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IBC overrides Electricity Act: Supreme Court Reinforces IBC’s Waterfall Mechanism

Introduction

On 17.07.2023, the Supreme Court (‘SC’) delivered the judgment in the case of Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited & Ors.[i], wherein the SC asserted that s. 238 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) takes precedence over the provisions of the Electricity Act, 2003 (‘2003 Act’) notwithstanding the presence of two particular provisions in the latter, namely ss. 173 and 174, which commence with non-obstante clauses.

Brief Facts

  • The Appellant and the Respondent Company/Corporate Debtor (‘CD’) entered into an agreement for the supply of electricity wherein it was stipulated that the outstanding dues would be a charge on the assets of the company. Based on the agreement, the Appellant raised bills from time to time on the CD, and as the dues remained unpaid, a charge was created on certain properties of the CD.

  • Meanwhile, the CD underwent a corporate insolvency resolution process (‘CIRP’) under IBC and thereafter became subject to liquidation, which was unsuccessful. On the other hand, the final electricity bill showed arrears of over Rs. 4 crores, and accordingly, the competent District Magistrate issued a notice for recovery through a property auction.

  • Thereafter, the liquidator claimed that the consequential attachment orders needed to be set aside to sell the property. The National Company Law Tribunal (‘NCLT’) directed the release of the property in favour of the liquidator so that the same could be sold and the proceeds could be appropriated towards the creditors as per the IBC.

  • The NCLAT also endorsed the reasoning of NCLT, holding that the Appellant was an ‘operational creditor’ under the IBC. Thus, it could realize its dues only as per the liquidation process as enshrined in the IBC.

Contentions by Parties

  • The Appellant argued that the 2003 Act, which overrides other enactments except for a few specific ones, grants electricity suppliers independent rights to claim their dues and should not be subordinate to the IBC mechanism. It was contended that the IBC, as a general insolvency law, could not override the specific provisions of the 2003 Act and the Uttar Pradesh Electricity Supply Code, 2005 (‘2005 Code’), which govern the recovery of electricity dues. Additionally, the Appellant claimed that the definitions of ‘security interest’[ii] and ‘transfer’[iii] under the IBC encompass all statutory claims and obligations, thus treating statutory charges as security interests.

  • On the other hand, the liquidator argued that under the IBC, government dues do not take priority over secured debts. The IBC’s waterfall mechanism[iv] clearly places government dues within the priority levels for a company’s liquidation. Additionally, the Appellant claimed that under the IBC, the definitions of ‘security interest’ and ‘transfer’ encompass all statutory claims and obligations, treating statutory charges as security interests.

Decision

  • The SC rejected the appeal, directing the liquidator to decide the Appellant’s claim in accordance with the IBC. It was noted that the hierarchy of preferences under the waterfall mechanism, as envisaged in the IBC, accords lower priority to government debts and operational debts when compared to the dues owed to unsecured financial creditors.

  • It was further observed that the amount due to the government is ranked at the same level of hierarchy as the amount due to the financial creditors who have not relinquished their security interests. In contrast, the financial creditors who have relinquished their security interests are placed as a very high priority under the waterfall mechanism.

  • Reliance was placed on Sundresh Bhatt v. CBIC[v], wherein the SC held that the IBC would prevail over the Customs Act, 1962 (‘CA62’) to the extent that once the moratorium is imposed under the IBC, then the revenue authorities do not have the power to initiate the recovery of dues under the CA62. The SC distinguished this case from the judgment in Rainbow Papers[vi], emphasizing the specific context and statutory provisions applicable to this case.

  • The SC clarified that while the Appellant could be considered a secured creditor due to the charge on assets, its claims as an operational creditor did not place it above other secured creditors in the hierarchy. Based on the above, it was concluded that s. 238 of the IBC overrides and prevails over ss. 173 and 174 of the 2003 Act despite there being any non-obstante clauses in the provisions of the 2003 Act.

Our Analysis

The SC affirmed that the IBC prevails over other enactments, including the 2003 Act, governing the process of debt realization during liquidation. The SC further emphasised that the meticulously crafted provision of s. 53 of the IBC strategically assigns priority to the settlement of outstanding amounts owed to secured creditors and workmen, positioning them second in order of precedence following the payment of the liquidator’s costs and expenses during the liquidation proceedings. In contrast, the dues owed to the government are relegated to a significantly lower priority level, below those owed to secured, unsecured, and operational creditors.







End Notes

[i] 2023 SCC OnLine SC 842

[ii] S. 3(31) of the IBC

[iii] S. 3(34) of the IBC

[iv] S. 53 of the IBC

[v] 2022 SCC OnLine SC 1101

[vi] State Tax Officer v. Rainbow Papers Ltd., (2022) 13 SCR 808





Please find below the write-ups on where the IBC overrides other laws:





Authored by Sanyam Aggarwal, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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