INTRODUCTION:
In a recent judgement of Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Ltd. and Ors. (being Civil Appeal No.7976 of 2019), the Hon’ble Supreme Court has held that Section 238 of the Insolvency and Bankruptcy Code, 2016 (“IBC/Code”) overrides the provisions of the Electricity Act, 2003, despite the latter containing two specific provisions being Section 173 and 174 which have overriding effect over all other laws.
FACTUAL BACKGROUND:
The Appellant, Paschimanchal Vidyut Vitran Nigam Ltd. (“PVVNL”) filed an appeal before the Hon’ble Supreme Court, being aggrieved by the decision of the National Company Law Appellate Tribunal (“NCLAT”), wherein, it had rejected PVVNL’s appeal against an order of the National Company Law Tribunal, Allahabad (“NCLT/Adjudicating Authority”).
The NCLT in its order had allowed an application directing the District Magistrate (“DM”) and Tehsildar, Muzaffarnagar, to immediately release a property (previously attached) in favour of the liquidator of the Respondent, Raman Ispat Pvt. Ltd. (“Corporate Debtor/CD”), to enable its sale and thereafter, distribution of the sale proceeds in accordance with the provisions of IBC.
In 2010, PVVNL and CD had entered a contract for supply of electricity. The said contract provided that a ‘charge’ would be constituted on the assets of the CD in case of any outstanding electricity dues. PVVNL raised bills for electricity dues from time to time. However, it continued to remain unpaid, hence, on January 12, 2016, PVVNL attached the properties of the CD. On January 23, 2016, the Tehsildar created a charge on the CD’s properties, thereby, restraining a transfer via sale, donation, etc.
On April 11, 2017, CD got admitted into Corporate Insolvency Resolution Process (“CIRP”) upon filing an application under Section 10 of IBC. On January 31, 2018, the NCLT passed a liquidation order and appointed a liquidator.
On March 05, 2018, the DM ordered auctioning of the CD’s properties for recovery of outstanding dues. On August 21, 2018, the NCLT directed the DM and Tehsildar to release the attached property to enable the sale and distribution of the sale proceeds in accordance with the Code. On May 15, 2019, the NCLAT dismissed the appeal of PVVNL and did not interfere with the findings of the NCLT. Aggrieved by the order of the NCLAT, PVVNL approached the Hon’ble Supreme Court seeking appropriate reliefs/ remedies.
ISSUES
The Court primarily analysed the importance and sanctity of the ‘Waterfall Mechanism’ of Section 53 of the IBC and whether the provisions of the IBC overrides the provisions of the Electricity Act, 2003?
OBSERVATION
Waterfall Mechanism
The Court held that ‘Waterfall mechanism’ is enshrined under Section 53 of the IBC, which provides for the order of distribution of assets. Accordingly, Section 53 confers Government debts [Section 53(1)(e)] and operational debts [Section 53(1)(f)] lower priority in comparison to dues owed to unsecured financial creditors. It is imperative to note that a secured creditor must make an informed decision, at the very outset of the liquidation process (under the Code), whether or not to relinquish its secured interest. In case the creditor relinquishes its interest, then its dues rank high in the waterfall mechanism. If the creditor chooses not to relinquish its security interest, and instead enforce it, but is unsuccessful in realizing its dues, then it will stand lower in priority, and accordingly, will have to await distribution of assets upon realization of the liquidation estate.
The rationale behind giving higher priority to secured creditors who relinquish their interest was provided in the Report of the Insolvency Law Committee (2020), which noted that Section 53(1)(b) of the IBC intends to replicate the benefits of security even when it has been relinquished, in order to promote overall value maximisation.
Lastly, the Court reaffirmed the importance of hierarchy of claims under Section 53, by reaffirming that, “every change in the waterfall mechanism is bound to lead to cascading effects on the balance of rights and interests of the secured creditors, operational creditors and even the Central and State Governments.”[2]
Interpretation of Government Dues under Section 53(1)(e)
The analysis in the above section was important for the Court to understand the nature of the debt owed by the CD to PVVNL. This eventually led the Court to also analyse the conflicting nature of the State Legislation (in the present case being Uttar Pradesh Electricity Supply Code 2005 (“2005 Code”)) and the IBC when it came to determining the nature of creditors and the priority of their claims during a CIRP.
The Court opined that owing to the hierarchy stipulated in Section 53, government dues have to be understood separate from dues owed to secured creditors. Additionally, dues payable to corporations created by statutes need not necessarily constitute ‘government dues. Such corporations may be operational, financial, or secured creditors, depending on their nature of transactions. Whereas, on the other hand, dues which are payable to the Treasury, such as tax, tariffs, etc., broadly fall within the scope of Article 265 of the Constitution as ‘government dues’ and hence, governed by Section 53(1)(e). The Court opined that even though PVVNL had government participation, the same does not render it a government or a part of the state government as its functions can be replicated by other entities (both private and public). It is a fact that supply of electricity, generation, transmission, and distribution of electricity has been liberalised in terms of the 2003 Act, barring certain segments. Therefore, the Hon’ble Supreme Court has held that dues payable to PVVNL do not fall within the description of ‘government dues’ as under Section 53(1)(e) of the IBC.
Furthermore, it was also held that the present case is distinct from the State Tax Officer v. Rainbow Papers Ltd.[3] (“Rainbow Papers”)as firstly, it did not consider the IBC’s ‘Waterfall Mechanism’ under Section 53 and secondly, Rainbow Papers was in the context of a resolution process and not during liquidation (as in the present case). Further, Rainbow Papers did not take note of the provisions of the IBC, which treat the dues payable to secured creditors at a higher pedestal than dues payable to the Central/ State Government. The Court further held that in Rainbow Papers, even though the Gujarat Value Added Tax Act 2003 (‘GVAT Act’) sought to bring the government under the definition of secured creditors, however, the legislative intent as gleaned from the IBC was to create a separate category for secured creditors and the government dues, thereby giving a lower priority to the latter (government dues).
Whether IBC overrides provisions of the Electricity Act, 2003?
The Hon’ble Supreme Court in the present judgment relied upon Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs,[4] wherein, it was held that owing to Section 238 of the IBC, the Code would prevail over the Customs Act, 1962. Similarly, in Duncans Industries Ltd. v. AJ Agrochem,[5] Section 16G of the Tea Act, 1953, which required prior consent of the Central Government (for initiation of winding up proceedings) was held to be overridden by the IBC. In view of the same, the Court, in the present case held that Section 238 of the IBC overrides the provisions of the Electricity Act, 2003, despite the latter containing two specific provisions, which opens with non-obstante clauses (i.e., Sections 173[6] and 174[7] of the 2003 Act).
CONCLUSION
While arriving at the conclusion that Section 238 of the IBC has an overriding effect over the 2003 Act, (even when Sections 173 and 174 have primacy/ overriding effect over other statutes), the Court rightly considered several precedents which accord primacy to the IBC over other statutes. The Court also relied on the seminal cases of Innoventive Industries Ltd. v. ICICI Bank[8] and Principal CIT v. Monnet Ispat & Energy Ltd[9]., wherein the Hon’ble Supreme Court upheld the non-obstante clause of IBC, which would prevail over the Maharashtra Relief Undertaking (Special Provisions) Act, 1958, and the Income Tax Act, 1961, respectively. The rationale that the Supreme Court wished to reaffirm in this case was that the IBC is a special statute that accounts for the dues of all creditors to be disbursed as per the waterfall mechanism during CIRP. More importantly, the applicability of Rainbow Papers has been confined to its own factual circumstances, thereby limiting its effect on treatment of government dues under the IBC.
In sum, this case -re-affirms the importance of Section 53 in the context of reclaiming dues, and the strength of the non-obstante clause of IBC in Section 238 in relation to other statutes.
For further information, please contact:
Sumit Attri, Partner, Cyril Amarchand Mangaldas
sumit.attri@cyrilshroff.com
[1] By Mr. Sumit Attri (Partner), Mr. Satatya Anand and Mr. Priyanshu Pandey (Associates)
[2] Moser Baer Karamchari Union thr. President Mahesh Chand Sharma v. Union of India (2023 SCC OnLine SC 547)
[3] 2022 (13) SCR 808
[4] 2022 SCC Online SC 1101
[5] (2019) 9 SCC 725)
[6] Section 173. (Inconsistency in laws): Nothing contained in this Act or any rule or regulation made thereunder or any instrument having effect by virtue of this Act, rule or regulation shall have effect in so far as it is inconsistent with any other provisions of the Consumer Protection Act, 1986 or the Atomic Energy Act, 1962 or the Railways Act, 1989.
[7] Section 174. (Act to have overriding effect): Save as otherwise provided in section 173, the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.
[8] (2017) 8 SCR 33
[9] (2018) 18 SCC 786
