IBC overrides Electricity Act: Supreme Court of India

ABSTRACT:

In common law practice, special laws supersede general laws but is the situation same for matters pertaining to insolvency? The waterfall mechanism has been mentioned in Section 53 of Insolvency and Bankruptcy Code, 2016 but time and again one comes across different interpretations. Which is the accurate one and legally applicable? The apex court yet again with its extraordinary reasonability and deliberations has answered these questions in the matter of Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited and Others. Vide Civil Appeal No. 7976 has clarified these common dilemmas that were unaddressed for long and laid a vivid sequence of waterfall mechanism via its final judgment date 17th July 2023. The author of this article has tried deliver a case analysis of the aforementioned appeal along with contentions made by both the parties.

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Background of the Case

M/s. Paschimanchal Vidyut Vitran Nigam Limited, referred to as the Appellant, had a contract with M/s. Raman Ispat Private Limited, referred to as the Respondent, for the supply of electricity. Despite billing the Respondent, they did not pay their outstanding dues. In response, the Appellant seized the Respondent's property through Order No. 1048 dated January 12, 2016, due to arrears amounting to INR 4,32,33,883.

The Tehsildar of Muzaffarnagar, through Order No. 1423F dated January 23, 2016, placed a legal claim on the assets, in accordance with Clause 4.3(f)(iv) of the Uttar Pradesh Electricity Supply Code, 2005. This action prevented the transfer of the property through sale, donation, or any other means.

During this time, the Respondent went through a resolution process under the Insolvency and Bankruptcy Code (IBC), which ultimately failed, leading to the Respondent's liquidation. Consequently, a liquidator was appointed to oversee the liquidation proceedings.

The liquidator believed that the assets should be sold off first, and the Appellant should receive a proportional share of the proceeds, along with other secured creditors. Displeased with this decision, the Appellant took the matter to the National Company Law Tribunal in Allahabad, which, in an order known as the Impugned order, canceled the attachment of the Respondent's property. The tribunal held that the Appellant could recover its dues by participating in the liquidation process as per the IBC.

Unhappy with the Impugned order, the Appellant appealed to the Supreme Court, arguing that they have a responsibility under the Electricity Act to recover their outstanding dues before the liquidation process takes place.

Source: http://surl.li/lvxyn

Issue

Whether the Electricity Act grant priority to electricity suppliers' claims over the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC)?

Rule of Law

• Section 53(1)(e)(i) of IBC- Distribution of assets.

• Section 238 of IBC- Provisions of this code to override other laws.

Analysis

The learned counsel appearing on behalf of appellants relied on the judgement of Hon’ble Supreme Court in the matter of Board of Trustees, Port of Mumbai v. Indian Oil Corporation[i], it was established that port dues, as regulated by the Major Port Trust Act of 1963, take precedence over any other claims, including those of secured creditors during liquidation proceedings. The legal counsel argued that Section 238 of the Insolvency and Bankruptcy Code (IBC) cannot supersede Sections 173 and 174 of the Electricity Act of 2003. This is because the Electricity Act is a specific law, and as such, it prevails over the IBC, which is a broader law focused on insolvency and was enacted later. The learned counsel argued that the 2003 Act (specifically, Sections 42, 45, and 56) and the 2005 Code (specifically, Clauses 4.3 and 6.15) lay out the procedure for collecting electricity charges. Since the 2003 Act is a "special Act" and contains a provision that overrides other laws (non-obstante clause), it takes precedence over the more general Insolvency and Bankruptcy Code (IBC). This means that the process for swiftly recovering electricity fees must be fully enforced. Therefore, he contended that the provisions of the IBC and the order of priority for claims during liquidation proceedings should be considered separately and apply after the collection of electricity charges as permitted by the 2003 Act and 2005 Code.

The argument presented by learned counsel appearing on behalf of the liquidators was that government dues were included in the 'waterfall mechanism' as outlined in Section 53(1)(e)(i) of the IBC. The legal counsel stressed that even under the previous Companies Act of 1956, Section 529A gave priority to debts owed to secured creditors and workers, and Section 530 made tax payments subject to the priority set in Section 529A. Similarly, the Companies Act of 2013, in Section 326, also prioritized debts owed to secured creditors and workers, with Section 327 making tax payments subject to the priority specified in Section 326. It was also pointed out that Section 26E of the SARFAESI Act and Section 31B of the RDDBFI Act granted priority to secured creditors over other outstanding dues. The Full Bench decision of the Bombay High Court in the case of Jalgaon Janta Shakari Bank Ltd. v. Joint Commissioner of Sales Tax, Nodal 9, Mumbai & Anr.[ii] further reinforced this priority accorded to secured creditors under Section 26E of the SARFAESI Act. The learned counsel argued that electricity bills don't have priority status and referred to High Court decisions, particularly the Calcutta High Court's ruling in the case of The West Bengal State Electricity Distribution Company Limited vs. Sri Vasavi Industries Limited & Anr. [iii]They contended that establishing a legal claim under a law is a factual matter that must be proven. In this case, the 2005 Code only allows for the collection of electricity dues as if they were recovering overdue revenue, which doesn't create a 'security interest' for the appellant. Additionally, this interest wasn't registered as required by the Liquidation Regulations and Section 77 of the Companies Act, 2013. Learned counsel urged that in case of apparent overlapping between the two entries, the doctrine of ‘pith and substance’ had to be applied to find out the true nature of the legislation and the entry within which it fell – reliance was placed on the decisions of Union of India & Ors. v. Shah Goverdhan L. Kabra Teachers' College [iv]and UCO Bank & Anr. v. Dipak Debbarma & Ors[v]. Having regard to this principle, IBC was thus a special law dealing with the entire subject matter of insolvency, bankruptcy and winding up of companies. Its provisions were later than those of the 2003 Act.

Source: http://surl.li/lvxyw

Conclusion

The hon’ble court dismissed the aforementioned appeal. The Court highlighted that within the framework of the IBC (Insolvency and Bankruptcy Code), the rights of both secured and unsecured creditors take precedence in terms of repayment when compared to outstanding debts owed to the State or Central governments, even in cases where other statutes may appear to supersede this principle. The Court underscored that within the IBC framework, both secured and unsecured creditors hold a higher repayment priority than dues owed to State or Central governments, even when conflicting laws may seem to suggest otherwise.

The Court specifically highlighted the importance of the 'waterfall mechanism' described in Section 53 of the IBC. This mechanism prioritizes the settlement of debts to secured creditors who forgo their security enforcement rights during liquidation. This process ensures an equitable allocation of funds among various stakeholders.

Furthermore, the Court raised a question about whether the appellant could be categorized as 'government,' as not all obligations mandated by statutes are automatically considered as 'government dues.' The ruling emphasizes the necessity of clear classifications in such scenarios.

This decision holds significant implications for legal practitioners and the legal sector, as it elucidates the sequence of creditor priorities, ensuring a well-structured and fair distribution of assets in insolvency proceedings.

Through this groundbreaking judgment, the Court reaffirms the supremacy of the IBC in resolving insolvency cases, bringing clarity and assurance to parties involved.

References [i] Board of Trustees, Port of Mumbai v. Indian Oil Corporation, 1998 (2) SCR 774. [ii] Jalgaon Janta Shakari Bank Ltd. v. Joint Commissioner of Sales Tax, Nodal 9, Mumbai & Anr., 2022 SCC OnLine Bom 1767. [iii] The West Bengal State Electricity Distribution Company Limited v. Sri Vasavi Industries Limited & Anr., 2022 SCC Online Cal 1918. [iv] Union of India & Ors. v. Shah Goverdhan L. Kabra Teachers' College, (2002) Supp (3) SCR 220. [v] UCO Bank & Anr. v. Dipak Debbarma & Ors., (2016) (11) SCR 723.

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*This article was authored by Poorvi Madan, Student from Symbiosis Law School, Noida and reviewed by Ishanvi Khanna, Student from Symbiosis Law School, Noida.