Introduction – The clean slate principle
The Supreme Court of India, in its recent judgment in Tata Power Western Odisha Distribution Ltd. & Anr. vs. Jagannath Sponge Pvt. Ltd. & Director, has upheld the clean slate principle under the Insolvency and Bankruptcy Code, 2016 (IBC) and held that the successful resolution applicant cannot be insisted to pay the arrears payable by the corporate debtor for the grant of an electricity connection in her/his name. The Supreme Court also held that the Electricity Act, 2003 does not override the provisions of the IBC and that the dues of electricity distribution companies (DISCOMs) are operational debts under the IBC.
Background
The case arose out of a corporate insolvency resolution process (CIRP) initiated against Jagannath Sponge Pvt. Ltd. (Corporate Debtor), a sponge iron manufacturing company, under the IBC. The Corporate Debtor had an electricity connection from Tata Power Western Odisha Distribution Ltd. (TPWODL), a DISCOM, and had accumulated arrears of Rs. 1,06,00,000/- towards electricity charges as on 31.03.2017. The Corporate Debtor was declared insolvent and a resolution professional (RP) was appointed to manage its affairs and invite resolution plans from prospective resolution applicants.
The RP received two resolution plans, one from Shyam Metalics and Energy Ltd. (SMEL) and another from Sarda Energy and Minerals Ltd. (SEML). The Committee of Creditors (CoC) approved the resolution plan submitted by SMEL, which offered to pay Rs. 165 crores to the financial creditors and Rs. 1 crore to the operational creditors, including TPWODL. The resolution plan also stated that SMEL would not be liable for any past liabilities or dues of the Corporate Debtor and that it would apply for a fresh electricity connection from TPWODL in its own name.
The National Company Law Tribunal (NCLT), Cuttack Bench, approved the resolution plan submitted by SMEL and directed TPWODL to provide a fresh electricity connection to SMEL without insisting on payment of arrears of the Corporate Debtor. TPWODL challenged the NCLT’s order before the National Company Law Appellate Tribunal (NCLAT), New Delhi, contending that it had a statutory right to recover its dues from SMEL under Section 56 of the Electricity Act, 2003 and that the IBC did not override the Electricity Act.
The NCLAT dismissed TPWODL’s appeal and upheld the NCLT’s order, holding that SMEL was not liable to pay the arrears of the Corporate Debtor as per the clean slate principle under Section 31 of the IBC and that TPWODL could not refuse to provide a fresh electricity connection to SMEL under Section 43 of the Electricity Act. The NCLAT also held that TPWODL was an operational creditor under the IBC and that its dues were subject to distribution as per Section 53 of the IBC.
TPWODL further challenged the NCLAT’s order before the Supreme Court, reiterating its arguments that it had a statutory right to recover its dues from SMEL under Section 56 of the Electricity Act and that the Electricity Act had an overriding effect over the IBC.
Supreme Court’s Judgment – The clean slate principle
The Supreme Court, after hearing both parties and considering the relevant provisions of the IBC and the Electricity Act, passed a detailed judgment on 23rd August 2023, wherein it held as follows:
- On the issue of whether SMEL was liable to pay the arrears of the Corporate Debtor for obtaining a fresh electricity connection, the Supreme Court held that SMEL was not liable to pay any such arrears as per Section 31 of the IBC, which provides that once a resolution plan is approved by NCLT, it is binding on all stakeholders, including DISCOMs, and that it grants a discharge to the corporate debtor from all its past liabilities and dues. The Supreme Court observed that this is based on the clean slate principle, which aims to give a fresh start to the corporate debtor and its business under new management and ownership. The Supreme Court also observed that this principle is consistent with the objective of maximising value of assets and promoting entrepreneurship under the IBC.
- On the issue of whether TPWODL could refuse to provide a fresh electricity connection to SMEL under Section 43 of the Electricity Act, which provides that every distribution licensee shall provide electricity supply on request by an owner or occupier of any premises in accordance with regulations made by State Commission, subject to such conditions as may be specified, the Supreme Court held that TPWODL could not refuse to provide a fresh electricity connection to SMEL on the ground of non-payment of arrears of the Corporate Debtor. The Supreme Court observed that Section 43 of the Electricity Act does not empower TPWODL to impose any condition that is contrary to or inconsistent with the provisions of the IBC and that TPWODL could only impose such conditions as are specified by the State Commission in its regulations. The Supreme Court also observed that Section 56 of the Electricity Act, which provides that no sum due from any consumer shall be recoverable after a period of two years from the date when such sum became first due unless such sum has been shown continuously as recoverable as arrear of charges for electricity supplied, does not apply to SMEL as it is not a consumer of TPWODL and has no privity of contract with TPWODL.
- On the issue of whether the Electricity Act overrides the IBC, the Supreme Court held that Section 238 of the IBC, which provides that the provisions of the IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law, overrides the provisions of the Electricity Act, despite the latter containing two specific provisions which open with non-obstante clauses (i.e., Section 173 and 174). The Supreme Court observed that Section 173 of the Electricity Act, which provides that save as otherwise provided in Section 174, the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force, is subject to Section 174, which provides that nothing contained in this Act shall affect the provisions of Consumer Protection Act, 1986; Atomic Energy Act, 1962; and Railway Act, 1989. The Supreme Court also observed that Section 174 of the Electricity Act does not mention or exclude the IBC and therefore, it cannot be construed to override or prevail over the IBC. The Supreme Court further observed that Section 238 of the IBC is a later and special law that deals with a specific subject matter of insolvency and bankruptcy and therefore, it prevails over the Electricity Act, which is a general law that deals with a different subject matter of electricity supply and distribution.
- On the issue of whether TPWODL is an operational creditor under the IBC and whether its dues are subject to distribution as per Section 53 of the IBC, which provides for a waterfall mechanism for distribution of assets in liquidation, the Supreme Court held that TPWODL is an operational creditor under the IBC and that its dues are operational debts under the IBC. The Supreme Court observed that TPWODL provides goods or services to the Corporate Debtor in relation to its business operations and therefore, falls within the definition of operational creditor under Section 5(20) of the IBC. The Supreme Court also observed that TPWODL’s dues are claims in respect of provision of goods or services and therefore, fall within the definition of operational debt under Section 5(21) of the IBC. The Supreme Court further observed that TPWODL’s dues are subject to distribution as per Section 53 of the IBC, which gives priority to secured creditors over unsecured creditors and to government dues over residual debts.
Conclusion
The judgment of Supreme Court in Tata Power Western Odisha Distribution Ltd. & Anr. vs. Jagannath Sponge Pvt. Ltd. & Director is a significant one as it reaffirms the clean slate principle under the IBC and holds that the successful resolution applicant cannot be burdened with the past liabilities or dues of the corporate debtor for obtaining a fresh electricity connection. The judgment also clarifies the interplay between the IBC and the Electricity Act and holds that the IBC overrides the Electricity Act and that the dues of DISCOMs are operational debts under the IBC.
