GUEST POST: SUPREME COURT’S VERDICT ON THE OVERRIDING EFFECT OF INSOLVENCY LAWS OVER THE ELECTRICITY ACT

The Supreme Court recently issued a landmark verdict in Paschimanchal Vidyut Vitran Nigam Ltd. vs Raman Ispat Private Limited & Ors. Civil Appeal No. 7976 of 2019 on 17-07-2023 addressing the overriding effect of insolvency laws over the Electricity Act. Specifically, the case centered on Section 53[1] of the Insolvency and Bankruptcy Code (IBC) 2016, which outlines the Waterfall Mechanism, a structured process for distributing funds to creditors during the liquidation of a company.

The Waterfall Mechanism operates on a pro rata distribution basis, ensuring that creditors sharing the same level of priority are repaid proportionally. This mechanism aims to prevent any undue advantage to individual creditors, promoting equitable treatment during liquidation proceedings.

Section 238 of IBC grants an overriding effect to the provisions of the IBC over other laws. On the other hand, Sections 173 and 174 of the Electricity Act 2003 assert an ultimatum over other laws related to the electricity sector. In this context, despite being a general law, insolvency law was given precedence over the specific provisions of the Electricity Act.

The Supreme Court’s ruling established the supremacy of insolvency laws in cases of conflict with other laws, including the Electricity Act. Consequently, during insolvency proceedings, Section 53 of IBC was deemed applicable, ensuring a fair and uniform distribution of funds to creditors, even in situations where the Electricity Act might otherwise assert its priority.

FACTS OF THE CASE-

The case was first filed in Appellate Authority and aggrieved by their decision the Appellant Paschimanchal Vidyut Vitran Nigam Limited appealed in the National Company Appellate Tribunal, where again it was rejected and the decision of NCLT was upheld. Later, aggrieved by the decision of NCLAT the case was taken up to the apex court of India.

Paschimanchal Vidyut Vitran Nigam Limited (herein referred to as the Appellant) filed a case in the Appellate Authority regarding the non-payment of electricity bills by Raman Ispat Pvt Ltd. (herein referred to as the Respondent). The Appellant attached the Respondent’s properties when they failed to pay the outstanding amount of approximately Rs 4 Lakhs. The Tehsildar of Muzaffarnagar restrained the sale or donation of the properties and subjected them to a charge. Subsequently, the Respondent went into a resolution process to revive the company but was unable to do so, leading to the liquidation of assets to pay off the debts.

In the National Company Appellate Tribunal (NCLT), the Appellant’s claim was upheld, and the attachment orders issued by the District Collector and Tehsildar of Muzaffarnagar were overturned. The liquidator, responsible for the sale of assets, argued that the legitimacy of the liquidator was uncertain until the NCLT made its decision, which deterred potential buyers. The liquidator contended that as a secured creditor, the Appellant’s claim should be prioritized according to Section 53 of IBC. The Appellant would be entitled to a pro-rata share of the proceeds from the sale of assets in the liquidation along with other secured creditors. This means that all secured creditors would be paid proportionately based on their claims.

The NCLT’s decision to overturn the attachment orders and the application of the IBC’s provisions take precedence over the provisions of The Electricity Act in this case. As per the IBC, the assets will be liquidated, and the proceeds will be distributed proportionately among the secured creditors, including the Appellant, to settle the outstanding debts of the Respondent company.

ANALYSIS OF THE CASE-

The case involved a contention regarding the Appellant’s status as a closely related entity to the Government, and whether it should be categorized under a lower priority claim, delaying its payment. The Supreme Court addressed this issue by clarifying that the term “government” lacks a specific definition within IBC. As a result, entities like the Appellant, not directly affiliated with the State or Central Government, cannot be considered as part of the government category. Instead, they are recognized as secured creditors, entitling them to receive payment on a priority basis through the prorate distribution process.

Another aspect discussed in the case pertained to the security interest of secured creditors. It was argued that if these creditors relinquish their security interest, they should be granted priority in debt repayment. However, the Supreme Court ruled that such priority is not granted under Section 52 of the IBC.

The Supreme Court played a decisive role in this matter, emphasizing the significance of the provision that confers priority to secured creditors. The Court directed the liquidator to finalize the liquidation process within a stipulated timeframe of 10 weeks and ensure the payment of all dues owed to the Respondent.

This landmark judgment by the Supreme Court delineates the order of claims and the relationship between the IBC and the Electricity Act. By affirming the supremacy of the IBC in cases of insolvency and liquidation, the ruling establishes a well-organized and structured procedure for debt collection and equitable distribution among creditors.

Contributed by:

Tanveen Kaur

7th Semester  

BA LLB,

Christ (Deemed to be University)

Pune, Lavasa

 

[1] Section 53 of the IBC 2016 states as follows:

(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely: —

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following: —

(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following: —

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

(2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the liquidator.

(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.