Essential Supplies and Contract Termination: CIRP Cases

A company in a CIRP must keep running, so the Code limits the power of suppliers and counterparties to walk away. Questions usually turn on whether a supply is essential or critical, whether the debtor is paying for current supplies, and whether a termination is founded on insolvency alone or on an independent breach. The NCLT's power to step in is real but narrow.

1. The Law in Brief

• Essential supplies, section 14(2). Electricity, water, telecommunication and IT services, as specified in Regulation 32, shall not be terminated, suspended or interrupted during the moratorium, to the extent they are not a direct input to the debtor's output.
• Critical supplies, section 14(2A). Inserted in 2020: goods or services the interim resolution professional or resolution professional considers critical to preserve value and run the business shall not be cut off, except where the debtor has not paid dues for supply during the moratorium.
• Licences. Under the Explanation to section 14(1), a government licence, permit or concession shall not be suspended or terminated on the ground of insolvency, if current dues for its use are paid.
• Termination of contracts. The Code has no general bar on ipso facto clauses; the NCLT may restrain a termination under section 60(5)(c) only in narrow cases (Gujarat Urja, 2021; TCS, 2021)

Figure 1: Essential and critical supplies compared

2. Can Electricity Be Cut Off for Pre-CIRP Dues?

• Issue. Whether electricity and gas supplies can be cut off during the moratorium for pre-admission dues.
• Law. Section 14(2) and Regulation 32 protect electricity, water, telecommunication and IT services, to the extent they are not a direct input to the output produced or supplied by the corporate debtor. Pre-admission dues are claims in the CIRP; supplies during the moratorium are paid as insolvency resolution process costs. Section 14(2A) allows the resolution professional to treat other supplies as critical.
• Application. For NO Ltd, electricity powers a textile plant and is not its output, so it is an essential supply; the board must continue supply against payment for current consumption. For PQ Power, gas is a direct input to the electricity it produces, so it is not an essential supply under Regulation 32.
• Conclusion. The board cannot disconnect NO Ltd for old dues and must file a claim. PQ Power cannot rely on section 14(2), but its resolution professional may declare the gas supply critical under section 14(2A); the supplier then cannot terminate so long as supplies during the moratorium are paid for.

3. When Can a Critical Supplier Stop Supply?

• Issue. Whether a critical supplier may demand payment of old dues as a condition of supply, and when it may stop supply.
• Law. Under section 14(2A), a supply the resolution professional considers critical shall not be terminated, suspended or interrupted during the moratorium, except where the corporate debtor has not paid dues arising from such supply during the moratorium. Old dues are claims in the CIRP and cannot be paid ahead of other creditors.
• Application. TU Ltd's demand for old dues as a condition of supply is not permitted. But once RS Ltd failed to pay for supplies made during the moratorium, the statutory exception applied.
• Conclusion. TU Ltd had to continue supply without payment of old dues, which it must claim in the CIRP. It was entitled to stop supply after RS Ltd defaulted on current supplies. The resolution professional should treat such payments as process costs and arrange interim finance if needed.

Figure 2: When the NCLT may restrain a termination

4. Can a Contract Be Terminated Solely for Insolvency?

• Issue. Whether the NCLT may restrain termination of a contract made solely on the ground of the debtor's insolvency.
• Law. In Gujarat Urja Vikas Nigam v Amit Gupta (2021), the Supreme Court upheld the NCLT's order under section 60(5)(c) restraining a State utility from terminating a power purchase agreement on the ground of insolvency alone, where the agreement was the debtor's only contract and termination would cause its corporate death. The Court stressed that the power is to be used cautiously and that its decision was confined to such facts.
• Application. The termination rests solely on the insolvency clause, with no breach in performance. The agreement is VW Solar's only source of revenue, and termination would end any chance of resolution.
• Conclusion. The NCLT may restrain the termination under section 60(5)(c) during the CIRP. The utility's contractual remedies for any later breach in performance remain available.

5. Can the NCLT Stay Termination for an Earlier Breach?

• Issue. Whether the NCLT may stay a termination based on breaches unrelated to the insolvency.
• Law. In Tata Consultancy Services v Vishal Ghisulal Jain (2021), the Supreme Court set aside an NCLT stay where the termination was for deficiencies in service that arose before and independently of the insolvency. The NCLT's jurisdiction under section 60(5)(c) arises only where the dispute relates to the insolvency, and it should intervene only where the contract is central to the CIRP or the debtor's survival.
• Application. ZA Ltd's termination rests on documented deficiencies notified before the CIRP, not on the insolvency. XY Ltd has other clients, so the loss of this contract would not cause its corporate death.
• Conclusion. The NCLT had no jurisdiction to stay the termination, and the appeal should be allowed. Any dispute over whether the termination was valid belongs to the forum chosen in the contract, such as a civil court or arbitration.

6. Frequently Asked Questions

Can a State refuse to renew a mining lease of a corporate debtor in CIRP?

A decision taken under statutory public law powers is reviewable by the High Court, not the NCLT (Embassy Property Developments, 2019), though the Explanation to section 14(1) bars suspension or termination of a licence on the ground of insolvency alone where current dues are paid.

Who pays for supplies made during the moratorium?

The corporate debtor, as insolvency resolution process costs, which are paid in priority in any plan or liquidation.

Does the Code invalidate all ipso facto clauses?

No. There is no general bar; protection comes through sections 14(2) and (2A), the Explanation on licences and the NCLT's narrow power under section 60(5)(c).

7. Related Topics

• Topic 23: Essential Supplies and Ipso Facto Clauses. Contracts during the moratorium.
• Topic 72: Adjudicating Authority. Section 60(5) jurisdiction.
• Topic 108: Section 138 Cheque Cases and Suits during IBC Moratorium. Proceedings during the moratorium.