Electricity Act Prevails Over IBC: NCLAT Rules on Fuel Surcharges in Insolvency Proceedings

By IBC, Insolvency Law

Introduction

In a significant ruling that impacts the intersection of electricity regulations and insolvency law, the National Company Law Appellate Tribunal (NCLAT) has held that Fuel Surcharge (FS) and Special Fuel Surcharge (SFS) under the Electricity Act, 2003 cannot be extinguished by resolution plans approved under the Insolvency and Bankruptcy Code, 2016 (IBC). This judgment in M/s Shree Rajasthan Syntex Ltd. v. Chief Engineer (Commercial), Ajmer Vidyut Vitran Nigam Ltd. delivered on March 11, 2025, clarifies the hierarchy between sectoral regulations and the insolvency regime’s clean slate principle.

Case Background

The appellant, M/s Shree Rajasthan Syntex Ltd., a public listed company manufacturing synthetic spun yarns, had undergone a Pre-Packaged Insolvency Resolution Process (PPIRP) initiated under Section 54C of the IBC. The PPIRP was admitted on April 19, 2023, and subsequently, a Base Resolution Plan was approved by the Committee of Creditors (CoC) and sanctioned by the National Company Law Tribunal (NCLT), Jaipur Bench on August 22, 2023.

Following the plan approval, Ajmer Vidyut Vitran Nigam Ltd. raised demands for FS and SFS charges dating back to 2013-2018, which were not included in the claims submitted during the resolution process. The electricity distribution company issued bills on April 5, 2023, and May 5, 2023, demanding substantial amounts for these charges.

The appellant challenged these demands, arguing that since the electricity distribution company had not filed claims during the prescribed period, these demands violated Section 31(1) of the IBC, which provides for a “clean slate” after a resolution plan is approved.

Key Legal Issues

The case presented several critical legal questions:

  1. Whether FS and SFS charges, being statutory dues under the Electricity Act, 2003, can be extinguished under the IBC’s clean slate principle
  2. When the liability for these charges actually arises – at the time of consumption or at the time of billing
  3. Whether the non-obstante clause under Section 238 of the IBC would override the provisions of the Electricity Act, 2003

NCLAT’s Decision

The NCLAT, comprising Justice Rakesh Kumar Jain (Judicial Member) and Technical Members Mr. Naresh Salecha and Mr. Indevar Pandey, dismissed the appeal and upheld the NCLT’s order permitting the recovery of FS and SFS charges despite the resolution plan’s approval.

The Tribunal based its decision on several key findings:

1. Timing of Liability

Relying on the Supreme Court’s decision in Prem Cottex v. Uttar Haryana Bijli Vitran Nigam Ltd., the NCLAT held that the liability for FS and SFS arises only upon billing, not when the underlying period of consumption occurs. Therefore, since these charges were billed after the insolvency process began, they could not have been included in the claims submitted during the resolution process.

2. Statutory Nature of Charges

The NCLAT emphasized that FS and SFS are statutory dues under the Electricity Act, 2003, and cannot be extinguished by proceedings under the IBC. The Tribunal affirmed that these obligations persist despite insolvency proceedings and must be honored according to the billing schedule.

3. Primacy of Sectoral Legislation

In a notable departure from the general understanding of the IBC’s overriding effect, the NCLAT concluded that the Electricity Act prevailed in this specific context, rejecting the appellant’s reliance on Section 238 of the IBC.

Practical Implications

This ruling has significant implications for corporate debtors undergoing insolvency resolution:

  1. Continued Liability for Statutory Dues: Corporate debtors must be prepared to face demands for statutory dues under the Electricity Act even after a resolution plan is approved.
  2. Limited Protection of Clean Slate Principle: The decision indicates that the IBC’s clean slate principle may not extend to all types of statutory dues, particularly those where liability arises upon billing rather than consumption.
  3. Sectoral Regulations May Prevail: The judgment suggests that in certain contexts, sectoral regulations may take precedence over the IBC, despite the non-obstante clause in Section 238.
  4. Financial Planning Considerations: Resolution applicants and corporate debtors must factor in potential liabilities for electricity charges that may not be apparent during the resolution process.

Analysis and Conclusion

The NCLAT’s ruling represents a significant interpretation of the interface between the IBC and the Electricity Act. While the IBC generally aims to provide a fresh start to corporate debtors through the clean slate principle, this decision carves out an exception for certain statutory dues under sectoral legislation.

This judgment appears to diverge from the Supreme Court’s ruling in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. (2021), which held that claims not forming part of an approved resolution plan stand extinguished. The NCLAT’s decision indicates that the application of this principle may vary depending on the nature of the claim and the specific statutory framework governing it.

For resolution professionals, corporate debtors, and creditors, this ruling underscores the importance of identifying and addressing potential statutory liabilities under the Electricity Act during the resolution process. It also highlights the need for a comprehensive assessment of sectoral regulatory obligations that might survive the insolvency resolution.

As the insolvency jurisprudence continues to evolve, this decision adds an important dimension to the understanding of the IBC’s interface with sectoral regulations and the limitations of the clean slate principle in specific contexts.

Disclaimer

This article is intended for informational purposes only and does not constitute legal advice. The information contained herein represents the views and analysis of August Attorneys LLP based on publicly available information and is current as of the publication date. This article should not be relied upon as a substitute for legal counsel on any specific matter. The views expressed are subject to change as further judicial pronouncements are made or as the law evolves. Readers should consult with a qualified attorney with respect to any legal decisions or issues. August Attorneys LLP expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this article.

© 2025 August Attorneys LLP. All rights reserved.