Paschimanchal Vidyut Vitran Nigam Ltd. vs Raman Ispat Private Limited & Ors.

Insolvency and Bankruptcy Code, 2016 – s.53(1)(a)-(f) – Waterfall mechanism – Priority of claims – Order of distribution of assets – “government dues” – Corporate debtor entered into an agreement with appellant-PVVNL for supply of electricity – PVVNL raised bills for supply of electricity to the corporate debtor but dues remained unpaid – PVVNL attached the corporate debtor’s properties – The Tehsildar, restrained transfer of property by sale, donation or any other mode, and also created a charge on the properties – Corporate debtor underwent resolution process which was not successful and became subject to liquidation – District Collector issued notice for recovery of outstanding dues – NCLT directed Tehsildar to immediately release property in favour of the liquidator of the corporate debtor for enabling its sale, and after realisation of its value, for distributing the proceeds in accordance with the IBC – Appeal rejected by NCLAT – PVVNL argued that rights of electricity suppliers like PVVNL were not subordinate and subject to the ‘priority of claims’ mechanism under the IBC – Plea of the liquidator that dues owed to PVVNL were technically owed to the “government”, and thus occupied a lower position in the order of priority of clearance – Held:”government dues” is not defined in the IBC – It finds place only in the preamble – However, what constitutes such dues is spelt out in the ‘waterfall mechanism’ u/s.53(1)(e), which inter alia states that, “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 the State” ranks lower in priority to the class of creditors described in Clauses (a) to (d) of s.53(1) – There exists a separate enumeration or specification of the Central Government and State Government dues, as a class apart from other creditors, including creditorswho may have secured interest (in respect of which amounts may be payable tothem) – These dues are distinct and have to be treated as separate from those owed to secured creditors – Further, PVVNL undoubtedly has government participation however, that does not render it a government or a part of the ‘State Government’ – Its functions can be replicated by other entities, both private and public – Therefore, dues or amounts payable to PVVNL do not fall within the description of s.53(1)(f) – Uttar Pradesh Electricity Supply Code, 2005 – General Clauses Act, 1897 – ss.3(8), 3(60). Insolvency and Bankruptcy Code, 2016 – Scheme of – Discussed.

Electricity Act, 2003 – Uttar Pradesh Electricity Supply Code, 2005 – Outstanding electricity dues, if a ‘charge’ on assets of corporate debtor – Circumstances in which such a ‘charge’ could be constituted in law – Held: In K.C. Ninan v. Kerala State Electricity Board, Supreme Court examined such circumstances and held that the creation of a charge need not necessarily be based on an express provision of the 2003 Act or plenary legislation, but could be created by properly framed regulations authorized under the parent statute – Thus, in the present case, PVVNL rightly argued that by virtue of Clause 4.3(f)(iv) of the Supply Code, read with the stipulations in the agreement between the parties, a charge was created on the assets of the corporate debtor – Order of the NCLT also reveals that this position was accepted – This is evident from the order of the NCLAT which clarified that PVVNL also came under the definition of ‘secured operational creditor’ as per law – This finding was affirmed by the impugned order – Therefore, the conclusion that PVVNL is a secured creditor cannot be disputed – Electricity. Insolvency and Bankruptcy Code, 2016 – ss.52, 53(1)(e), (f) – Government debts, operational debts vis-à-vis dues owed to unsecured financial creditors–Rationale for placing secured creditors who relinquish their security, higher in priority– Held: The priority of claims, indicated in the hierarchy of preferences, under the waterfall mechanism accords government debts [clause (e)] and operational debts [clause (f)] lower priority than dues owed to unsecured financial creditors – Further, debts owed to a secured creditor, whenever such secured creditor “has relinquished security in the manner set out in s. 52” receive a fairly high priority (immediately after insolvency resolution process costs) – When the secured creditor does not relinquish security, the priority of claim is lower [s.53(1)(e)(ii)] in respect of “any amount unpaid following the enforcement of security interest” – Amounts due to the government (i.e., payable into the Consolidated Fund of India or Consolidated Fund of a State) are ranked in the same manner as those of secured creditors who do not relinquish their security interest [s.53(1)(e)(ii)]– Aforesaid rationale discussed.

Electricity Act, 2003 – ss.50, 56, 181(2)(x) – Uttar Pradesh Electricity Supply Code, 2005 – Clause 4.3 (f) (iv), Clause 6.15 – Recovery mechanism under– Discussed– Uttar Pradesh Government Electrical Undertakings (Dues Recovery) Act, 1958.

Insolvency and Bankruptcy Code, 2016 – s.53(1)(f) – Constitution of India – Article 265 – “government dues” – Held: Dues payable or requiring to be credited to the Treasury, such as tax, tariffs, etc. which broadly fall within the ambit of Article 265 are ‘government dues’ and therefore covered by s.53(1)(f) – Whereas, dues payable to statutory corporations which do not fall within the description “amounts due to the central or state government” for instance amounts payable to corporations created by statutes which have distinct juristic entity but whose dues do not constitute government dues payable or those payable into the respective Consolidated Funds stand on a different footing. Companies Act, 2013 – ss.77, 78, 3(31) – Plea of the liquidator that without registration of charge u/s.77, the same was unenforceable under liquidation proceedings – Held: s.78 enacts that when a company whose property is subject to charge, fails to register it, the charge holder (or the person entitled to the charge over the company’s assets) can seek its registration – s.3(31) defines “security interest” in the widest terms – Liquidator cannot urge this aspect at this stage, because of the concurrent findings of the NCLT and the NCLAT that PVVNL is a secured creditor – Further, on facts, it is not appropriate to rule on the submissions of the liquidator visà-vis the fact of non-registration of charges u/s.77. Interpretation of Statutes –Insolvency and Bankruptcy Code, 2016 – Gujarat Value Added Tax Act, 2003–Held: When an enactment uses two different expressions, they cannot be construed as having the same meaning – Reliance on Rainbow Papers case is of no avail to the appellant and that judgment is to be confined to its own facts.

Dismissing the appeal, the Court

HELD: 1.1 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.Debts owed to a secured creditor, whenever such secured creditor “has relinquished security in the manner set out in section 52” receive a fairly high priority (immediately after insolvency resolution process costs), whereas in other cases, i.e., when the secured creditor does not relinquish security, the priority of claim is lower [Section 53 (1) (e) (ii)] in respect of “any amount unpaid following the enforcement of security interest”. Another feature is that amounts due to the government (i.e., payable into the Consolidated Fund of India or Consolidated Fund of a State) are ranked in the same manner as those of secured creditors who do not relinquish their security interest [Section 53 (1) (e) (ii)]. [Paras 27 and 28][1244-C-G]

1.2 Section 52 gives an option to secured creditors to either relinquish their security interest, in the liquidation process (the procedure for which is prescribed in Regulations 21 and 21A of the Liquidation Regulations), or proceed to enforce it. In case of the latter option, the secured creditor has to first indicate its option, within the time prescribed (30 days, in Form C or D of Schedule II to the Liquidation Regulations). The liquidator may then, per Section 52 (3), permit the secured creditor to realize such dues as are proved to exist, as security debts. Upon clearance by the liquidator, the secured creditor may proceed to enforce its claim, under Section 52 (4). If there is resistance during the process, the secured creditor may approach the NCLT [Section 52 (5) and (6)]. Upon enforcement, any excess amount realized should be tendered to the liquidator [Section 52 (7)]. It is thus, apparent, that a secured creditor has to take a calculated decision, at the outset of the liquidation process, whether or not to relinquish its secured interest. In case it does so, its dues rank high in the waterfall mechanism. In case it chooses not to relinquish its security interest, and instead proceeds to enforce it without success or is unable to realize all its dues in the process of enforcement, ithas to then perforce stand lower in priority, and await distribution of assets upon realization of the liquidation estate, by the liquidator, vis-à-vis the balance of its dues. The procedure envisioned, thus, takes a nuanced approach for the recovery of a secured creditor’s dues. In case they opt to relinquish the security, their priority is ranked high; in case, they seek to enforce such security, subject to intimation and verification by the liquidator, they can proceed to do so. In the event of short fall, they rank lower in priority. This appears to be the reason, as is clear from the explanation provided in response to comments as a result of Parliamentary debates in 2018, that secured creditors opting not to relinquish their security interest are “presumed that such secured creditors have recovered most of their dues by enforcement of their security outside the liquidation proceedings”.27 There is sound logic in this, because those opting to ‘stand out’ and enforce security interest, are permitted to do so; in the event of excess recovery, they have to intimate and hand over such excess for distribution in liquidation proceeding; in case they are unable to recover their dues, for such of the dues as are outstanding, such secured creditors are ranked low. The provisions of the IBC are carefully thought out, and give options to secured creditors, and balance their interests with those of other creditors in a liquidation proceeding. [Paras 34-38][1249-F-G; 1250-A-F; 1251-A-B; 1256-B] Moser Baer Karamchari Union thr. President Mahesh Chand Sharma v. Union of India & Ors. (2023) SCC OnLine SC 547 – referred to.

1.3 By virtue of Section 56 of the 2003 Act, in the event of any person’s neglect “to pay any charge for electricity or any sum other than a charge for electricity” payable “in respect of supply, transmission or distribution or wheeling of electricity to him” (after a clear fifteen days’ notice in writing) “and without prejudice to his rights to recover such charge or other sum by suit”, a licensee (including a distribution licensee such as PVVNL) is empowered to disconnect electricity supply to such consumer or person. By virtue of Section 181(2)(x) of the 2003 Act, State Commissions are empowered to frame regulations. Section 50 empowers the State Commissions to frame the “Electricity Supply Code” to provide for recovery of electricity charges, intervals for billing of electricity charges, disconnection of supply of electricity for non-payment, etc. These provisions in the 2003 Act and the respective Codes form the legal framework for recovery of dues by various kinds of licensees under the 2003 Act. In the present case, the Uttar Pradesh State Commission had framed the 2005 Supply Code. Clause 6.15 of the 2005 Code enacts that recovery of arrears shall be in accordance with the provisions of the Uttar Pradesh Government Electrical Undertakings (Dues Recovery) Act, 1958. [Paras 39-41] [1256-B-G]

1.4 A recent ruling of this court in K.C. Ninan v. Kerala State Electricity Board examined the circumstances in which such a ‘charge’ could be constituted in law. This court held that the creation of a charge need not necessarily be based on an express provision of the 2003 Act or plenary legislation, but could be created by properly framed regulations authorized under the parent statute. In these circumstances, the argument of PVVNL that by virtue of Clause 4.3(f)(iv) of the Supply Code, read with the stipulations in the agreement between the parties, a charge was created on the assets of the corporate debtor, is merited. A careful reading of the impugned order of the NCLT also reveals that this position was accepted. This is evident from the order of the NCLAT which clarified that PVVNL also came under the definition of ‘secured operational creditor’ as per law. This finding was not disturbed, but rather affirmed by the impugned order. In these circumstances, the conclusion that PVVNL is a secured creditor cannot be disputed. [Paras 42, 43][1258-A-C]

K.C. Ninan v. Kerala State Electricity Board 2023 SCC Online SC 603 – relied on.

1.4 The counsel for the liquidator had submitted that dues owed to PVVNL were technically owed to the “government”, and thus occupied a lower position in the order of priority of clearance. The expression “government dues” is not defined in the IBC - it finds place only in the preamble. However, what constitutes such dues is spelt out in the ‘waterfall mechanism’ under Section 53(1)(e), which inter alia states that, “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 the State” ranks lower in priority to the class of creditors described in Clauses (a) to (d) of Section 53(1). Thus, there exists a separate enumeration or specification of the Central Government and State Government dues, as a class apart from other creditors, including creditors who may have secured interest (in respect of which amounts may be payable to them). The repeated reference of lowering of priority of debts to the government, on account of statutory tax, or other dues payable to the Central Government or State Government, or amounts payable into the Consolidated Fund on account of either government, in the various reports which preceded the enactment of the IBC, as well as its Preamble, means that these dues are distinct and have to be treated as separate from those owed to secured creditors. The Central Government and State Government are defined by the General Clauses Act, 1897. The former is defined by Section 3(8), 32 and latter by Section 3 (60). [Para 44][1258-D-G]

Shrikant v. Vasantrao & Ors. [2006] 1 SCR 496 – referred to.

1.5 The specific mention of other class of creditors whose dues are statutory, such as dues payable to workmen or employees, “the provident fund, the pension fund, the gratuity fund” under Section 36(4), which excludes these enumerated amounts from the liquidation, especially clarifies that not all dues owed under statute are treated as ‘government’ dues. In other words, dues payable to statutory corporations which do not fall within the description “amounts due to the central or state government” such as for instance amounts payable to corporations created by statutes which have distinct juristic entity but whose dues do not constitute government dues payable or those payable into the respective Consolidated Funds stand on a different footing. Such corporations may be operational creditors or financial creditors or secured creditors depending on the nature of the transactions entered into by them with the corporate debtor. On the other hand, dues payable or requiring to be credited to the Treasury, such as tax, tariffs, etc. which broadly fall within the ambit of Article 265 of the Constitution are ‘government dues’ and therefore covered by Section 53(1)(f) of the IBC. PVVNL undoubtedly has government participation. However, that does not render it a government or a part of the ‘State Government’. Its functions can be replicated by other entities, both private and public. The supply of electricity, the generation, transmission, and distribution of electricity has been liberalized in terms of the 2003 Act barring certain segments. Private entities are entitled to hold licenses. In this context, it has to be emphasized that private participation as distribution licensees is fairly widespread. For these reasons, it is held that in the present case, dues or amounts payable to PVVNL do not fall within the description of Section 53(1)(f) of the IBC. [Paras 46, 47][1261-B-G] Municipal Commissioner of Dum Dum Municipality & Ors. v. Indian Tourism Development Corporation & Ors. 1995

(5) SCC 251 : [1995] 2 Suppl. SCR 433 – relied on.

1.6 Section 53 enacts the waterfall mechanism providing for the hierarchy or priority of claims of various classes of creditors. 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 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 Gujarat Value Added Tax Act, 2003 no doubt creates a charge in respect of amounts due and payable or arrears. It would be possible to hold [in the absence of a specific enumeration of government dues as in the present case, in Section 53(1)(e)] that the State is to be treated as a ‘secured creditor’. However, the separate and distinct treatment of amounts payable to secured creditor on the one hand, and dues payable to the government on the other clearly signifies Parliament’s intention to treat the latter differently- and in the present case, having lower priority. This intention is also evident from a reading of the preamble to the Act itself. When an enactment uses two different expressions, they cannot be construed as having the same meaning. [Paras 49-51][1262-G-H; 1263-A-E]

State Tax Officer v. Rainbow Papers Ltd. [2022] 13 SCR

808 – distinguished.

Brihan Mumbai Mahanagarpalika & Anr. v. Willington Sports Club & Ors. [2013] 16 SCR 216 – referred to.

1.7 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). [Para 52][1263-F-G]

Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs 2022 SCC Online SC 1101; Duncans Industries Ltd. v. AJ Agrochem (2019)

9 SCC 725 : [2019] 12 SCR 830 – relied on.

Innoventive Industries Ltd. v. ICICI Bank &Anr. [2017]

8 SCR 33; CIT v. Monnet Ispat& Energy Ltd. (2018) 18 SCC 786; Ghanashyam Mishra & Sons (P) Ltd. v.

Edelweiss Asset Reconstruction Co. Ltd. [2021] 13 SCR 737; Jagmohan Bajaj v. Shivam Fragrances Private Limited 2018 SCC OnLine NCLAT 413 – referred to.

1.8 Section 78 enacts, that when a company whose property is subject to charge, fails to register it, the charge holder (or the person entitled to the charge over the company’s assets) can seek its registration. Section 3 (31) of the IBC defines “security interest” in the widest terms. In this court’s opinion, the liquidator cannot urge this aspect at this stage, because of the concurrent findings of the NCLT and the NCLAT that PVVNL is a secured creditor. [Para 55][1266-E]

Board of Trustees, Port of Mumbai v. Indian Oil Corporation [1998] 2 SCR 774; Jitender Nath Singh v. Official Liquidator & Ors. [2012] 13 SCR 339; ICICI Bank Ltd. v. Sidco Leathers Ltd. [2006] Supp 1 SCR 528; Jalgaon Janta Shakari Bank Ltd. v. Joint

Commissioner of Sales Tax, Nodal 9, Mumbai & Anr. 2022 SCC OnLine Bom 1767; The West Bengal State Electricity Distribution Company Limited v. Sri Vasavi Industries Limited & Anr. 2022 SCC Online Cal 1918; Union of India & Ors. v. Shah Goverdhan L. Kabra Teachers’ College [2002] Supp 3 SCR 220; UCO Bank & Anr. v. Dipak Debbarma & Ors. [2016] 11 SCR 723; Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC

17 : [2019] 3 SCR 535; K. Shashidhar v. Indian Overseas Bank [2019] 3 SCR 845; Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors. [2019]

16 SCR 275; Member, Board of Revenue v. Anthony Paul Benthall [1955] 2 SCR 842 – referred to.

The Bankruptcy Law Reforms Committee Report, (2015), Heading 5.5.8- Establishing Priority of Payout in Liquidation; Report of the Insolvency Law Committee (2020)- Heading 7.3- Realisation or Relinquishment of Security Interest by a Secured Creditor (pg. 76) – referred to.