Introduction
Pre-CIRP obligations refer to liabilities incurred before the commencement of the Corporate Insolvency Resolution Process (CIRP), such as unpaid electricity dues, taxes, and lease rentals. These liabilities are addressed under the Insolvency and Bankruptcy Code (IBC), 2016, through the waterfall mechanism in Section 53. Courts have ruled that successful auction purchasers of corporate debtor assets during liquidation are not responsible for pre-CIRP obligations, acquiring assets on a “clean slate” basis, free from past liabilities. Utility providers are required to restore services upon payment of post-CIRP charges. The Hon’ble NCLAT discussed the present issue in the matter of M/s Uttarakhand Power Corporation Limited (UPCL) vs. M/s. Shyam Baba Developers & Builders Pvt. Ltd. and Anr.
Facts
The CIRP against the corporate debtor was initiated in early 2019 following an application under Section 7 of the IBC, filed by a financial creditor. As no resolution plan was approved, the Adjudicating Authority ordered liquidation in late 2020. In mid-2022, the Liquidator’s stakeholder list admitted the appellant’s claim of ₹7,66,95,203/-. The debtor’s land and building were sold to a Successful Auction Purchaser (SAP), who was issued a possession letter. The SAP then filed an application for the restoration of electricity, which the appellant opposed due to unpaid pre-CIRP dues. The Adjudicating Authority directed the appellant to restore the connection, prompting the appellant to appeal the decision.
Tribunal’s Views
The case examined whether a Successful Auction Purchaser (SAP) can be compelled to pay pre-CIRP electricity dues before the restoration of services. The NCLAT dismissed the appellant’s appeal, emphasizing that such dues should be resolved through the liquidation process under the IBC, rather than being imposed on the SAP.
The appellant argued that the e-Auction terms, which specified an “as is where is” sale, required the SAP to settle all outstanding liabilities, including electricity dues. However, the SAP contended that pre-CIRP liabilities, including electricity arrears, must be addressed through the liquidation process according to the waterfall mechanism. The SAP stressed that these liabilities had been admitted in the liquidation, and imposing them on the SAP would violate the clean slate principle, which ensures that auction purchasers acquire assets free of the debtor’s past obligations.
The NCLAT upheld the IBC’s objective of providing a fresh start for debtor assets, asserting that pre-CIRP dues should be settled within the insolvency framework. Requiring the SAP to pay these dues would undermine the IBC’s goal of maximizing asset value and ensuring equitable treatment of stakeholders.
This judgment affirms that pre-CIRP liabilities must be resolved within the IBC framework and that successful auction purchasers are not liable for past obligations, ensuring assets are free from encumbrances.
*The content of this article is intended to provide general information. No reader or user should act or refrain from acting based on the information written above without first seeking legal advice from a qualified law practitioner.
* R & D Law Chambers is a firm that provides legal advisory and international and domestic tax advisory services. To know more visit https://rdlawchambers.com/.