Supreme Court Clarifies Priority of Electricity Dues in Insolvency: Paschimanchal Vidyut Vitran Nigam Ltd. vs. Raman Ispat Pvt. Ltd. (2023)

Case Background

Paschimanchal Vidyut Vitran Nigam Limited (PVVNL) and Raman Ispat Pvt. Ltd. (corporate debtor) entered into an agreement on February 11, 2010, for the supply of electricity. The agreement stipulated that outstanding dues would be a charge on the company’s assets. PVVNL raised bills for electricity supply, but the corporate debtor failed to pay. Consequently, PVVNL attached the corporate debtor’s properties on January 12, 2016. The Tehsildar, Muzaffarnagar, further restrained the transfer of the property on January 23, 2016. The corporate debtor initially underwent a resolution process under the Insolvency and Bankruptcy Code (IBC), but it was unsuccessful, leading to liquidation. The total arrears due to PVVNL amounted to ₹ 4,32,33,883. The District Collector issued a notice for recovery of ₹ 2,50,14,080 by auctioning the corporate debtor’s properties on March 5, 2018. The liquidator argued that the attachment orders needed to be set aside to facilitate the sale of the property, and that PVVNL’s claim should be classified under Section 53 of the IBC, entitling them to a pro-rata distribution along with other secured creditors.

Timeline

Arguments

Arguments by PVVNL:

• PVVNL argued that the Electricity Act, 2003, being a special law, overrides all other laws, including the IBC, except the Consumer Protection Act, 1986, the Atomic Energy Act, 1962, and the Railway Act, 1989.
• They contended that Sections 173 and 174 of the Electricity Act, 2003, grant primacy to the Act over other laws.
• PVVNL asserted that a special mechanism for recovery of electricity dues exists under the Electricity Act, 2003, and the Uttar Pradesh Electricity Supply Code, 2005, making their rights not subordinate to the IBC’s priority of claims.
• They relied on the judgment in Board of Trustees, Port of Mumbai v. Indian Oil Corporation, stating that port dues override all other claims, including those of secured creditors in liquidation.
• PVVNL argued that Section 238 of the IBC cannot override Sections 173 and 174 of the Electricity Act, 2003, as the latter is a special enactment.
• They submitted that the Electricity Act, 2003, and the 2005 Code prescribe a mechanism for the recovery of electricity charges, which should be given full effect.
• PVVNL also relied on State Tax Officer v. Rainbow Papers Ltd., arguing that tax authorities are secured creditors under the IBC due to security interest created by law.
• Alternatively, PVVNL argued that electricity dues are also security interests in their favor, relying on the definitions of “secured creditor” and “security interest” under the IBC.
• They contended that the definition of “security interest” under the IBC includes all claims, including statutory claims, against the corporate debtor.

Arguments by the Liquidator:

• The liquidator argued that the IBC classifies creditors as secured or unsecured, and distinguishes between financial and operational creditors.
• They submitted that government dues are not given priority under the IBC, as per the Bankruptcy Law Reforms Committee Report, 2015, and the UNCITRAL Legislative Guide on Insolvency Law.
• The liquidator argued that Section 52(3) of the IBC mandates verification of security interest from records maintained by an information utility or as specified by the IBBI.
• They contended that registration of any charge is mandatory under Section 77 of the Companies Act, 2013.
• The liquidator highlighted Section 48 of the Transfer of Property Act, 1882, which deals with priority of rights, and referred to the judgments in Jitender Nath Singh v. Official Liquidator & Ors. and ICICI Bank Ltd. v. Sidco Leathers Ltd.
• They argued that government dues are placed in the ‘waterfall mechanism’ under Section 53(1)(e)(i) of the IBC.
• The liquidator emphasized that even under the old Companies Act, 1956, and the Companies Act, 2013, priority was given to secured creditors and workers.
• They cited Section 26E of the SARFAESI Act and Section 31B of the RDDBFI Act, which accord priority to secured creditors over other dues.
• The liquidator argued that electricity dues do not enjoy any priority and cited the Calcutta High Court ruling in The West Bengal State Electricity Distribution Company Limited v. Sri Vasavi Industries Limited & Anr.
• They submitted that creation of charge under a law has to be proved, and the 2005 Code only enabled recovery of electricity dues as arrears of revenue, not creating a security interest.
• The liquidator contended that the IBC is a special law dealing with insolvency, and its provisions prevail over the Electricity Act, 2003, due to Section 238 of the IBC.
• They relied on Innoventive Industries Ltd. v. ICICI Bank & Anr. and Swiss Ribbons (P) Ltd. v. Union of India, which upheld the IBC’s overriding nature.

Summary of Arguments

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues addressed by the court can be summarized as follows:

1. Whether the dues of electricity distribution companies constitute a “security interest” under the Insolvency and Bankruptcy Code, 2016.
2. Whether the Electricity Act, 2003, overrides the provisions of the Insolvency and Bankruptcy Code, 2016, with respect to the priority of claims.
3. What is the priority of electricity dues in the waterfall mechanism under Section 53 of the IBC?
4. Whether the non-registration of a charge under Section 77 of the Companies Act, 2013 affects the enforceability of a security interest in liquidation proceedings.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Board of Trustees, Port of Mumbai v. Indian Oil Corporation: Distinguished. The court found that the facts of the case were different and therefore not applicable.
• State Tax Officer v. Rainbow Papers Ltd.: Confined to its facts. The court held that the judgment was not applicable in the present case and confined it to its facts.
• Jitender Nath Singh v. Official Liquidator & Ors.: Referred to. The court referred to this case to highlight the general principles of priority of rights.
• ICICI Bank Ltd. v. Sidco Leathers Ltd.: Referred to. The court referred to this case to highlight the general principles of priority of rights.
• Jalgaon Janta Shakari Bank Ltd. v. Joint Commissioner of Sales Tax, Nodal 9, Mumbai & Anr.: Referred to. The court referred to this case to highlight the priority of secured creditors.
• The West Bengal State Electricity Distribution Company Limited v. Sri Vasavi Industries Limited & Anr.: Referred to. The court referred to this case to highlight the argument that electricity dues do not enjoy any priority.
• Union of India & Ors. v. Shah Goverdhan L. Kabra Teachers’ College: Referred to. The court referred to this case to explain the doctrine of pith and substance.
• UCO Bank & Anr. v. Dipak Debbarma & Ors.: Referred to. The court referred to this case to explain the doctrine of pith and substance.
• Innoventive Industries Ltd. v. ICICI Bank & Anr.: Referred to. The court referred to this case to emphasize the overriding nature of the IBC.
• Swiss Ribbons (P) Ltd. v. Union of India: Referred to. The court referred to this case to emphasize the overriding nature of the IBC.
• K. Shashidhar v. Indian Overseas Bank: Referred to. The court referred to this case to state that the Adjudicating Authority is obligated to initiate liquidation process under Section 33(1) of the IBC.
• Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors.: Referred to. The court referred to this case to state that the NCLT does not possess any discretionary jurisdiction regarding initiation of liquidation proceedings.
• Moser Baer Karamchari Union thr. President Mahesh Chand Sharma v. Union of India & Ors.: Referred to. The court referred to this case to discuss the waterfall provisions of the IBC.
• K.C. Ninan v. Kerala State Electricity Board: Referred to. The court referred to this case to examine the circumstances in which a charge could be constituted in law.
• Shrikant v. Vasantrao & Ors.: Referred to. The court referred to this case to underline the distinction between State and State Government.
• Municipal Commissioner of Dum Dum Municipality & Ors. v. Indian Tourism Development Corporation & Ors.: Referred to. The court referred to this case to highlight the nature of statutory corporations.
• Member, Board of Revenue v. Anthony Paul Benthall: Referred to. The court referred to this case to explain the principles of statutory interpretation.
• Brihan Mumbai Mahanagarpalika & Anr. v. Willington Sports Club & Ors.: Referred to. The court referred to this case to explain the principles of statutory interpretation.
• Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs: Followed. The court followed this case to hold that the IBC would prevail over the Customs Act.
• Duncans Industries Ltd. v. AJ Agrochem: Followed. The court followed this case to hold that Section 16G of the Tea Act, 1953 was over ridden by the IBC.
• CIT v. Monnet Ispat & Energy Ltd.: Followed. The court followed this case to reiterate the primacy of the IBC.
• Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.: Followed. The court followed this case to reiterate the primacy of the IBC.
• Jagmohan Bajaj v. Shivam Fragrances Private Limited: Followed. The court followed this case to reiterate the primacy of the IBC.

Key Findings of the Court:

• Electricity dues can constitute a “security interest” under the IBC, provided that there is a charge created on the assets of the corporate debtor.
• The IBC overrides the Electricity Act, 2003, due to Section 238 of the IBC.
• Electricity distribution companies are treated as secured creditors in liquidation proceedings, but their dues are not considered “government dues.”
• The priority of claims of electricity distribution companies is determined by the waterfall mechanism under Section 53 of the IBC.

Decision and Implications

The Supreme Court held that the dues of electricity distribution companies can be considered as secured debts under the IBC, provided a charge is created on the assets of the corporate debtor. However, the court clarified that these dues are not to be treated as government dues. The Court further held that the IBC overrides the Electricity Act, 2003, due to Section 238 of the IBC, thus rejecting the argument that the Electricity Act, being a special law, should prevail. The court held that the dues of electricity distribution companies should be treated as secured debts, and their priority will be determined by the waterfall mechanism under Section 53 of the IBC.

Implications:

• Clarity on Priority: The judgment provides clarity on the priority of electricity dues in insolvency proceedings. Electricity distribution companies are now recognized as secured creditors, but not as government dues.
• Impact on Distribution Companies: This decision impacts electricity distribution companies by clarifying their rights during liquidation. They can now be treated as secured creditors, improving their position in the waterfall mechanism.
• Overriding Nature of IBC: The judgment reaffirms the overriding nature of the IBC over other laws, including the Electricity Act, 2003, in matters of insolvency and liquidation.
• Balancing Interests: The Supreme Court balanced the interests of various stakeholders, including the electricity distribution companies and other creditors, by providing a clear framework for the treatment of electricity dues in insolvency proceedings.
• Waterfall Mechanism: The waterfall mechanism under Section 53 of the IBC is upheld as the mechanism for determining the priority of claims, including those of electricity distribution companies.

Flowchart

Disclaimer

The information provided in this document is for informational purposes only and should not be considered as legal advice. For specific legal issues, it is recommended to consult with a qualified legal professional.