Essential Supply Protection under Section 14(2) IBC: Electricity Disconnection Prohibited During CIRP Moratorium Despite Non-Payment

NCLAT held that under Section 14(2) of the IBC, electricity as an essential supply cannot be disconnected during the CIRP moratorium period, notwithstanding non-payment of dues.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, reviewed an appeal and held that electricity, not being a direct input to the production process, qualifies as an essential supply under Section 14(2) of the IBC. Consequently, its disconnection is prohibited during the CIRP moratorium, with dues treated as CIRP costs payable through the resolution process rather than through enforced disconnection.

The National Company Law Appellate Tribunal (NCLAT) dismissed the appeal filed by Maharashtra State Electricity Distribution Company Ltd. (MSEDCL) against the NCLT, Mumbai Bench’s order directing restoration and continuation of electricity supply to Morarjee Textile Limited during its Corporate Insolvency Resolution Process (CIRP). The dispute arose from the Corporate Debtor’s default on electricity payments, which led MSEDCL to disconnect power. The Resolution Professional (RP) sought relief under Section 14(2) of the Insolvency and Bankruptcy Code (IBC), asserting electricity as an essential supply that cannot be interrupted during the moratorium.

MSEDCL argued that under Section 14(2A), the Corporate Debtor must pay for critical supplies like electricity even during CIRP, emphasising the absence of any statutory bar on recovering dues and the significant operational costs electricity entails. Conversely, the RP relied on Section 14(2) and Regulation 32 of the CIRP Regulations to assert that electricity qualifies as an essential service, and its disconnection violates the moratorium imposed under the IBC. The RP further contended that dues for essential supplies form part of CIRP costs, payable with priority under the insolvency resolution framework.

In its judgment, the NCLAT analysed the distinction between Sections 14(2) and 14(2A), referencing the Supreme Court’s clarification that Section 14(2A) pertains to goods and services not covered under Section 14(2). The Tribunal interpreted Regulation 32, which defines "essential supply," to include electricity unless it constitutes a direct input in the production process. Finding no evidence that electricity was a direct input in Morarjee Textile’s manufacturing, the Tribunal held electricity to be an essential supply protected under Section 14(2), thereby prohibiting disconnection during CIRP. The Tribunal also clarified that dues for such supplies are to be settled as CIRP costs during resolution and cannot be enforced by discontinuing supply.

The Tribunal distinguished the present case from the precedent in Shailesh Verma, Resolution Professional of Lavasa Corporation Limited v. Maharashtra State Electricity Distribution Company Limited, REEDLAW 2022 NCLAT Del 09515, where the RP relied on Section 14(2A) for payment of electricity dues, whereas in this matter, the RP had expressly relied solely on Section 14(2). Noting the RP’s ongoing partial payments and efforts to arrange interim finance, the Tribunal affirmed that the moratorium’s protection against disconnection remains effective until resolution. It also referred to the Insolvency and Bankruptcy Board of India’s (IBBI) Discussion Paper proposing amendments to better distinguish essential and critical services, but held that until such changes are enacted, the existing regulatory framework governs.

Accordingly, the NCLAT upheld the NCLT’s direction to MSEDCL to maintain electricity supply to the Corporate Debtor during CIRP and directed the RP to continue efforts to clear dues. The appeal was disposed of without costs, with the Tribunal urging IBBI to expedite regulatory amendments to resolve operational challenges arising in insolvency proceedings.

Mr. Pulkit Doera, Mr. Anup Jain and Ms. Sneha Singh, Advocates, represented the Appellants.

Mr. J. Rajesh, Mr. Dhrupad Vaghani, Mr. Yashwardhan Agarwal and Mr. Arsalan Ahmed, Advocates, appeared for the Respondent.

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