Discoms not immune to insolvency, can be sued under IBC: Power Ministry

The Union Power Ministry has said that provisions of the Insolvency and Bankruptcy Code (IBC), 2016 would be applicable to state-run power discoms and that creditors are free to initiate the corporate insolvency resolution process (CIRP) against defaulting distribution companies.

The ministry also clarified that there is no conflict between the IBC and Electricity Act 2003 in regards to the resolution of monetary claims.

The statement made by the ministry after deliberations with the Ministry of Law and Justice on Monday not only dispels the myth that discoms are immune to insolvency proceedings, but also empowers creditors to demand their dues in court.

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According to the power ministry, insolvent discoms owe around ₹1 trillion to power generation companies. The failure of discoms to pay pending dues to power generating companies has disabled the latter from paying coal dues, leading to a depletion in coal supplies at power-generating plants across the country and a consequent power crisis.

The issue was taken up by the Power Ministry after the Tamil Nadu government in a letter on September 16 said that discoms do not come under the purview of insolvency provisions of IBC as they were providing power as an extension of the state government.

The Tamil Nadu government made the statement during the hearing of a writ petition filed by South India Corporation Pvt Ltd., requesting the Madras High Court to initiate proceedings under IBC.

The power ministry in its reply on November 8, said that state discoms are not an extension of the state government as they are set up under the Companies Act and not under a statute like the NHAI Act. The ministry also cited several Supreme Court rulings on the matter to make its case.

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The ministry’s clarification means now financial or operational creditors can sue state discoms in the National Company Law Tribunal for defaulting on a minimum payment of ₹1 crore.