Interpretation of Essential Goods and Services under the Insolvency and Bankruptcy Code 2016

[Archis Choudhary is a 4^th year B.A., LL.B. (Hons.) student at Hidayatullah National Law University in Raipur]

Section 14(2) of the Insolvency and Bankruptcy Code 2016 (Code) restricts the termination of supply of essential goods or services to the corporate debtor during moratorium period. In the case of Innoventive Industries Limited v. ICICI Bank Limited (2017), the Supreme Court observed that the intent behind the moratorium was “to provide the debtors a breathing spell in which he is to seek to reorganize his business.” In the light of the quoted sentence from the judgement, it is safe to mention that section 14(2) of the Code seeks to ensure that the corporate debtor is not deprived of essential goods or services during the period of moratorium. Section 14(2) of the Code states that 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.

Regulation 32 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) states:

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 [emphasis supplied].

Therefore, a reading of section 14(2) of the Code along with regulation 32 of the CIRP Regulations would mean that the supply of electricity, water, telecommunication services and information technology services to the corporate debtor shall not be terminated during the period of moratorium, to the extent these are not a direct input to the output produced or supplied by the corporate debtor. The illustration provided thereunder further throws light on the issue by stating that water shall be covered under the definition of essential goods and services only to the extent it is used for drinking and sanitation purposes, and not as an input to the output produced.

Analysis of the Interpretation of the NCLT Hyderabad Bench

Issues arise when we look at the decision of the Hyderabad Bench of the National Company Law Tribunal (NCLT) in the matter of Canara Bank v. Deccan Chronicle Holdings Limited (2017) where, whilst declaring moratorium, the tribunal accepted the prayer of the corporate debtor to consider “Printing ink, Printing plates, Printing blanket, Solvents etc.” along with water and electricity as essential goods and services which fall within the exemption under section 14(2) of the Code. The order does not emphasize on the reason as to why these commodities fall under the exemption contemplated.

Regulation 32 of the CIRP Regulations mentions four items as essential goods and services for the purpose of section 14(2). It further narrows down this interpretation by considering them as essential to the extent these are not a direct input to the output produced or supplied by the corporate debtor. The ambit of this provision is narrow and the list of items seems to be exhaustive in nature when we factor in the use of the word ‘and’ in the language.

Thus, according to the CIRP Regulations and section 14(2), one fails to construe the reasoning behind the order in the aforementioned case where printing ink printing plates, printing blanket, solvents etc., which are prima facie, inputs to the output produced by the corporate debtor, which in the instant matter is in the business of printing and publishing newspapers and periodicals. It is also pertinent to note that such deviation has not been challenged by the other party on appeal decided by the National Company Law Tribunal on September 14, 2017.

Conclusion

This order seems to be in conformity with the intent of a moratorium, i.e., to provide a breathing spell to the debtor to reorganize his business, but is not in line with what has been laid out under the CIRP Regulations. The interpretation of these two provisions has not come under the judicial scanner lately, and the point of law is thus left in ambiguity. Therefore, this precedent may bring about a situation wherein certain creditors are bound to supply the goods or services as declared essential by an order of the tribunal till the end of the moratorium period and then later have to file a claim before the insolvency resolution professional for their dues.

– Archis Choudhary