Essential Goods and Services under the IBC: Greater Discretion to the Resolution Professional

The Insolvency and Bankruptcy Code (‘IBC’ or ‘Code’) read with the Corporate Insolvency Resolution Process Regulations (‘CIRP Regulations’) prohibits the termination of essential goods and services during the moratorium period. At present, Section 32 of the CIRP Regulations lists electricity, water, telecommunications and information technology as essential services. Importantly, CIRP Regulations also specify that these commodities are only essential to the extent that ‘they are not a direct input to the output produced or supplied by the corporate debtor.’ Any company supplying essential goods and services is prohibited from terminating, suspending or interrupting their supply until the conclusion of the moratorium period.

It can be inferred from the above language of the regulation that IBBI intended to limit the scope of essential goods and services to exclude suppliers that would typically be understood to come under the ambit of an operational creditor, such as vendors that provide raw materials to the company. This inference was confirmed by the National Company Law Tribunal (‘NCLT’) in ICICI Bank v. Innoventive Industries [1] which clarified this using the example of a Hydroelectric Plant. The court illustrated that water was ‘essential’ only to the extent that it was used for a purpose necessary for the ‘survival of human kind’ rather than ‘for making business and earning profits’.

The Insolvency and Bankruptcy (Second Amendment) Bill, 2020, which has been passed by the Lok Sabha on 6 March 2020 and the Rajya Sabha on 12 March 2020, proposes appending Section (2A) to Section 14(2) of the IBC. This amendment gives the Resolution Professional (‘RP’) the authority to increase the ambit of essential goods and services to those supplies that it considers ‘critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern.’ Any supplier that falls within this new definition will also be bound to continue the provision of their service unless the corporate debtor has not paid such dues arising from its provision during the moratorium.

A clear concern that arises from the drafting of this amendment is the discretion that is awarded to the RP. This is an issue firstly because, even with the priority in the Section 53 IBC waterfall given to dues arising from the supply of essential goods and services, there is still a risk that  payments could be delayed till the approval of a resolution plan or final distribution in liquidation and in some cases the corporate debtor may be unable to repay the essential goods/service provider in full if the company is unable to recoup enough value in a liquidation proceeding. This amendment now encompasses several additional suppliers, many of which may already be unpaid operational creditors, exposing to them to additional credit risk of a distressed company. Further, inclusion of a supplier within this ambit is determined by the discretion of the RP. It will therefore be unclear to the suppliers of a company undergoing CIRP whether they will be required to bear the additional risk which increases the financial uncertainty faced by the vendors.

Secondly, this amendment reduces the flexibility given to operational creditors on whether to continue to their business transactions with the corporate debtor. Under the current law creditors are able to continue providing goods and services to the distressed companies through bespoke arrangements between the operational creditor and the RP. The ability to negotiate bespoke agreements allowed the non-essential operational creditors to gauge their risk appetite and control the extent of their exposure to contingent liabilities in the form of a credit risk. Further, the arrangement could be customized with provisions such as caps on maximum debt, time-tables for payments and other provisions which could be negotiated on a case by case basis and tailored to the individual needs to the corporate debtor and the operational creditor. This amendment removes this flexibility in favour of a one-size-fits-all approach.

However, an advantage of this amendment is it will likely increase India’s rank in the World Bank Group’s Ease of Doing Business Report. As per the 2020 report, India’s insolvency framework does not adequately provide for the continuation supplying essential goods and services to the debtor. Implementing this amendment will likely increase India’s score in the global ranking further increasing foreign investor awareness of the Indian market. Secondly, the amendment also empowers the resolution professional to effectuate a viable restructuring by ensuring that the corporate debtor is able to function as a viable entity during the moratorium.

It remains to be seen how the interest of essential goods/service providers are balanced with the interests of the corporate debtor in practice.

Footnotes:
[1] ICICI Bank v. Innoventive Industries 2017 SCC Online NCLT 7

Authors:
Nikunj Maheshwari, Partner
Nihal Sharma, Associate

Date: March 19, 2020