IBC Overrides Electricity Act; Dues To Secured Creditors At Higher Footing Than Electricity Dues : Supreme Court

The Supreme Court observed that Section 238 of the Insolvency and Bankruptcy Code overrides the provisions of the Electricity Act, 2003.The provisions of the IBC treat the dues payable to secured creditors are at a higher footing than dues payable to Central or State Government, the bench of Justices S. Ravindra Bhat and Dipankar Datta said.In this case, National Company Law Tribunal, Allahabad set aside an attachment of the property of the respondent Raman Ispat Pvt. Ltd. (“corporate debtor”) which was over electricity charge dues to Paschimanchal Vidyut Vitran Nigam Limited (PVVNL) and held that PVVNL can realise its dues by participating in the liquidation process as per the IBC. The NCLAT also approved this view..In appeal before the Apex Court, the PVVNL contention was that the the Electricity Act is a special enactment, and would prevail over the IBC, which is a later general law, dealing with insolvency. Reliance was placed on State Tax Officer v. Rainbow Papers Ltd. 2022 LiveLaw (SC) 743. On the other hand, the respondent- liquidator contended that the provisions of the IBC would prevail and have overriding effect.The judgment analyzes the scheme of IBC, especially the 'waterfall mechanism' under the Section 53 IBC and noted that the government debts have lower priority that the debts owed to unsecured financial creditors."The priority of claims, indicated in the hierarchy of preferences, under the waterfall mechanism is therefore: Firstly, insolvency resolution process costs and the liquidation costs; Secondly, 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; Thirdly, wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date; Fourthly, financial debts owed to unsecured creditors; Fifthly, 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; Sixthly, any remaining debts and dues; Seventhly, preference shareholders; and Eighthly equity shareholders or partners. This hierarchy or order of priority thus accords government debts [clause (e)] and operational debts [clause (f)] lower priority than dues owed to unsecured financial creditors"The bench noted that the judgment in Rainbow Papers (supra) did not notice the ‘waterfall mechanism’ under Section 53."The careful design of Section 53 locates amounts payable to secured creditors and workmen at the second place, after the costs and expenses of the liquidator payable during the liquidation proceedings. However, the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. This design was either not brought to the notice of the court in Rainbow Papers (supra) or was missed altogether. In any event, the judgment has not taken note of the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to Central or State Government."Noting that Rainbow Papers dealt with a case relating to resolution process and not liquidation process, the Court opined that the judgment in Rainbow Papers has to be confined to the facts of that case.With these observations, the court dismissed the appeal.Case detailsPaschimanchal Vidyut Vitran Nigam Ltd vs Raman Ispat Private Limited | 2023 LiveLaw (SC) 534 | 2023 INSC 625HeadnotesInsolvency and Bankruptcy Code, 2016 ; Section 238 - Electricity Act, 2003 ; Sections 173,174- Section 238 of the IBC overrides the provisions of the Electricity Act, 2003 despite the latter containing two specific provisions which open with non-obstante clauses (i.e., Section 173 and 174) - The provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to Central or State Government. (Para 49-53)Insolvency and Bankruptcy Code, 2016 ; Section 53 - The ‘waterfall mechanism’ - The priority of claims: Firstly, insolvency resolution process costs and the liquidation costs; Secondly, 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; Thirdly, wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date; Fourthly, financial debts owed to unsecured creditors; Fifthly, 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; Sixthly, any remaining debts and dues; Seventhly, preference shareholders; and Eighthly equity shareholders or partners. This hierarchy or order of priority thus accords government debts [clause (e)] and operational debts...

IBC Overrides Electricity Act; Dues To Secured Creditors At Higher Footing Than Electricity Dues : Supreme Court

Ashok KM

The Court also observed that 'Rainbow Papers' judgment did not consider 'waterfall mechanism' under IBC.

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