IBC overrides Electricity Act, creditors should be repaid before settling government dues: Supreme Court

The Supreme Court recently ruled that the Insolvency and Bankruptcy Code of 2016 (IBC) overrides the provision of the Electricity Act, 2003, in view of Section 238 of the IBC. [Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited and Others]

"It is held that 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 judgment stated.

A division bench of Justices S Ravindra Bhat and Dipankar Dutta also clarified that creditors under the IBC, both secured and unsecured, are entitled to have their debts repaid first before dues payable to the State or the Central governments are settled.

The Court passed the ruling while dismissing an appeal by the Paschimanchal Vidyut Vitran Nigam Limited (appellant), which had challenged the release of some property earlier attached in the appellant's favour.

The property had been released on a plea by the liquidator overseeing insolvency proceedings initiated against Raman Ispat Pvt. Ltd. (corporate debtor or respondent).

The liquidator had sought the release of the property so that the same may be sold and its sale proceeds used to settle pending dues as per the IBC.

The National Company Law Tribunal (NCLT), Allahabad and the National Company Law Appellate Tribunal (NCLAT) had both rejected the appellant's challenge to this move, prompting the appeal before the top Court.

The Supreme Court upheld the NCLT and NCLAT rulings.

Pertinently, the apex court highlighted that the dues payable to creditors under the IBC stand on a higher footing than the electricity dues payable under the Electricity Act.

The Supreme Court placed substantial emphasis on the 'waterfall mechanism' under Section 53 of the IBC.

This provision prioritises the payment of dues to secured creditors who relinquish the right to enforce security when the liquidation process is initiated.

The payment of such creditors (which stands on equal footing with the payment of workmen's dues) is second only to the payment of insolvency resolution process costs and the liquidation costs, the Court noted.

Further, the Court noted that even secured creditors who do not relinquish rights to enforce security interest and unsecured creditors, rank higher than government agencies who are owed money by the corporate debtor in the scheme of repayment under Section 53 of IBC.

The bench also rejected the appellant's reliance on the Supreme Court's 2022 ruling in State Tax Officer v. Rainbow Papers Limited. The appellant had relied on this judgment to contend that the Electricity Act, 2003 had primacy over other laws, including the IBC.

Justices Bhat and Dutta, however, pointed out that the Rainbow Papers case appeared to have been passed without noticing the waterfall mechanism set out under Section 53 of the IBC.

Further, since Section 238 of the IBC gives the Code an overriding effect, the Court concluded that the appellant's reliance on the Rainbow Papers case was of no avail.

"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," the Court observed.

The Court also questioned whether the appellant could be treated as "government", since not all dues payable under statutes are viewed as "government dues" and since the appellant's electricity distribution functions are also now replicated by private entities.

In any case, the Court observed that the appellant can be treated as a secured creditor, a position that was supported in the NCLT and NCLAT rulings as well.

With these observations, the Court proceeded to dismiss the appeal after directing the liquidator to decide on the claims of the appellant (being a secured creditor) in ten weeks' time.

Advocate Pradeep Mishra appeared for Paschimanchal Vidyut Vitran Nigam Limited. Advocate Aravind Kumar Gupta appeared for the liquidator overseeing the insolvency resolution process in respect of Raman Ispat Pvt. Ltd.

[Read Judgment]