IBC overrides Electricity acts Non-Obstante Clause: Supreme Court

Case Details: Paschimanchal Vidyut Vitran Nigam Ltd V. Raman Ispat Private Limited & Ors.

Citation: Civil Appeal No. 7976 of 2019

Hon'ble Judges/Coram: S. Ravindra Bhat and Dipankar Datta, JJ.

Decided On: 17.07.2023.

Introduction

A division bench of Justices S Ravindra Bhat and Dipankar Dutta of the Hon’ble Supreme Court held that the provisions of the Electricity Act, 2003 take precedence over the provisions of the Insolvency and Bankruptcy Code of 2016 (“IBC”). The Court clarified that under the IBC, secured creditors have priority in debt recovery above dues payable to state or central government.

 The decision came while dismissing an appeal filed by Paschimanchal Vidyut Vitran Nigam Limited (“PVVNL”), which questioned the release of attached property in favour of the liquidator managing insolvency proceedings. The Court supported the National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal's (NCLAT”) decisions, emphasising the waterfall process under Section 53 of the IBC, which defines the order of debt repayment. The Court also rejected reliance on a previous ruling that favoured the primacy of the Electricity Act, claiming that it ignored the IBC requirements. The appellant was given ten weeks to file their claims as a secured creditor.

Background of the Case

PVVNL is a subsidiary company of Uttar Pradesh Power Corp. Ltd. The dispute arrised out of outstanding electricity bills due to Raman Ispat Pvt. Ltd. to PVVNL. As a result, PVVNL obtained an order of attachment of Raman Ispat's property in its favour.

At the commencement of the liquidation process of Raman Ispat, the liquidator argued before the Hon’ble NCLT that the attached property should be freed since any dues owed to PVVNL will be allocated in accordance with the IBC. The liquidator had requested that the property be released so that it may be auctioned and the earnings used to settle outstanding debts in accordance with the IBC. The Hon'ble NCLT, Allahabad Bench, in its, affirmed the Liquidator's views and observed the asset belongs to the Corporate Debtor's Liquidation Estate.

The matter was then Challenged before Hon’ble NCLAT, the bench agreed with the liquidator's assessment and ordered the property to be released. Dissatisfied with this ruling, PVVNL moved to the Supreme Court, claiming that the Electricity Act took precedence over the IBC and that it could reclaim its dues under the act independently, even outside of the liquidation process.

The Hon’ble Supreme Court Held

The court addressed a specific legal question, whether dues accruing to a Distribution Licensee can be recovered under the mechanism envisaged under the Electricity Act, 2003 and the UPERC Electricity Supply Code, 2005, and thus override the liquidation proceedings and the waterfall mechanism of dues repayment provided under the IBC.

The Hon’ble court observed that the mechanism for recovering outstanding electricity dues under the Electricity Act and the Supply Code cannot function while the borrower is in insolvency or liquidation proceedings as a result of the moratorium period granted to the Corporate Debtor under the IBC.

The Court centred its consideration on the 'Waterfall Mechanism' outlined in Section 53 of the IBC. In liquidation processes, this method defines the order of priority for debt payments. Notably, government obligations, including those owed to the Central and State Governments, are prioritised lower than those owed to secured creditors.

The bench opined that the provisions of the IBC have precedence over the requirements of the Electricity Act, even though the latter contains particular provisions with non-obstante clauses. The Court emphasised that the earlier case, Rainbow Papers Ltd. (State Tax Officer v. Rainbow Papers Ltd., 2022 (13) SCR 808) did not considered the 'waterfall mechanism' under Section 53 which envisages higher priority given to the secured creditors.

Conclusion

This judgement clarifies and strengthens the IBC's hierarchy of creditors claim, providing a fair and equitable distribution of assets during the liquidation process. The Supreme Court’s interpretation has emphasized that the IBC accords higher footing to the dues payable to secured creditors compared to dues payable to the Central or State Government. The Hon’ble Court held that electricity dues from the said corporation do not from part of Government dues and has placed it as a secured creditor, thereby PVVNL cannot be classified under the Government dues within the meaning of section 53(1)(e) of the IBC. The waterfall mechanism under section 53 of IBC ensures that the creditors of a company are paid in a fair and orderly manner thereby protecting the interests of the stakeholders.

This Article has been compiled by Anurag Tewari (Associate)

You can direct your queries or comments to the author at info@factumlegal.com

Disclaimer-

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.