Legislations are intended to address issues involving specific subject matter. A right granted under one legislation may be affected by the provisions of another legislation. A logical question that follows is – which provision would prevail? The obvious answer is that the legislation dealing with the specific subject matter should prevail over general legislation.
Further, what happens if both the legislations in question contain provisions which state that the legislation in question would apply notwithstanding anything inconsistent therewith contained in any other law?
Specific issues surrounding the above questions are dealt with by the Hon'ble Supreme Court with respect to the provisions of the Electricity Act, 2003 in relation to the Insolvency and Bankruptcy Code, 2016 ('IBC'), in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited ('PVVN Case').
This write-up discusses certain interesting issues arising from the ruling of the Hon'ble Supreme Court in the PVVN Case.
The PVVN Case
Recently, in the PVVN case decided on 17 July 2023, the
Hon'ble Supreme Court of India 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).
This ruling is based on the interpretation of Section 238 of the IBC, which reads as under:
"The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."
While dismissing the appeal of Paschimanchal Vidyut Vitran Nigam Limited (PVVNL), the Court, among other things, clarified the rights and preference of the secured and unsecured creditors under the IBC. The Court held that the secured and unsecured creditors are prioritized in debt repayment before the dues owed to the State or Central Government are repaid and settled.
It is important here to understand the facts to enable a critical outlook regarding the reasoning stated in the reported judgment in the PVVNL Case.
- Electricity bills were raised on Raman Ispat Pvt. Ltd. (Company) by PVVNL. Due to non-payment of bills and dues, the Company properties were attached by PVVNL. Consequently, a charge was created on the properties with restraint on the transfer of property vide orders of the Tehsildar, Muzaffarnagar.
- The resolution process to revive the Company was unsuccessful, and therefore, it became subject to liquidation under the IBC.
- It was argued by the liquidator that unless the attachment orders of the District Collector, Muzaffarnagar and Tehsildar, Muzaffarnagar, were set aside by the National Company Law Tribunal ('NCLT'), the property of the corporate debtor (i.e., the Company) would not be purchased by anyone owing to the uncertainty regarding the authority of the liquidator to sell such property.
- The liquidator argued that the claims being made by PVVNL would be governed by the order of priority as set out under Section 53 of the IBC. The National Company Law Appellate Tribunal ('NCLAT') directed the District Collector and Tehsildar to release the attached properties for effecting a sale, the proceeds of which would be distributed in accordance with the IBC.
- This order of the NCLAT was challenged by PVVNL before the Hon'ble Supreme Court, citing that Sections 173 and 174 of the Electricity Act had an overriding effect on all other laws, with the exception of the Consumer Protection Act, 1986, the Atomic Energy Act, 1962 and the Railway Act, 1989.
- PVVNL argued that the Electricity Act, being a special Act enacted for generation, transmission, distribution and adjudication of disputes in relation to electricity, would have to be given primacy over other applicable laws, which would also include the IBC, a law of 'general' character that dealt with corporate insolvency. Under the Uttar Pradesh Electricity Supply Code, 2005, framed under the Electricity Act, there existed a specific mechanism for recovering electricity dues. It was further argued that PVVNL would not be subject to the hierarchy under the 'priority of claims' as listed in the IBC.
Scheme of the IBC
- The Court noted that the IBC was enacted with the objective of unifying the legal regime on commercial insolvency and that when the process of resolution is not successful, the corporate debtor enters into the phase of liquidation under Section 33 of the IBC, making it the obligation of the Adjudicating Authority to initiate liquidation process under Section 33 of the IBC.
- The Court discussed the 'waterfall mechanism' under
Section 53 of the IBC, which provides for the following order of
distribution of assets:
"(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."
- The Court explained that in the above-mentioned order of priority, dues owed to unsecured financial creditors are given a higher priority over governmental debts. Further, Section 52 allows secured creditors to relinquish their security interest in the liquidation process (under the procedure prescribed in Regulations 21 and 21A of the Liquidation Regulations) or proceed to enforce it. In case of enforcement, the secured creditor must first indicate its option within the time prescribed (30 days, in Form C or D of Schedule II to the Liquidation Regulations). This calculated decision of whether or not to relinquish secured interest decides the order of priority for such secured creditors. Under Section 52(3) of the IBC, the liquidator permits the secured creditor to claim dues that may be proven to exist as security debts. Upon clearance by the liquidator, the secured creditor can enforce the claim per Section 52(4) of the IBC.
- The Court also brought to notice the Preamble to the IBC to emphasize the shift in law and change in the order of priority of Government dues."An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto."
- It was contended by the liquidator that the dues owed to PVVNL were, technically speaking, owed to the 'government', and therefore, such dues ranked lower in the order of priority of clearance. The Court explained that the expression 'government dues' had not been defined under the IBC and found a mention only in the Preamble. However, what would constitute such dues has been detailed 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 Court held that under Section 36(4) of the IBC, amounts such as the provident fund, the pension fund, and the gratuity fund are excluded from liquidation. Section 36(4), therefore, clarifies that not all dues owed under the statute are treated as 'government' dues.The Central Government and State Government are defined by the General Clauses Act of 1897. Concerning PVVNL, the Court said that 'it 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 have been liberalized in terms of the 2003 Act, barring certain segments. Private entities are entitled to hold licenses.' Hence, it was held that the dues or amounts payable to PVVNL do not fall within the description of Section 53(1)(f) of the IBC.
Rainbow Papers Judgement
- While contending that the Electricity Act is a special enactment and thus would prevail over IBC, which is a general law, PVVNL placed reliance on the judgement of the Supreme Court in State Tax Officer v. Rainbow Papers Ltd. ('Rainbow Papers Case'). PVVNL contended that in the Rainbow Papers Case, the Hon'ble Supreme Court had determined that when a security interest is established in favour of the government for tax claims under the Gujarat Value Added Tax Act, 2003, the government assumes the role of a secured creditor under the Gujarat Value Added Tax Act, 2003. Therefore, under Section 53(1)(b)(ii), the debts owed to a secured creditor would include the State as well.
- While referring to the Rainbow Papers Case, the Court observed that the arrangement of section 53 places the amounts payable to secured creditors and workmen second in the order of priority, below the liquidator's costs and expenses during the liquidation process. The Court further observed that the dues owed to the government are placed significantly lower in priority compared to secured creditors, unsecured creditors, and operational creditors, and further observed that this 'particular design' either went unnoticed or was not brought to the Court's attention in Rainbow Papers Case. The Court held that the separate and distinct treatment of amounts payable to secured creditors and dues payable to the government signifies the intention of the Parliament to treat the latter differently. The Court pointed out that the Rainbow Papers Case overlooked the essential 'waterfall mechanism' in section 53 of the IBC, which determines the priority of debt repayment during insolvency. Consequently, dismissing the appeal, the Court directed the liquidator to decide the claim exercised by PVVNL in the manner required by law and complete the process within 10 weeks.
- The Court placed reliance on the 'non-obstante'
provision of the IBC over the non-obstante provision under the
This raises the question of why the non-obstante provision of the Electricity Act does not apply. The basis for determining priority among non-obstante provisions in two different legislations is unclear.
- An attractive argument would be that IBC is a specific legislation which deals with, among other things, governance and management of a corporate upon commencement of process thereunder, while the Electricity Act is a general provision which would apply till the time the corporate is outside the purview of the IBC. Possibly, such aspects could be addressed at the time of legislative drafting.
- The decision in the Rainbow Papers Case would merit a review in light of the observation of the Court that the dues owed to the government are placed significantly lower in priority compared to secured creditors, unsecured creditors, and operational creditors, and this 'particular design' either went unnoticed or was not brought to the Court's attention in Rainbow Papers Case.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.