Nanu Tradecom Private Limited & Anr. vs West Bengal State Electricity Distribution Company Limited & Ors.

Sabyasachi Bhattacharyya, J

The present writ petition has been filed by the petitioners, challenging an order of rejection dated March 16, 2019, by which the respondent no.3, that is, the Chief Engineer, Central Commercial Department, West Bengal State Distribution Company Limited (WBSEDCL) refused to grant new electricity connection to the petitioners in respect of the factory of the petitioner no.1-Company unless the alleged outstanding dues left by the erstwhile owner, to the tune of above Rs.3.5 crore, was deposited by the petitioner.

The learned Senior Advocate appearing for the petitioner contends that on March 31, 2018, the liquidator of Barjora Steel Re-Rolling Mills Private Limited (in liquidation) published an invitation of Expression of Interest (EOI) for acquisition of the assets/plant of the company (in liquidation). The list of assets included in the invitation of EOI included land, the factory, plant and machinery on such land. It is submitted that the EOI disclosed that the assets would be sold by way of slump sale and the applicant acquiring the asset would be required to endeavour to run the concern/business of the company after acquiring its assets. The entire aforesaid developments took place in connection with a proceeding initiated for corporate resolution under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘the IBC’) in which the corporate resolution had failed and liquidation had been initiated.

It is submitted that the petitioners’ bid for the assets was accepted by the liquidator and the assets were ultimately sold to the petitioners. Since there was no electricity connection, the petitioners applied for fresh electricity in respect of the factory premises.

However, it was alleged by the WBSEDCL that there was nexus between the petitioners and the erstwhile owner of the company, due to which the petitioners had to clear the outstanding dues prior to getting a new electricity connection.

The learned Senior Advocate for the petitioners cites Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta, reported at 2019 SCC OnLine SC 1478 for the proposition that a successful resolution applicant cannot suddenly be faced with ‘undecided’ claims after the resolution plan submitted by him was accepted as this would amount to a hydra-head popping up which would throw into uncertainty the amount payable by a prospective resolution applicant who successfully takes over the business of the corporate debtor. Unless the claims were submitted and decided by the resolution professional, the successful resolution applicant starts all over on a ‘fresh slate’.

Only upon failure of the corporate insolvency resolution process, the IBC provides for liquidation, which is governed by Chapter III of the IBC. The learned Senior Advocate places reliance on the said Chapter, in particular referring to Sections 36 to 42 of the IBC, to elucidate the scheme of liquidation under the IBC.

It is submitted that only if claims are admitted by the liquidator under Section 40 of the IBC, those can be a part in the distribution of proceeds from the sale of liquidation assets under Section 53 of the IBC.

By placing reliance on Isha Marbles Vs. Bihar State Electricity Board and another, reported at (1995) 2 SCC 648 and AI Champdani Industries Limited Vs. Official Liquidator and another, reported at (2009) 4 SCC 484, the petitioners submit that it is settled law that in the event of an auction sale of the assets of an entity, the supply of electricity to the purchaser of the assets cannot be denied on account of outstanding debts of the defaulting entity.

In view of the claim of Section 238 of the IBC, which is a non obstante clause, the question of any demand being made by the respondent no.1 on the petitioners or refusal to grant fresh electricity connection at its factory at Durgapur on account of alleged outstanding dues of the company in liquidation, does not and cannot arise, it is argued.

Learned counsel for the distribution licensee (respondent no.1) contends that the sale was effected in favour of the writ petitioners on “as is where is, whatever there is” basis. It will appear from the terms and conditions of sale that there were specific clauses for payment of any statutory dues apart from sale price, it is contended.

Learned counsel for the respondent no.1 further submits that Clause 3.4.2 of Regulation 55 dated August 7, 2013 of the West Bengal Regulatory Commission (WBERC) as well as Clause 2.5 of the WBSEDCL Procedure-B (2010) clearly say that where there are arrears of charges outstanding for a premises, before the application is processed, the applicant shall be liable for clearing the dues if nexus is established with the erstwhile defaulting consumer.

It is further submitted that the Electricity Act, 2003 (in short, ‘the 2003 Act’), being an earlier enactment, prevails over the IBC, even if there is a non obstante clause in the latter enactment, since the earlier enactment is a special enactment on the particular subject in issue.

By Notification dated December 26, 2018, it was declared by the Government of West Bengal that with effect from January 1, 2019, the entire distribution business and activities undertaken by the Durgapur Project Limited (DPL) along with all assurances, assets and liabilities will be transferred to the WBSEDCL via the mechanism of slump transaction of assets.

Under the terms and conditions of sale, it is submitted, the petitioners acknowledged that the assets of the company were being transferred by way of slump sale. However, there is no other reference to slump sale in the relevant documents.

The National Company Law Tribunal (NCLT), in connection with the corporate resolution proceedings, specified vide order dated September 14, 2018 that the petitioner would have to make application in the prescribed format for reconnection. Since a pre-condition of such restoration of connection was payment of the outstanding dues against electricity, the petitioners could not avoid the liability to pay the same.

Since the business was sold as a whole, as a ‘going concern’, it is the liability of the petitioner-company to pay the outstanding electricity charges to get electricity line at the factory premises.

Learned counsel for the respondent no.1 submits that the respondent no.1 is entitled to Rs.3.5 crore as outstanding dues from M/s. Barjora Steel and Re-Rolling Mills Private Limited, which was purchased by the petitioner through a slump sale. It is submitted that repeated assurances were given by the erstwhile owners to clear off the outstanding dues of the respondent no.1.

Under the provisions of the 2003 Act, as per Section 48 thereof, it is submitted that the WBSEDCL is empowered to put any restriction in providing the connection to the petitioner for the purpose of preventing economic loss.

In the present matter, the petitioners were all along aware of its liability before entering into an agreement with M/s. Barjora Steel and Re-Rolling Mills Private Limited. As such, the petitioner-company has made incorrect declaration before the WBSEDCL or before the erstwhile licensee stating that there is no connection either live or disconnected. Despite having full knowledge of the outstanding amount, the petitioner has sought to avoid payment of same, thereby depriving the respondent-company of the said dues.

Since it is the admission of the petitioner-company that the entire sale proceeding is pending with the NCLT for the adjudication, the petitioner cannot claim benefit of the scheme of the IBC, it is contended.

The electricity connection to the company-in-question was disconnected in the month of August, 2017, it is submitted.

It will be clear from the terms and conditions of the sale under Clauses 6, 7 and 11 that the purchaser takes the responsibility of clearing the dues in relation to the property and the liquidator will have no liability. Admittedly, the sale proceeding was challenged by the erstwhile licensee before the NCLT, Kolkata, which is still pending.

The sale proceedings-in-question, it is argued, was a process for slump sale as defined under Section 2(42c) of the Income Tax Act, 1961 and it is made clear that the transfer of assets without transfer of liabilities is not a slump sale.

Sections 174 and 175 of the 2003 Act, it is reiterated, empower the WBSEDCL to act under the provisions thereunder.

It may be noted that the liquidation process in the present case was undertaken as a result of the failure of the corporate insolvency resolution proceeding and is governed by the IBC. As such, irrespective of the nomenclature in the terms and conditions of the sale, the provisions of the IBC prevail.

Moreover, the distribution license had made a claim before the Adjudicating Authority, during the resolution process, which was not admitted in the said proceeding. Hence, the distribution licensee cannot make a claim all over again, despite such refusal by the Adjudicating Authority to admit its claim. Mere pendency of an appeal against such refusal and/or the order of sale does not, it is well-settled, ipso facto, operate as a stay or cancellation of such refusal of claim.

The IBC is a self-sufficient Code and provides a complete mechanism in respect of Corporate Insolvency Resolution and Liquidation.

Liquidation, as envisaged in the IBC, is not a mere isolated offshoot of Insolvency Resolution proceeding but is one of the logical conclusions of a resolution proceeding. The procedure as contemplated in the IBC is an integrated continuum.

In order to examine the scheme of liquidation under the IBC in such context, Section 5(18) of IBC is required to be considered first. The said sub-section provides that “liquidator” means of an insolvency professional appointed as a Liquidator in accordance with the provisions of Chapter III or Chapter V of Part-II, as the case may be. Section 5(20) stipulates that “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. Section 5(21), on the other hand, defines “operational debt” as a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

Section 33, IBC provides for initiation of liquidation. It is clear from a plain reading of Section 33 that liquidation begins where a Corporate Insolvency Resolution fails.

Section 35 stipulates the powers and duties of the liquidator. Clauses (a) to (d), (f) and (j) of Section 35, sub-section (1) are relevant in the context. Clause (a) empowers the liquidator to verify claims of all the creditors, Clause (b) to take into custody or control all the assets, property, effects and actionable claims of the corporate debtor, Clause (c) to evaluate the assets and property of the corporate debtor in the manner as may be specified by the Board and prepare a report and Clause (d) to take such measures to protect and preserve the assets and properties of the corporate debtor as he considers necessary. Clause (f) confers power on the Liquidator, subject to Section 52, to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate or to sell the same in parcels in such manner as may be specified. The proviso thereto says that the liquidator shall not sell immovable and movable property or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant. Clause (j) empowers the liquidator to invite and settle claims of the creditor and claimants and distribute proceeds in accordance with the provisions of the Code.

Section 38 of the IBC provides for consolidation of claims by the liquidator, Section 39 the verification of claims and Section 40 deals with the admission or rejection of claims by the liquidator.

Hence, the powers of the liquidator are on a similar footing as those of a Resolution Professional in a resolution proceeding. It is also noteworthy that Section 5 (18) of the IBC stipulates that a Liquidator has to be a Resolution Professional in the first place.

Section 53 provides for distribution of assets in liquidation and sets out the order of priority of distribution of proceeds from the sale of the liquidation assets. The sixth category in such pecking order is Section 53(1)(f), “any remaining debts and dues”. Clause (f) is the only provision in Section 53 which confers rights on the operational creditors to recover their dues.

As such, Section 53 is the culmination of the entire endeavour of the Liquidator and the order of priority given therein cannot be overridden by any of the operational creditors of the corporate debtor by jumping the queue in contravention of the priorities enumerated in Section 53.

What is next relevant is Regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. The different types of sale of asset have been enumerated therein. Up to Clause (d) of Regulation 32, sale of assets is dealt with. Clause (e) provides for sale of the corporate debtor as a going concern. Again, Clause (f) contemplates the business of the corporate debtor being sold as a going concern.

Regulation 32-A of the said Regulations provides for sale as a going concern. Sub-regulation (2) of Rule 32-A stipulates that for the purpose of sale under Sub-regulation (1), the group of assets and liabilities of the corporate debtor, as identified by the committee of creditors under sub-regulation (2) of Regulation 39-C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, shall be sold as a going concern.

On the other hand, Regulation 32-A (3) provides that where the committee of creditors has not identified the assets and liabilities under sub-regulation (2) of Regulation 39-C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall identify and group the assets and liabilities to be sold as a going concern, in consultation with the consultation committee.

It is evident from the scheme of the IBC, in respect of Liquidation, is that the pecking order as stipulated in Section 53 of the IBC cannot be superseded by any of the categories as provided therein. The said provision is set out below for convenience:

“53. Distribution of Assets. – (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely:-

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following:-

(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following:-

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

(2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the liquidator.

(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.

Explanation.- For the purpose of this section—

(i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients , if the proceeds are insufficient to meet the debts in full; and class of recipients, if the proceeds are insufficient to meet the debts in full; and class off recipients, if the proceeds are insufficient to meet the debts in full; and

(ii) the term “workmen’s dues” shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013.”

Thus, the operational creditors, who fall within category (f), that is, “any remaining debts and dues”, cannot claim any priority over the preceding categories in having their debts paid off.

However, that is precisely what will happen if the argument of the WBSEDCL is accepted, that is, if the expression “sale of going concern”, as used in the IBC and connected Regulations in respect of liquidation, is construed to include transfer of pre-CIRP liabilities of the corporate debtor.

Regulation 32-A of the Liquidation Process Regulations of 2016 clearly specifies that “liabilities” for the purpose of going concern sales in liquidation are only those liabilities which have been identified and earmarked for the going concern sale by the committee of creditors, if not, by the liquidator.

The said provision, read with Regulation 39-C of the Corporate Persons Regulations, 2016, is unambiguous and leaves no scope of construing that all the liabilities, including pre-CIRP liabilities, are transferred to the successful Resolution Applicant in a going concern sale.

It is well-settled that the debts of the power distribution licensee do not operate as charge on the assets of the corporate debtor.

Hence, both sale of the corporate debtor and the business(es) of the corporate debtor as a going concern, as envisaged in Regulation 32, Clauses (e) and (f) respectively, do not contemplate automatic transfer of all pre-CIRP liabilities of the corporate debtor to the auction purchaser.

In any event, the Regulations framed under the authority conferred by the IBC cannot be construed to override the provisions of the Code itself. Hence, no interpretation contrary to Section 53 of the IBC which, again, is preceded by a non obstante clause, can be attributed to the expression “going concern sale”, as contemplated in Rule 32 of the Liquidation Process Regulations, 2016.

The expressions “going concern sale”, “as is where is basis”, etc. may have several shades of connotations in market parlance. However, in an auction sale under an IBC liquidation process, such terms are circumscribed by the provisions of the Code and the ancillary Regulations, as discussed above.

Hence, in the present case, the claim of the WBSEDCL of outstanding dues from the petitioners as a pre-condition for grant of electricity cannot be sustained.

Thus, WPA 7364 of 2019 is allowed, thereby setting aside the order of rejection dated March 16, 2019, by which the respondent no.3, that is, the Chief Engineer, Central Commercial Department, West Bengal State Distribution Company Limited (WBSEDCL) refused to grant new electricity connection to the petitioners in respect of the factory of the petitioner no.1-Company unless the alleged outstanding dues left by the erstwhile owner, to the tune of above Rs.3.5 crore, was deposited by the petitioner.

The WBSEDCL shall give new electricity connection without insisting upon payment of such dues by the petitioners, subject to compliance of all other formalities by the petitioners in connection with their application for new electricity connection at the earliest, latest within a month from compliance of such formalities by the petitioners.

There will be no order as to costs.

Urgent certified server copies of this order, if applied for, be supplied to such applicants upon satisfaction of all requisite formalities.