in the Delhi Office of Khaitan & Co LLP. She focuses on corporate restructurings, finance transactions and mergers & acquisitions.