2023 (7) TMI 831 - SC - Insolvency and Bankruptcy

Recovery of outstanding electricity dues - Secured Creditor - attachment of properties - waterfall mechanism - classification of property in order of priority of dues prescribed under Section 53 of the IBC - 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. Rainbow Papers 2022 (9) TMI 317 - SUPREME COURT did not notice the waterfall mechanism under Section 53 the provision had not been adverted to or extracted in the judgment. Furthermore, Rainbow Papers was in the context of a resolution process and not during liquidation. Section 53, as held earlier, 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. As noticed earlier, this intention is also evident from a reading of the preamble to the Act itself. Similarly, in DUNCANS INDUSTRIES LTD. VERSUS A.J. AGROCHEM 2019 (10) TMI 301 - SUPREME COURT , Section 16G of the Tea Act, 1953 which required prior consent of the Central Government (for initiation of winding up proceedings) was held to be overridden by the IBC. In a similar manner, 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). It is held that the reliance on Rainbow Papers is of no avail to the appellant. In this court s view, that judgment has to be confined to the facts of that case alone. 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. The record further shows that after the NCLT passed its order, the appellant preferred its claim on 10.04.2018. Based on that application, the liquidator had filed an application before the NCLT for modification of its order dated 21.08.2018, and contended that PVVNL also came under the definition of secured operational creditor in realization of its dues in the liquidation proceedings as per law. The application sought amendment of the list of stakeholders. The application was allowed. In view of these factual developments, this Court does not consider it appropriate to rule on the submissions of the liquidator vis-a-vis the fact of non-registration of charges under Section 77 of the Companies Act, 2013. At the same time, the liquidator is directed to decide the claim exercised by PVVNL in the manner required by law. It shall complete the process within 10 weeks from the date of pronouncement of this decision, after providing such opportunity to the appellant, as is necessary under law - Appeal dismissed.

Summary

Issues Involved:
1. Whether the provisions of the Electricity Act, 2003 override the Insolvency and Bankruptcy Code, 2016.
2. Whether PVVNL's electricity dues constitute a "security interest" under the IBC.
3. Whether PVVNL's dues should be treated as government dues under the IBC.
4. The impact of non-registration of charges under Section 77 of the Companies Act, 2013 on PVVNL's claim.

Summary:

Issue 1: Overriding Provisions of the Electricity Act, 2003
PVVNL argued that Sections 173 and 174 of the Electricity Act, 2003, which have an overriding effect on other laws, should prevail over the IBC. They contended that the Electricity Act, being a special law, should take precedence over the IBC, a general law. The Supreme Court held that Section 238 of the IBC, which contains a non-obstante clause, overrides the provisions of the Electricity Act, 2003. The Court cited previous judgments affirming the primacy of the IBC over other laws, including the Electricity Act.

Issue 2: Security Interest under the IBC
PVVNL claimed that their electricity dues constituted a "security interest" under the IBC, relying on the definition of "secured creditor" and "security interest" in the IBC. The Court accepted that a charge was created on the assets of the corporate debtor by virtue of Clause 4.3(f)(iv) of the 2005 Code and the agreement between the parties. Consequently, PVVNL was recognized as a secured creditor.

Issue 3: Treatment of PVVNL's Dues as Government Dues
The liquidator argued that PVVNL's dues should be treated as government dues, which rank lower in priority under the IBC's "waterfall mechanism." The Court clarified that dues payable to statutory corporations like PVVNL, which do not fall within the description of "amounts due to the central or state government," are distinct from government dues. Therefore, PVVNL's dues do not fall under Section 53(1)(f) of the IBC and should not be treated as government dues.

Issue 4: Non-Registration of Charges under Section 77 of the Companies Act, 2013
The liquidator contended that PVVNL's claim was unenforceable due to the non-registration of charges under Section 77 of the Companies Act, 2013. The Court noted that both the NCLT and the NCLAT had concurrently found PVVNL to be a secured creditor. Given these findings and subsequent factual developments, the Court did not rule on the liquidator's submission regarding non-registration of charges.

Conclusion:
The appeal was dismissed, and the liquidator was directed to decide PVVNL's claim in accordance with the law within 10 weeks. The Supreme Court upheld the primacy of the IBC over the Electricity Act, recognized PVVNL as a secured creditor, and clarified that PVVNL's dues should not be treated as government dues under the IBC.