{"id":297390,"date":"2023-07-21T12:00:42","date_gmt":"2023-07-21T06:30:42","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=297390"},"modified":"2023-07-21T11:46:58","modified_gmt":"2023-07-21T06:16:58","slug":"ibc-overrides-electricity-act-sc-explains-hierarchy-for-settling-dues-in-insolvency-cases","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2023\/07\/21\/ibc-overrides-electricity-act-sc-explains-hierarchy-for-settling-dues-in-insolvency-cases\/","title":{"rendered":"IBC overrides Electricity Act; Supreme Court explains hierarchy for settling dues in insolvency cases"},"content":{"rendered":"
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Supreme Court:<\/b> In a case centring round Paschimanchal Vidyut Vitran Nigam Limited (PVVNL)’s claim for unpaid electricity dues and the priority of claims under the Insolvency and Bankruptcy Code, 2016<\/a> (IBC), the bench of S. Ravindra Bhat and Dipankar Datta, JJ has held that Section 238<\/a> of the IBC<\/a> overrides the provisions of the Electricity Act, 2003<\/a> despite the latter containing two specific provisions which open with non-obstante clauses (i.e., Section 173 and 174).<\/p>\n

Background<\/h4>\n

The PVVNL raised electricity bills for Raman Ispat Pvt. Ltd. but the dues remained unpaid, so PVVNL attached the company’s properties. The Tehsildar, Muzaffarnagar created a charge on the properties and restrained transfer of property by sale, donation or any other mode. The company underwent resolution process under the IBC<\/a> but it was unsuccessful and became subject to liquidation.<\/p>\n

It is important to note that as on 27.01.2017, the total arrears due were ₹ 4,32,33,883\/-. Of this, the District Collector issued notice for recovery of outstanding dues to the tune of ₹ 2,50,14,080\/-, by auction of movable and immovable properties on 05.03.2018. The liquidator alleged that unless the attachment orders of the District Collector, Muzaffarnagar and Tehsildar, Muzaffarnagar were set aside by the NCLT, no buyer would purchase the property of the corporate debtor due to uncertainty about the authority of the liquidator to sell the property.<\/i> The liquidator also took the plea that PVVNL’s claim would be classified in order of priority prescribed under Section 53<\/a> of the IBC<\/a>, and PVVNL would be entitled to pro rata distribution of proceeds along with the other secured creditors from sale of liquidation assets.<\/p>\n

For this reason, the NCLAT directed the District Magistrate and Tehsildar, Muzaffarnagar to immediately release the attached property in its favour so as to enable sale of the property, and after realisation of the property’s value, to ensure its distribution in accordance with the relevant provisions of the IBC<\/a>. The NCLAT also endorsed NCLT’s reasoning that PVVNL fell within the definition of ‘operational creditor’, which could realize its dues in the liquidation process in accordance with the law.<\/p>\n

PVVNL’s Contention<\/h4>\n

PVVNL challenged NCLAT’s order before the Supreme Court arguing that Sections 173<\/a> and 174<\/a> of the Electricity Act, 2003<\/a> had an overriding effect on all other laws except Consumer Protection Act, 1986<\/a>; the Atomic Energy Act, 1962<\/a>; and the Railway Act, 1989<\/a>. Being a special law relating to all aspects of electricity – generation, transmission, distribution and adjudication of disputes – it had primacy over all other laws, including the IBC<\/a>, which was a ‘general’ law dealing with corporate insolvency implemented much later. In terms of the 2003 Act, and the regulations framed under it, including the Uttar Pradesh Electricity Supply Code, 2005, a special mechanism for recovery of electricity dues existed. The rights of electricity suppliers like PVVNL, therefore, were not subordinate and subject to the ‘priority of claims’ mechanism under the IBC<\/a><\/i>. Therefore, PVVNL could opt to independently stay out of the liquidation process and recover its dues.<\/p>\n

Supreme Court’s analysis<\/h4>\n

The Court explained the ‘waterfall mechanism’ mentioned under Section 53<\/a> of the IBC<\/a>, which provides for the following order of distribution of assets:<\/p>\n

a. insolvency resolution process costs and the liquidation costs;<\/p>\n

b. workmen’s dues for the period of 24 months preceding the liquidation commencement date and debts owed to a secured creditor in the event such secured creditor has relinquished security;<\/p>\n

c. wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date;<\/p>\n

d. financial debts owed to unsecured creditors;<\/p>\n

e. any amount due to the central government and the state government and debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;<\/p>\n

f. any remaining debts and dues;<\/p>\n

g. preference shareholders; and<\/p>\n

h. equity shareholders or partners.<\/p>\n

This hierarchy or order of priority thus accords government debts and operational debts lower priority than dues owed to unsecured financial creditors.<\/p>\n

Further, Section 52 gives an option to secured creditors to either relinquish their security interest, in the liquidation process (the procedure for which is prescribed in Regulations 21 and 21A of the Liquidation Regulations), or proceed to enforce it. In case of the latter option, the secured creditor has to first indicate its option, within the time prescribed (30 days, in Form C or D of Schedule II to the Liquidation Regulations). The liquidator may then, per Section 52(3), permit the secured creditor to realize such dues as are proved to exist, as security debts. Upon clearance by the liquidator, the secured creditor may proceed to enforce its claim, under Section 52(4). If there is resistance during the process, the secured creditor may approach the NCLT [Section 52(5) and (6)]. Upon enforcement, any excess amount realized should be tendered to the liquidator [Section 52(7)].<\/p>\n

The Court hence noticed that the procedure takes a nuanced approach for the recovery of a secured creditor’s dues. In case they opt to relinquish the security, their priority is ranked high; in case, they seek to enforce such security, subject to intimation and verification by the liquidator, they can proceed to do so. In the event of short fall, they rank lower in priority. This appears to be the reason, as is clear from the explanation provided in response to comments as a result of Parliamentary debates in 2018, that secured creditors opting not to relinquish their security interest are “presumed that such secured creditors have recovered most of their dues by enforcement of their security outside the liquidation proceedings”.<\/p>\n

Stating that there is sound logic in this, the Court explained,<\/p>\n

“those opting to ‘stand out’ and enforce security interest, are permitted to do so; in the event of excess recovery, they have to intimate and hand over such excess for distribution in liquidation proceeding; in case they are unable to recover their dues, for such of the dues as are outstanding, such secured creditors are ranked low.”<\/b><\/p>\n

On the contention that the dues owed to PVVNL were technically owed to the “government”, and thus occupied a lower position in the order of priority of clearance, the Court explained that the expression “government dues” is not defined in the IBC<\/a> – it finds place only in the preamble. However, what constitutes such dues is spelt out in the ‘waterfall mechanism’ under Section 53(1)(e), which inter alia states that, “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 the State” ranks lower in priority to the class of creditors described in Clauses (a) to (d) of Section 53(1).<\/p>\n

Thus, there exists a separate enumeration or specification of the Central Government and State Government dues, as a class apart from other creditors, including creditors who may have secured interest (in respect of which amounts may be payable to them). The repeated reference of lowering of priority of debts to the government, on account of statutory tax, or other dues payable to the Central Government or State Government, or amounts payable into the Consolidated Fund on account of either government, in the various reports which preceded the enactment of the IBC<\/a>, as well as its Preamble, means that these dues are distinct and have to be treated as separate from those owed to secured creditors. The Central Government and State Government are defined by the General Clauses Act, 1897<\/a>.<\/p>\n

Coming to PVVNL, the Court said that it undoubtedly has government participation., however, that does not render it a government or a part of the ‘State Government’.<\/b> Its functions can be replicated by other entities, both private and public. The supply of electricity, the generation, transmission, and distribution of electricity has been liberalized in terms of the 2003 Act barring certain segments. Private entities are entitled to hold licenses. Hence, it was held that the dues or amounts payable to PVVNL do not fall within the description of Section 53(1)(f)<\/a> of the IBC<\/a>.<\/p>\n

Consequently, dismissing the appeal, the Court directed the liquidator to decide the claim exercised by PVVNL in the manner required by law and complete the process within 10 weeks.<\/p>\n

[Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat (P) Ltd., 2023 SCC OnLine SC 842<\/a>, decided on 17-07-2023<\/span>]<\/p>\n

Judgment authored by Justice S. Ravindra Bhat<\/span><\/strong><\/p>\n

Know Thy Judge | Justice S. Ravindra Bhat<\/a><\/p><\/blockquote>\n