Paschimanchal Vidyut Vitran Nigam Limited (PVVNL) has filed an appeal in the Supreme Court against the order of the National Company Law Appellate Tribunal (NCLAT), which upheld the decision of ...
2023 INSC 625 1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 7976 OF 2019
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. ...APPELLANT(S)
VERSUS
RAMAN ISPAT PRIVATE LIMITED & ORS. ...RESPONDENT(S)
JUDGMENT
S. RAVINDRA BHAT, J
1. The appellant Paschimanchal Vidyut Vitran Nigam Limited (hereinafter,
“PVVNL”) is aggrieved by an order of the National Company Law Appellate
Tribunal (hereinafter, “NCLAT”)
1
which rejected its appeal against an order of the
National Company Law Tribunal, Allahabad (hereinafter, “NCLT”/ “Adjudicating
Authority”),
2
which allowed an application directing the District Magistrate and
Tehsildar, Muzaffarnagar to immediately release property (which was previously
attached at the request of the appellant) in favour of the liquidator of the
respondent Raman Ispat Pvt. Ltd. (hereinafter, “corporate debtor”) for enabling
its sale, and after realisation of its value, for distributing the proceeds in
accordance with the provisions of the Insolvency and Bankruptcy Code, 2016
(hereinafter, “IBC” / “Code”).
1
Company Appeal (AT) (Insolvency) No. 639 of 2018, dated 15.05.2019.
2
C.A. No. 88/ALD/2018 in CP No. (IB) 23/ALD/2017, dated 21.08.2018.
2
I. FACTS
2. The parties had entered into an agreement on 11.02.2010 for supply of
electricity. Clause 5 of the agreement provided that:
“The outstanding dues will be a charge on the assets of the company. Before
sale is made, the outstanding dues will be cleared and, (in) the alternative the
deed to agreements/sale will specifically mention the outstanding dues and
the method of its payment.”
3. PVVNL raised bills for supply of electricity to the corporate debtor from
time to time. Since the dues remained unpaid, PVVNL attached the corporate
debtor’s properties by Order No. 1048, dated 12.01.2016. The Tehsildar,
Muzaffarnagar by Order No. 1423F dated 23.01.2016, restrained transfer of
property by sale, donation or any other mode, and also created a charge on the
properties. The corporate debtor initially underwent resolution process under the
IBC, however that process was not successful. It therefore became subject to
liquidation.
4. Under the final bill dated 27.01.2017, the total arrears due were ₹
4,32,33,883/-. Of this, the District Collector issued notice for recovery of
outstanding dues to the tune of ₹ 2,50,14,080/-, by auction of movable and
immovable properties located at Khasara No. 0.4710, on 05.03.2018. The
liquidator alleged that unless the attachment orders of the District Collector,
Muzaffarnagar and Tehsildar, Muzaffarnagar were set aside by the NCLT, no
buyer would purchase the property of the corporate debtor due to uncertainty
about the authority of the liquidator to sell the property. The liquidator also took
the plea that PVVNL’s claim would be classified in order of priority prescribed
under Section 53 of the IBC, and PVVNL would be entitled to pro rata
distribution of proceeds along with the other secured creditors from sale of
liquidation assets.
5. The liquidator’s position ultimately led the NCLAT to direct the District
Magistrate and Tehsildar, Muzaffarnagar to immediately release the attached
3
property in its favour so as to enable sale of the property, and after realisation of
the property’s value, to ensure its distribution in accordance with the relevant
provisions of the IBC. The NCLAT also endorsed NCLT’s reasoning that PVVNL
fell within the definition of ‘operational creditor’, which could realize its dues in
the liquidation process in accordance with the law.
II. PVVNL’S ARGUMENTS
6. Mr. Pradeep Mishra, learned advocate for PVVNL, submitted that Sections
173 and 174 of the Electricity Act, 2003 (hereinafter, “2003 Act”) had an
overriding effect on all other laws except Consumer Protection Act, 1986; the
Atomic Energy Act, 1962; and the Railway Act, 1989. Being a special law relating
to all aspects of electricity – generation, transmission, distribution and
adjudication of disputes – it had primacy over all other laws, including the IBC,
which was a ‘general’ law dealing with corporate insolvency implemented much
later. In terms of the 2003 Act, and the regulations framed under it, including the
Uttar Pradesh Electricity Supply Code, 2005 (hereinafter, “2005 Code”), a special
mechanism for recovery of electricity dues existed. The rights of electricity
suppliers like PVVNL, therefore, were not subordinate and subject to the ‘priority
of claims’ mechanism under the IBC. Therefore, PVVNL could opt to
independently stay out of the liquidation process and recover its dues.
7. Learned counsel relied on the judgment of this court in Board of Trustees,
Port of Mumbai v. Indian Oil Corporation,
3
wherein this court had ruled that port
dues, under the Major Port Trust Act, 1963 overrode all other claims, including
those of secured creditors in liquidation proceedings. Learned counsel urged that
Section 238 of IBC could not override Sections 173 and 174 of the 2003 Act, since
3
Board of Trustees, Port of Mumbai v. Indian Oil Corporation, 1998 (2) SCR 774.
4
the latter (i.e. the Electricity Act) is a special enactment, and would prevail over
the IBC, which is a later general law, dealing with insolvency.
8. Counsel urged that provisions of the 2003 Act (Sections 42, 45 and 56) and
the 2005 Code (Clauses 4.3 and 6.15), prescribed the mechanism for recovery of
electricity charges. The 2003 Act being a ‘special Act’ with a non-obstante clause,
would have an overriding effect over the ‘general’ IBC law. This mechanism for
speedy recovery of electricity dues, had to be given full effect. Thus, the
provisions of IBC and the priority of claims under it in liquidation proceedings,
were separate and applied in respect of other amounts available for distribution,
after the recovery of electricity dues were permitted under the 2003 Act and 2005
Code.
9. Learned counsel also relied upon the decision of this court in State Tax
Officer v. Rainbow Papers Ltd.,
4
in which this court held that by virtue of a
security interest created in favour of the government for tax claims under the
Gujarat Value Added Tax Act, 2003, tax authorities i.e., the government, was a
secured creditor under the IBC. This court held that if a resolution plan excluded
such tax or statutory dues payable to the government, it would not be in
conformity with the provisions of the IBC and, as such, would not be binding on
the State.
10. Alternatively, the learned counsel submitted that electricity dues were also
‘security interests’ in favour of electricity service providers. He relied on the
definition of ‘secured creditor’ which meant “a creditor in favour of whom
security interest is created.”
5
Such ‘security interest’ was defined under the IBC
as:
“Right, title or interest or a claim in a property, created in favour of, or
provided for a secured creditor by a transaction which secures payment or
performance of an obligation and includes mortgage, charge, hypothecation,
4
State Tax Officer v. Rainbow Papers Ltd., 2022 (13) SCR 808.
5
Section 3 (30), IBC.
5
assignment and encumbrance or any other agreement or arrangement
securing payment or performance of any obligation of any person.”
6
11. ‘Claim in a property’ section of the definition could be invoked when one
secured payment or performance of any obligation under the law. Additionally,
the term “transfer” was defined under the IBC to mean:
“Includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other
form of transfer of right, title, possession or lien.”
7
12. It was urged that a reading of the definitions of ‘security interest’ and
‘transfer’ indicated that the intent of the IBC was to include, in the concept of
‘security interest’, all claims, including statutory claims arising in law, against the
corporate debtor. Thus, obligations and statutory charges were also ‘security
interests’.
III. LIQUIDATOR’S ARGUMENTS
13. Mr. Arvind Kumar Gupta, learned advocate appearing for the liquidator,
argued that under the IBC, creditors were classified either as secured or unsecured.
Further, a highlight of the IBC was the distinction between the financial and
operational creditors, and their differential treatment with regards to recovery. He
submitted that the Bankruptcy Law Reforms Committee Report, 2015 and the
UNCITRAL Legislative Guide on Insolvency Law, stipulate that government
dues were not given priority under the IBC. This formed the backdrop of the
legislation. In fact, the Statement of Objects and Reasons to the IBC stipulates
alteration in the priority of payment of government dues.
14. It was argued that in terms of Section 52(3), before realization of security
interest by secured creditors, the liquidator had to verify the existence of security
interest from the records maintained by an information utility or by such other
6
Section 3 (31), IBC.
7
Section 3 (34), IBC.
6
means as may be specified by the Insolvency and Bankruptcy Board of India
(hereinafter, “Board / IBBI”).
8
The existence of a security interest could be proved
by a secured creditor in terms of Regulation 21, IBBI (Liquidation Process)
Regulations, 2016 (hereinafter, “Liquidation Regulations”).
15. Learned counsel submitted that the registration of any charge was
mandatory under Section 77 of the Companies Act, 2013 (corresponding to
Section 125 of the erstwhile Companies Act, 1956). It was highlighted that
Section 48 of the Transfer of Property Act, 1882 (hereinafter, “TPA”) dealt with
priority of rights, and inter-se priorities amongst creditors prevailed in the
distribution of assets in liquidation proceedings. Counsel referred to this court’s
judgments of Jitender Nath Singh v. Official Liquidator & Ors.
9
and ICICI Bank
Ltd. v. Sidco Leathers Ltd.
10
16. It was submitted that government dues were placed in the ‘waterfall
mechanism’ under Section 53(1)(e)(i) of the IBC. Learned counsel emphasized
that even under the old Companies Act, 1956, Section 529A provided priority to
the debts due to the secured creditors and the workers, and Section 530 made
payment of taxes subject to the priority embodied in Section 529A. Similarly,
priority of debts due to secured creditors and workers was reflected under Section
326 of the Companies Act, 2013. Section 327 made payment of taxes subject to
the priority embodied in Section 326. It was urged that Section 26E of the
Securitization of Financial Assets and Enforcement of Security Interest Act, 2002
(hereinafter, “SARFAESI Act”) and Section 31B of the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 (hereinafter, “RDDBFI Act”) accorded
priority to secured creditors over other dues. The Full Bench judgment of the
Bombay High Court in Jalgaon Janta Shakari Bank Ltd. v. Joint Commissioner
8 The Insolvency and Bankruptcy Board of India is established under Section 188 of the IBC. Is powers are
enumerated under Section 196.
9
Jitender Nath Singh v. Official Liquidator & Ors., 2012 (13) SCR 339.
10
ICICI Bank Ltd. v. Sidco Leathers Ltd., 2006 Supp (1) SCR 528
7
of Sales Tax, Nodal 9, Mumbai & Anr.,
11
reinforced the priority accorded to
secured creditors under Section 26E of SARFAESI Act.
17. Learned counsel submitted that electricity dues did not enjoy any priority,
and cited High Court rulings, especially the judgment of the Calcutta High Court
in The West Bengal State Electricity
Distribution Company Limited v. Sri Vasavi Industries Limited & Anr.
12
It was
submitted that creation of charge under a law was a matter of fact which had to be
proved. In the present case, the statute (the 2005 Code) merely enabled recovery
of electricity dues as though they were recovery of arrears of revenue. That did
not result in the creation of ‘security interest’ in favour of the appellant. Moreover,
such interest was not registered in accordance with the Liquidation Regulations
and Section 77 of the Companies Act, 2013.
18. Learned counsel urged that in case of apparent overlapping between the two
entries, the doctrine of ‘pith and substance’ had to be applied to find out the true
nature of the legislation and the entry within which it fell – reliance was placed
on the decisions of Union of India & Ors. v. Shah Goverdhan L. Kabra Teachers'
College
13
and UCO Bank & Anr. v. Dipak Debbarma & Ors.
14
. Having regard to
this principle, IBC was thus a special law dealing with the entire subject matter of
insolvency, bankruptcy and winding up of companies. Its provisions were later
than those of the 2003 Act. Despite Sections 173 and 174 of the 2003 Act, by
virtue of Section 238 of IBC, the provisions of the latter would prevail and have
overriding effect. It was submitted that the law under IBC was constantly evolving
since its inception in 2016. Reliance was placed on Innoventive Industries Ltd. v.
ICICI Bank & Anr.,
15
and Swiss Ribbons (P) Ltd. v. Union of India
16
which upheld
11
Jalgaon Janta Shakari Bank Ltd. v. Joint Commissioner of Sales Tax, Nodal 9, Mumbai & Anr., 2022 SCC
OnLine Bom 1767.
12
The West Bengal State Electricity Distribution Company Limited v. Sri Vasavi Industries Limited & Anr., 2022
SCC Online Cal 1918
13
Union of India & Ors. v. Shah Goverdhan L. Kabra Teachers' College, (2002) Supp (3) SCR 220.
14
UCO Bank & Anr. v. Dipak Debbarma & Ors., (2016) (11) SCR 723.
15
Innoventive Industries Ltd. v. ICICI Bank & Anr., (2017) 8 SCR 33.
16
Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17.
8
the IBC, and emphasized the overriding nature of the enactment, by virtue of
Section 238.
IV. ANALYSIS
A. SCHEME OF THE IBC
19. The IBC was enacted with the objective of unifying the legal regime on
commercial insolvency. Upon a corporate debtor’s default
17
in repayment of a
debt,
18
the insolvency resolution process can be triggered when the value of the
default crosses the statutory threshold (Section 4); or it may be initiated by the
corporate debtor itself or a financial creditor or operational creditor (Section 6).
IBC makes a distinction between debts owed to both these classes of creditors. A
financial creditor has been defined under Section 5(7) as, “A person to whom a
financial debt is owed”. A “financial debt” is defined by Section 5(8) as a debt
which is disbursed against consideration for the time value of money. On the other
hand, an operational creditor is one to whom an operational debt is owed.
“Operational debt” under Section 5(21) is “a claim in respect of provision of
goods or services”.
20. Sections 7 and 8 of the IBC control the initiation of insolvency process by
financial creditors and operational creditors respectively. The corporate debtor
can contest a debt within a stipulated time period. The Adjudicating Authority has
to determine the existence of a default from the records of the information utility
or on the basis of evidence furnished by the creditors, and communicate the same
to the corporate debtor – this initiates the resolution process, which must be
completed within 180 days from the date of admission of the application (Section
12), and can be extended beyond 180 days for a further period of not exceeding
17
Default is defined in Section 3(12) in wide terms as, “Non-payment of debt when whole or any part or instalment
of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the
case may be”.
18
Per Section 3(11), which states that a debt is, “A liability of obligation in respect of a ‘claim’”. A ‘claim’ is
inter alia defined under Section 3(6) as, “A right to payment”.
9
90 days if the committee of creditors (hereinafter, “CoC”) by a vote of 75% of
voting shares so decides. Speedy resolution thus forms the mainstay of the entire
resolution process. Upon admission of the application, a moratorium under
Section 14 of the Code is to be declared by the Adjudicating Authority followed
by a public announcement indicating the last date for submission of claims, along
with the details of the interim resolution professional (hereinafter, “IRP”). The
management of the corporate debtor as a going concern on the instructions of the
CoC is vested in the IRP (and later under the RP under Section 28), who is a
trained person registered under Chapter IV of IBC, per Section 17. The CoC’s
decisions have to be taken by a vote of not less than 75% of the voting share of
financial creditors. Anyone interested or willing to put the corporate debtor back
to its rails can, under Section 30, submit a resolution plan to the RP, prepared on
the basis of an information memorandum. When such a plan is approved by the
CoC, the Adjudicating Authority has to record satisfaction of the same – it then
becomes binding on the corporate debtor as well as its employees, members,
creditors, guarantors and other stakeholders. Immediately upon approval of the
resolution plan, the moratorium order passed by the Authority under Section 14
ceases to have effect.
21. When the resolution process does not yield any success, or no application
is received, and in certain other situations, the corporate debtor enters into the
liquidation phase. This is provided by Section 33 of the IBC, which is extracted
below:
“Section 33 - Initiation of liquidation
(1) Where the Adjudicating Authority, --
(a) before the expiry of the insolvency resolution process period or the
maximum period permitted for completion of the corporate insolvency
resolution process under section 12 or the fast track corporate insolvency
resolution process under section 56, as the case may be, does not receive a
resolution plan under sub-section (6) of section 30; or
(b) rejects the resolution plan under section 31 for the non-compliance of the
requirements specified therein, it shall--
10
(i) pass an order requiring the corporate debtor to be liquidated in the manner
as laid down in this Chapter;
(ii) issue a public announcement stating that the corporate debtor is in
liquidation; and
(iii) require such order to be sent to the authority with which the corporate
debtor is registered.
(2) Where the resolution professional, at any time during the corporate
insolvency resolution process but before confirmation of resolution plan,
intimates the Adjudicating Authority of the decision of the committee of
creditors 2[approved by not less than sixty-six per cent. of the voting share]
to liquidate the corporate debtor, the Adjudicating Authority shall pass a
liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b)
of sub-section (1).
Explanation- For the purposes of this sub-section, it is hereby declared that
the committee of creditors may take the decision to liquidate the corporate
debtor, any time after its constitution under sub-section (1) of section 21 and
before the confirmation of the resolution plan, including at any time before
the preparation of the information memorandum.
(3) Where the resolution plan approved by the Adjudicating Authority 4[under
section 31 or under sub-section (1) of section 54L,] is contravened by the
concerned corporate debtor, any person other than the corporate debtor,
whose interests are prejudicially affected by such contravention, may make
an application to the Adjudicating Authority for a liquidation order as
referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).
(4) On receipt of an application under sub-section (3), if the Adjudicating
Authority determines that the corporate debtor has contravened the
provisions of the resolution plan, it shall pass a liquidation order as referred
to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).
(5) Subject to section 52, when a liquidation order has been passed, no suit
or other legal proceeding shall be instituted by or against the corporate
debtor:
Provided that a suit or other legal proceeding may be instituted by the
liquidator, on behalf of the corporate debtor, with the prior approval of the
Adjudicating Authority.
(6) The provisions of sub-section (5) shall not apply to legal proceedings in
relation to such transactions as may be notified by the Central Government
in consultation with any financial sector regulator.
(7) The order for liquidation under this section shall be deemed to be a notice
of discharge to the officers, employees and workmen of the corporate debtor,
except when the business of the corporate debtor is continued during the
liquidation process by the liquidator.”
11
22. According to the judgment of this court K. Shashidhar v. Indian Overseas
Bank
19
the Adjudicating Authority is, “obligated to initiate liquidation process
under Section 33(1) of the I&B Code.” It was also held that the Parliament did
not empower the Adjudicating Authority “with the jurisdiction or authority to
analyse or evaluate the commercial decision of the CoC much less to enquire into
the justness of the rejection of the resolution plan by the dissenting financial
creditors.” Thus, on occurrence of any eventuality specified under Section 33, the
liquidation process has to begin, as a matter of course – there is no choice in the
matter. Again, in Committee of Creditors of Essar Steel India Limited v. Satish
Kumar Gupta & Ors.,
20
this court rejected the argument that the NCLT possessed
any discretionary jurisdiction with regard to initiation of liquidation proceedings,
upon an interpretation of Sections 30, 31(2) and 60(5)(c) of IBC.
23. Upon initiation of liquidation, a liquidator has to be appointed, to carry out
the liquidation process and manage other affairs of the corporate debtor. The
RP, appointed to conduct the resolution process, is ordinarily appointed as
liquidator. The powers and duties of liquidator are prescribed by Section 35
21
of
the IBC. It includes verification of claims of creditors, evaluation of assets of the
corporate debtor, carrying on the business of the corporate debtor, taking into
19
K. Shashidhar v. Indian Overseas Bank, 2019 (3) SCR 845.
20
Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors., 2019 (16) SCR 275.
21
"35. Powers and duties of liquidator.-- (1) Subject to the directions of the Adjudicating Authority, the liquidator
shall have the following powers and duties, namely:-
(a) to verify claims of all the creditors;
(b) to take into his custody or control all the assets, property, effects and actionable claims of the corporate debtor;
********************* *********************
(d) to take such measures to protect and preserve the assets and properties of the corporate debtor as he considers
necessary;
(e) to carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary;
(f) subject to section 52, to sell the immovable and movable property and actionable claims of the corporate debtor
in liquidation by public auction or private contract, with power to transfer such property to any person or body
corporate, or to sell the same in parcels in such manner as may be specified:
Provided that the liquidator shall not sell the immovable and movable property or actionable claims of the
corporate debtor in liquidation to any person who is not eligible to be a resolution applicant;"
12
consideration the assets of the corporate debtor, etc. The liquidator has to issue a
public announcement within 5 days from appointment in a prescribed format; the
purpose of public announcement is to call upon creditors and others persons to
submit their claims in relation to the corporate debtor. The creditors of the
corporate debtor have to send their claims within 30 days from the initiation of
the liquidation process. After the receipt of the claims, the liquidator has to verify
the claims submitted by the creditors (Section 39). The liquidator may also ask
the creditors to submit any evidence in relation to their claims for the purpose of
verification. The liquidator is empowered to either admit or reject the claims on
the basis of due verification. If the liquidator rejects or admits a claim of a creditor,
the same has to be communicated to the creditor as well as the corporate debtor
within 7 days from such decision (Section 40). The liquidator has to concurrently
determine what constitutes the “liquidation estate”. Section 36 (3) lists out the
various assets and claims, etc. which form the liquidation estate.
22
After the
admission of claims, the liquidator has to determine the value of the claims, for
the purpose of distribution of assets of the corporate debtor.
24. In terms of Regulation 47 of the Liquidation Regulations, liquidation
proceedings should be completed within 1 year from the date of its initiation. This
contrasts with the extendable time limit of 330 days, for the resolution process
under IBC.
22
Section 36 (3) enumerates the liquidation estate as comprising of the following:
“(a) any assets over which the corporate debtor has ownership rights, including all rights and interests therein
as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or
any depository recording securities of the corporate debtor or by any other means as may be specified by the
Board, including shares held in any subsidiary of the corporate debtor;
(b) assets that may or may not be in possession of the corporate debtor including but not limited to encumbered
assets;
(c) tangible assets, whether movable or immovable;
(d) intangible assets including but not limited to intellectual property, securities (including shares held in a
subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights;
(e) assets subject to the determination of ownership by the court or authority;
(f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this
Chapter;
(g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest;
(h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and
(i) all proceeds of liquidation as and when they are realised.”
13
25. During the insolvency resolution process, a secured creditor is not
permitted to realize its dues by initiating any proceeding. This is by virtue of
Section 14 (1) (c) which enables the imposition of a moratorium period, during
which a secured creditor is precluded from bringing any action to foreclose,
recover or enforce any security interest. Secured creditors’ rights are restored only
in the event of failure of the insolvency resolution process, at the stage of
liquidation.
B. THE ‘WATERFALL MECHANISM’
26. Section 53 of the IBC, which contains the ‘waterfall mechanism’, provides
for the order of distribution of assets. It 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.
14
(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.
Explanation - For the purpose of this section--
(i) it is hereby clarified that at each stage of the distribution of proceeds in
respect of a class of recipients that rank equally, each of the debts will either
be paid in full, or will be paid in equal proportion within the same class of
recipients, if the proceeds are insufficient to meet the debts in full; and
(ii) the term "workmen's dues" shall have the same meaning as assigned to it
in section 326 of the Companies Act, 2013 (18 of 2013).”
27. 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.
28. 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
15
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)].
29. The Bankruptcy Law Reforms Committee Report, 2015, which led to the
framing and later enactment of IBC, pertinently stated that:
“The Committee has recommended to keep the right of the Central and State
Government in the distribution waterfall in liquidation at a priority below the
unsecured financial creditors in addition to all kinds of secured creditors for
promoting the availability of credit and developing a market for unsecured
financing (including the development of bond markets). In the long run, this
would increase the availability of finance, reduce the cost of capital, promote
entrepreneurship and lead to faster economic growth. The government also
will be the beneficiary of this process as economic growth will increase
revenues. Further, efficiency enhancement and consequent greater value
capture through the proposed insolvency regime will bring in additional
gains to both the economy and the exchequer.”
**************** ****************** ***************
“For the remaining creditors who participate in the collective action of
Liquidation, the Committee debated on the waterfall of liabilities that should
hold in Liquidation in the new Code. Across different jurisdictions, the
observation is that secured creditors have first priority on the realizations,
and that these are typically paid out net of the costs of insolvency resolution
and Liquidation. In order to bring the practices in India in-line with the
global practice, and to ensure that the objectives of this proposed Code is
met, the Committee recommends that the waterfall in Liquidation should be
as follows:
1. Costs of IRP and liquidation.
2. Secured creditors and Workmen dues capped up to three months from the
start of IRP.
3. Employees capped up to three months.
4. Dues to unsecured financial creditors, debts payable to workmen in respect
of the period beginning twelve months before the liquidation commencement
date and ending three months before the liquidation commencement date;
5. Any amount due to the State Government and the Central Government in
respect of the whole or any part of the period of two years before the
16
liquidation commencement date; any debts of the secured creditor for any
amount unpaid following the enforcement of security interest
6. Remaining debt
7. Surplus to shareholders.”
23
30. The explanation to this appears in the Report of the Insolvency Law
Committee (2020):
24
“7.3. The Committee noted that the Code aims to promote a collective
liquidation process, and towards this end, it encourages secured creditors to
relinquish their security interest, by providing them second-highest priority
in the recovery of their dues, as under Section 53(1)(b). Thus, they are not
treated as ordinary unsecured creditors under the Code, as they would have
been under the Companies Act, 1956. It was noted that, to some extent, this
provision intends to replicate the benefits of security even where it has been
relinquished, in order to promote overall value maximisation. However, even
if secured creditors realise their security interest, they would only recover to
the extent of their security interest, and would claim any excess dues
remaining unpaid under Section 53(1)(e) of the liquidation waterfall. Thus,
the Committee was of the view that this provision could not have been
intended to provide secured creditors who relinquish their security interest,
priority of repayment over their entire debt regardless of the extent of their
security interest, as it would tantamount to respecting a right that has never
existed. Further, if the “debts owed to a secured creditor” is not restricted to
the extent of the security, there would be broad scope for misuse of the priority
granted under Section 52(1)(b), as even creditors who are not secured to the
full extent of their debt would rely on the mere fact of holding any form of
security, to recover the entire amount of their unpaid dues in priority to all
other stakeholders.
7.4. On the basis of the above discussion, the Committee agreed that the
priority for recovery to secured creditors under Section 53(1)(b)(ii) should be
applicable only to the extent of the value of the security interest that is
relinquished by the secured creditor. The Committee was of the opinion that
this issue stands clarified in terms of the reasoning provided above and does
not necessitate any further amendment to the provisions of the Code.”
23
The Bankruptcy Law Reforms Committee Report (2015), Heading 5.5.8 – Establishing Priority of Payout in
Liquidation.
24
Report of the Insolvency Law Committee (2020) – Heading 7.3 – Realisation or Relinquishment of Security
Interest by a Secured Creditor (pg. 76).
17
31. The Preamble to the IBC expressly recognizes the shift in the law, with
respect to ordering priority of claims, especially with respect to 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.”
32. In response to the comments received on this aspect from Parliamentary
Debates on the Amendment Act in the Sixteenth Lok Sabha Session in 2018, the
Report of the Insolvency Law Committee stated:
“Section 53 of the Code places secured creditors who have relinquished their
security above unsecured financial creditors. Thus, clear distinction has been
drawn between unsecured and secured creditors who join the liquidation
proceedings for the purpose of the payment waterfall in case of liquidation.
Unsecured creditors are ranked above secured creditors who have unpaid
debts following enforcement of securities as it is presumed that such secured
creditors have recovered most of their dues by enforcement of their security
outside the liquidation proceedings. Moreover, as stated in the BLRC Report,
protection of dues of unsecured creditors is intentional in order to encourage
the market for corporate bonds and other unsecured debt.
With respect to dues of workmen, they have been placed at the highest priority
along with secured creditors who have relinquished their security, second
only to IRP costs under the payment waterfall provided in section 53 of the
Code.”
25
33. The rationale for placing secured creditors who relinquish their security,
higher in priority, is found upon a conjoint reading of Sections 52 and 53. Section
52 reads as follows:
“Secured creditor in liquidation proceedings.
(1) A secured creditor in the liquidation proceedings may—
(a) relinquish its security interest to the liquidation estate and receive
proceeds from the sale of assets by the liquidator in the manner specified in
section 53; or
(b) realise its security interest in the manner specified in this section.
25
Report of the Insolvency Law Committee (2018) (pg. 87).
18
(2) Where the secured creditor realises security interest under clause (b) of
sub-section (1), he shall inform the liquidator of such security interest and
identify the asset subject to such security interest to be realised.
(3) Before any security interest is realised by the secured creditor under this
section, the liquidator shall verify such security interest and permit the
secured creditor to realise only such security interest, the existence of which
may be proved either—
(a) by the records of such security interest maintained by an information
utility; or
(b) by such other means as may be specified by the Board.
(4) A secured creditor may enforce, realise, settle, compromise or deal with
the secured assets in accordance with such law as applicable to the security
interest being realised and to the secured creditor and apply the proceeds to
recover the debts due to it.
(5) If in the course of realising a secured asset, any secured creditor faces
resistance from the corporate debtor or any person connected therewith in
taking possession of, selling or otherwise disposing of the security, the
secured creditor may make an application to the Adjudicating Authority to
facilitate the secured creditor to realise such security interest in accordance
with law for the time being in force.
(6) The Adjudicating Authority, on the receipt of an application from a
secured creditor under sub-section (5) may pass such order as may be
necessary to permit a secured creditor to realise security interest in
accordance with law for the time being in force.
(7) Where the enforcement of the security interest under sub-section (4) yields
an amount by way of proceeds which is in excess of the debts due to the
secured creditor, the secured creditor shall—
(a) account to the liquidator for such surplus; and
(b) tender to the liquidator any surplus funds received from the enforcement
of such secured assets.
(8) The amount of insolvency resolution process costs, due from secured
creditors who realise their security interests in the manner provided in this
section, shall be deducted from the proceeds of any realisation by such
secured creditors, and they shall transfer such amounts to the liquidator to be
included in the liquidation estate.
(9) Where the proceeds of the realisation of the secured assets are not
adequate to repay debts owed to the secured creditor, the unpaid debts of such
secured creditor shall be paid by the liquidator in the manner specified in
clause (e) of sub-section (1) of section 53.”
34. 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
26
), or proceed to
26
The said provisions of the Liquidation Regulations read as follows:
“21. Proving security interest. The existence of a security interest may be proved by a secured creditor on the
basis of-
(a) the records available in an information utility, if any;
(b) certificate of registration of charge issued by the Registrar of Companies; or
19
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)].
35. 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,
it has 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.
36. 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
(c) proof of registration of charge with the Central Registry of Securitisation Asset Reconstruction and Security
Interest of India.
21A. Presumption of security interest. (1) A secured creditor shall inform the liquidator of its decision to
relinquish its security interest to the liquidation estate or realise its security interest, as the case may be, in Form
C or Form D of Schedule II:
Provided that, where a secured creditor does not intimate its decision within thirty days from the liquidation
commencement date, the assets covered under the security interest shall be presumed to be part of the liquidation
estate.
(2) Where a secured creditor proceeds to realise its security interest, it shall pay as much towards the amount
payable under clause (a) and sub-clause (i) of clause (b) of sub-section (1) of section 53, as it would have shared
in case it had relinquished the security interest.”
20
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.
37. The recent judgment of this court, in Moser Baer Karamchari Union thr.
President Mahesh Chand Sharma v. Union of India & Ors
28
had dealt with the
waterfall provisions of the IBC at length, albeit in the context of priority of claims
of workmen’s dues. This court observed as follows:
“66. …Sub-section (1) to Section 52 of the Code gives two options to a
secured creditor. First, the secured creditor in a liquidation proceeding may
relinquish its security interest and receive the proceeds from the sale of assets
by the liquidator in the manner specified in Section 53 of the Code. The
second option is to realise the security interest, but in the manner specified in
Section 52 of the Code. Sub-section (2) to Section 52 of the Code states that
where the secured creditor realises the security interest, he shall inform the
liquidator of such security interest and identify the asset subject to such
security interest to be realised. The liquidator is to verify the security interest
and shall permit the secured creditor to realise such security interest, which
is proved either by records of such security interest maintained by an
information utility, or by such other means as may be specified by the Board.
Sub-section (4) to Section 52 of the Code states that the secured creditor may
enforce, realise, settle, compromise or deal with the secured asset in
accordance with such law as applicable to the security interest being realised
and to the secured creditor. The secured creditor is to accordingly apply the
proceeds to recover the debts due to him. We need not refer to Sub-section (5)
to Section 52 of the Code as it relates to the action which the secured creditor
may take if he faces resistance from the corporate debtor or any other person
27
Supra note 25.
28
Moser Baer Karamchari Union thr. President Mahesh Chand Sharma v. Union of India & Ors., 2023 SCC
OnLine SC 547.
21
connected therewith in taking possession of, selling or otherwise disposing
off the security. Sub-section (6) to Section 52 of the Code applies when an
adjudicating authority is in receipt of an application Under Sub-section (5)
to Section 52 of the Code. Sub-section (7) to Section 52 of the Code, however,
is important as it states that where on enforcement of the security interest, an
amount by way of proceeds is in excess of the debts due to the secured creditor,
the secured creditor shall account for and pay the excess/surplus amount to
the liquidator from enforcement of such secured assets. The amount of
insolvency resolution process costs, due from secured creditors who realise
their security interests in the manner provided in the section, are to be
deducted from the proceeds of any realisation by such secured creditors. They
are to be transferred and included in the liquidation estate. Sub-section (9) to
Section 52 of the Code states that where proceeds for realisation of the
secured assets are not adequate to repay the debts owed to the secured
creditor, the unpaid debts of such secured creditor shall be paid by the
liquidator in the manner specified in Clause (e) to Sub-section (1) to Section
53 of the Code.
67. To protect the interest of the workmen where the secured creditor does not
relinquish its security interest to fall Under Section 53 of the Code, Regulation
21A of the Insolvency and Bankruptcy Board of India (Liquidation Process)
Regulations, 2016 has been enacted, and it requires that the secured creditor,
who opts to realise its security interest as per Section 52 of the Code, has to
pay as much towards the amount payable under the Clause (a) and Sub-clause
(i) to Clause (b) of Sub-section (1) to Section 53 of the Code to the liquidator
within the time and the manner stipulated therein. The workmen's dues, even
when the secured creditor opts to proceed Under Section 52 of the Code, are
therefore protected in terms of Sub-clause (b) of Sub-section (1) to Section 53
of the Code.
*******
69. We now turn our attention to Section 53 of the Code which begins with a
non-obstante Clause and states that 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 liquidation assets shall
be distributed in the order of priority, which is stipulated, and within such
period and such manner as may be specified. The consequence of Sub-section
(1) to Section 53 of the Code is that it will override the rights of parties,
including the secured creditor, when the said provision applies. Section 53 of
the Code is the complete and comprehensive code which ensures collection of
assets and then provides the manner in which the creditors are to be paid.
Even the rights of the secured creditor falling Under Section 53 of the Code
to enforce, realise, settle, compromise or deal with the secured assets as
applicable to the security interest are diluted and compromised.
22
70. Clause (a) to Sub-section (1) to Section 53 deals with insolvency
resolution process costs and the liquidation costs which are to be paid in full.
No grievance or issue can be raised in respect of the said clause. Clause (b)
to Sub-section (1) to Section 53 states that the debts due in the form of
workmen's dues for a period of twenty four months preceding the liquidation
commencement date and the debts owed to the secured creditor in the event
such secured creditor has relinquished security in the manner set out in
Section 52 of the Code shall rank equally between and amongst the workmen
and the secured creditors. The Explanation to Section 53 of the Code states
that 'workmen's dues' shall have the same meaning as assigned to it in Section
326 of the Companies Act, 2013. In other words, Explanation to Section 326
of the Companies Act, 2013 has been incorporated and applies to the
waterfall mechanism as prescribed in Clause (b) to Sub-section (1) to Section
53 of the Code. What is significant here is that under Clause (b) to Sub-section
(1) to Section 53 of the Code, the workmen's dues are for the period of twenty-
four months preceding the liquidation commencement date. The liquidation
commencement date, as defined in terms of Sub-section (17) to Section 5 of
the Code, is much earlier in point of time and need not coincide with the date
of winding up. This is in the interest of the workmen. Clause (i) of Explanation
to Section 53 of the Code states that where the distribution of proceeds in
respect of class of recipients that rank equally, each of the debts would be
paid either in full or would be paid in equal proportion within the same class
of recipients, if the proceeds are insufficient to meet the debts in full. Ex facie,
the Clause is very just and fair. It is to be noted that the wages and unpaid
dues owed to employees other than the workmen fall in Clause (c), which is
below Clause (b) to Sub-section (1) to Section 53 of the Code. They are to be
paid wages and unpaid dues only for a period of twelve months preceding the
liquidation commencement date, and that too only if surplus funds are
available after making payment in terms of Clause (a) and (b) of Sub-section
(1) to Section 53 of the Code. Clause (d) of Sub-section (1) to Section 53 of
the Code relates to financial debts owed to unsecured creditors. The amounts
due to the Central Government and the State Government, etc., and the debts
owed to a secured creditor for any amount that remains unpaid following the
enforcement of security interest, have been clubbed together in Clause (e) of
Sub-section (1) to Section 53 of the Code, and have to be ranked equally
between and among both of them. The remaining debts and dues fall in Clause
(f) of Sub-section (1) to Section 53 of the Code. Preference shareholders fall
under Clause (g) of Sub-section (1) to Section 53 of the Code, and equity
shareholders or partners fall under Clause (h) of Sub-section (1) to Section
53 of the Code. Sub-section (2) to Section 53 of the Code states that any
contractual arrangements between recipients Under Sub-section (1) with
equal ranking, if disrupting the order of priority under the said Sub-section
will be disregarded by the liquidator.
23
71. The waterfall mechanism is based on a structured mathematical formula,
and the hierarchy is created in terms of payment of debts in order of priority
with several qualifications, striking down any one of the provisions or
rearranging the hierarchy in the waterfall mechanism may lead to several
trips and disrupt the working of the equilibrium as a whole and stasis,
resulting in instability. Every change in the waterfall mechanism is bound to
lead to cascading effects on the balance of rights and interests of the secured
creditors, operational creditors and even the Central and State Governments.
Depending upon the facts, in some cases, the waterfall mechanism in the Code
may be more beneficial than the hierarchy provided Under Section 326 of the
Companies Act, 2013 and vice-versa. Therefore, we hesitate and do not
accept the arguments of the Petitioners.
72. The Code is based on the organic evolution of law and is a product of an
extensive consultative process to meet the requirements of the Code governing
liquidation. It introduced a comprehensive and time-bound framework to
maximise the value of assets of all persons and balance the interest of the
stakeholders. The guiding principle for the Code in setting the priority of
payments in liquidation was to bring the practices in India in line with global
practices. In the waterfall mechanism, after the costs of the insolvency
resolution process and liquidation, secured creditors share the highest
priority along with a defined period of dues of the workmen. The unpaid dues
of the workmen are adequately and significantly protected in line with the
objectives sought to be achieved by the Code and in terms of the waterfall
mechanism prescribed by Section 53 of the Code. In either case of
relinquishment or non-relinquishment of the security by the secured creditor,
the interests of workmen are protected under the Code. In fact, the secured
creditors are taking significant hair-cut and workmen are being compensated
on an equitable basis in a just and proper manner as per Section 53 of the
Code. The Code balances the rights of the secured creditors, who are
financial institutions in which the general public has invested money, and also
ensures that the economic activity and revival of a viable company is not
hindered because it has suffered or fallen into a financial crisis. The Code
focuses on bringing additional gains to both the economy and the exchequer
through efficiency enhancement and consequent greater value capture. In
economic matters, a wider latitude is given to the law- maker and the Court
allows for experimentation in such legislations based on practical
experiences and other problems seen by the law-makers. In a challenge to
such legislation, the Court does not adopt a doctrinaire approach. Some
sacrifices have to be always made for the greater good, and unless such
sacrifices are prima facie apparent and ex facie harsh and unequitable as to
classify as manifestly arbitrary, these would be interfered with by the court.”
24
38. It is hence clear that 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.
C. RECOVERY MECHANISM UNDER THE 2003 ACT AND 2005 CODE
39. 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.
40. 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 4.3 (f) (iv) of the 2005 Code is relevant, which
inter alia provides as follows:
“The outstanding dues will be first charge on the assets of the company, and
the licensee shall ensure that this is entered in an agreement with new
applicant.”
41. 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:
“6.15 Recovery of Arrears
(a) The payments due to the Licensee shall be recovered as per provision of
Section 56 of the Act, and arrears of land revenue as per the provisions of the
25
U.P. Government Electrical Undertaking (Dues Recovery) Act, 1958, as
amended from time to time.
(b) Notwithstanding anything contained in any other law for the time being
in force, no sum due from any consumer shall be recoverable after the period
of two years from the date when such sum became first due unless such sum
has been shown continuously as recoverable as arrear of charges of
electricity supplied, and the licensee shall not cut off the supply of the
electricity.
(Explanation: The date from which such charges becomes ‘first due’, needs
to be correctly interpreted. If as a result of regular meter reading / inspection
of installation of consumer, such charges / penalties levied as per this code or
tariff schedule, shall become first due after 15 days of receipt of such a bill
by consumer, and such bill shall be provided to the consumer not later than
two billing cycle for that category of consumer).”
42. As previously stated above, the corporate debtor entered into an agreement
with PVVNL for supply of electricity on 11.02.2010 which provided that
outstanding electricity dues would constitute a ‘charge’ on its assets.
29
This was
in accordance with Clause 4.3(f)(iv) of the 2005 Code. Clause 8 of the
agreement
30
also mentioned that the parties would be governed by the 2003 Act.
43. A recent ruling of this court in K.C. Ninan v. Kerala State Electricity
Board
31
examined the circumstances in which such a ‘charge’ could be constituted
in law, and held as follows:
“107. Consequently, in general law, a transferee of the premises cannot be
made liable for the outstanding dues of the previous owner since electricity
arrears do not automatically become a charge over the premises. Such an
action is permissible only where the statutory conditions of supply authorise
the recovery of outstanding electricity dues from a subsequent purchaser
claiming fresh connection of electricity, or if there is an express provision of
law providing for creation of a statutory charge upon the transferee.”
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
29
Clause 5 of the agreement, extracted at paragraph 2.
30
Clause 8 of the agreement read as follows: “This agreement shall be governed by the Electricity Act, 2003 with
all its amendments, various other laws of India for the time being in force, but not limited to various regulations
of UPERC, as applicable to the State of U.P. and shall be subject to the jurisdiction of the Court subordinate to
High Court of Judicature of Allahabad.”
31
K.C. Ninan v. Kerala State Electricity Board, 2023 SCC Online SC 603.
26
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.
44. 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
27
is defined by Section 3(8),
32
and latter by Section 3 (60).
33
The distinction between
the governments has been recognized and maintained by previous decisions of
this court. For instance, in Shrikant v. Vasantrao & Ors.,
34
this court underlined
that while an entity or corporation may be “State” under Article 12 of the
Constitution of India, nevertheless, its distinct entity, for other purposes, is always
maintained, and fact-dependent:
“Both may answer the definition of 'State' under Article 12 for the limited
purpose of Part-III of the Constitution. Further, the very inclusive definition
of 'State' under Article 12 by referring to Government of India, the
Government of each of the States and the local and other authorities, makes
it clear that a 'State Government' and a local or other authorities, are different
and that they fall under a common definition only for the purpose of Part-III
of the Constitution. This Court has consistently refused to apply the enlarged
definition of 'State' given in Part-III (and Part-IV) of the Constitution, for
interpreting the words 'State' or 'State Government' occurring in other parts
of the Constitution. While the term "State" may include a State Government
as also statutory or other authorities for the purposes of part-III (or Part- IV)
32
(8) “Central Government” shall,—
(a) in relation to anything done before the commencement of the Constitution, mean the Governor General or the
Governor General in Council, as the case may be; and shall include,—
(i) in relation to functions entrusted under sub-section (1) of section 124 of the Government of India Act, 1935, to
the Government of a Province, the Provincial Government acting within the scope of the authority given to it
under that subsection; and
(ii) in relation to the administration of a Chief Commissioner’s Province, the Chief Commissioner acting within
the scope of the authority given to him under sub-section (3) of section 94 of the said Act; and
(b) in relation to anything done or to be done after the commencement of the Constitution, mean the President;
and shall include,—
(i) in relation to functions entrusted under clause (1) of article 258 of the Constitution, to the Government of a
State, the State Government acting within the scope of the authority given to it under that clause; 1***
(ii) in relation to the administration of a Part C State 2[before the commencement of the Constitution (Seventh
Amendment) Act, 1956], the Chief Commissioner or the Lieutenant Governor or the Government of a
neighbouring State or other authority acting within the scope of the authority given to him or it under article 239
or article 243 of the Constitution, as the case may be; and
(iii) in relation to the administration of a Union territory, the administrator thereof acting within the scope of the
authority given to him under article 239 of the Constitution”.
33
(60) “State Government”,—
(a) as respects anything done before the commencement of the Constitution, shall mean, in a Part A State, the
Provincial Government of the corresponding Province, in a Part B State, the authority or person authorised at
the relevant date to exercise executive government in the corresponding Acceding State, and in a Part C State, the
Central Government; 1***
(b) as respects anything done 2[after the commencement of the Constitution and before the commencement of the
Constitution (Seventh Amendment) Act, 1956] , shall mean, in a Part A State, the Governor, in a Part B State, the
Rajpramukh, and in a Part C State, the Central Government;
(c) as respects anything done or to be done after the commencement of the Constitution (Seventh Amendment) Act,
1956, shall mean, in a State, the Governor, and in a Union territory, the Central Government; and shall, in relation
to functions entrusted under article 258A of the Constitution to the Government of India, include the Central
Government acting within the scope of the authority given to it under that article”
34
Shrikant v. Vasantrao & Ors ., 2006 (1) SCR 496
28
of the Constitution, the term "State Government" in its ordinary sense does
not encompass in its fold either a local or statutory authority”.
45. The judgment of this court, in Municipal Commissioner of Dum Dum
Municipality & Ors. v. Indian Tourism Development Corporation & Ors.,
35
noticed that, “In the case of major public utilities, statutory corporations were
created under different enactments”, and went on to enumerate some examples
such as Road Transport Corporations, Electricity Boards under the Electricity
Supply Act, 1948 and so on. The court observed that:
“With a view to enable these statutory corporations and companies to carry
on the activity which was hitherto carried on by the governments, the relevant
properties, assets and liabilities were transferred to such new corporations.
They were supposed to operate on business lines, pay taxes and justify their
creation and constitution. These corporations, whether created under the
statute or registered under the Companies Act are distinct juristic entities
owning their own properties, having their own fund, capable of borrowing
and lending monies and entering into contracts like any other corporation. In
many cases, the entire share capital of these corporations is owned by the
Government whether Central or State. In some cases, the major share holding
is of the Government with some private share holding as well. In case of some
statutory corporations, the enactment creating them did not provide for any
share capital, though it was made a body corporate with all the necessary
and incidental powers that go with such concept. The International Airports
Authority is one such corporation created under the Act with no share capital
but which has its own properties, its own fund, accounts, employees and
capable of lending and borrowing and entering into contracts.”
46. 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
35
Municipal Commissioner of Dum Dum Municipality & Ors. v. Indian Tourism Development Corporation &
Ors., 1995 (5) SCC 251.
29
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.
47. 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.
48. PVVNL had relied upon the decision Rainbow Papers (supra). In that case,
the issue involved was interpretation of Section 48 of the Gujarat Value Added
Tax Act, 2003 which enacted that any amount payable towards tax or penalty by
any person would constitute a ‘first charge’ on the property of such dealer or
person. The corporate debtor had defaulted in payment of its tax dues and recovery
proceedings had been initiated. In the meanwhile, insolvency proceedings had
commenced. During the resolution process, the State tax authorities claimed that
the dues payable had to be accrued previously and relied upon Section 48, in
addition to Section 53 of the IBC. The State contended that the non-obstante
clause in the state enactment and the non-obstante clause in the IBC operated at
different fields, and the State had to be treated as a ‘secured creditor’ by virtue of
Section 48 of the state act. This was rejected by the NCLT and the NCLAT.
30
However, this court took note of Sections 30 and 31 of the IBC and certain other
provisions and held that NCLT had erred in its observations. It was held that:
“56. Section 48 of the GVAT Act is not contrary to or inconsistent with Section
53 or any other provisions of the IBC. Under Section 53(1)(b)(ii), the debts
owed to a secured creditor, which would include the State under the GVAT
Act, are to rank equally with other specified debts including debts on account
of workman’s dues for a period of 24 months preceding the liquidation
commencement date.
57. As observed above, the State is a secured creditor under the GVAT Act.
Section 3(30) of the IBC defines secured creditor to mean a creditor in favour
of whom security interest is credited. Such security interest could be created
by operation of law. The definition of secured creditor in the IBC does not
exclude any Government or Governmental Authority.
58. We are constrained to hold that the Appellate Authority (NCLAT) and the
Adjudicating Authority erred in law in rejecting the application/appeal of the
appellant. As observed above, delay in filing a claim cannot be the sole
ground for rejecting the claim.”
49. Rainbow Papers (supra) did not notice the ‘waterfall mechanism’ under
Section 53 – the provision had not been adverted to or extracted in the judgment.
Furthermore, Rainbow Papers (supra) 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 (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.
31
50. 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.
51. According to the principles of statutory interpretation, when an enactment
uses two different expressions, they cannot be construed as having the same
meaning. It was held in Member, Board of Revenue v. Anthony Paul Benthall
36
that:
“When two words of different import are used in a statute, in two consecutive
provisions, it would be difficult to maintain that they are used in the same
sense…”
This idea is reflected in a subsequent judgment in Brihan Mumbai
Mahanagarpalika & Anr. v. Willington Sports Club & Ors.
37
52. The views expressed by the present judgment finds support in the decision
reported as Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of
Indirect Taxes and Customs
38
. In that case, Section 142A of the Customs Act 1962
was in issue – authorities had submitted that dues payable to it were to be treated
as ‘first charge’ on the property of the assessee concerned. In the resolution
process, it was argued that the Customs Act, 1962 acquired primacy and had to
be given effect to. This court, after noticing the overriding effect of Section 238
of the IBC, held as follows:
36
Member, Board of Revenue v. Anthony Paul Benthall (1955) 2 SCR 842.
37
Brihan Mumbai Mahanagarpalika & Anr. v. Willington Sports Club & Ors., (2013) (16) SCR 216.
38
Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, 2022 SCC Online
SC 1101.
32
“55. For the sake of clarity following questions, may be answered as under:
(a) Whether the provisions of the IBC would prevail over the Customs Act,
and if so, to what extent?
The IBC would prevail over the Customs Act, to the extent that once
moratorium is imposed in terms of Sections 14 or 33(5) of the IBC as the case
may be, the respondent authority only has a limited jurisdiction to
assess/determine the quantum of customs duty and other levies. The
respondent authority does not have the power to initiate recovery of dues by
means of sale/confiscation, as provided under the Customs Act.
(b) Whether the respondent could claim title over the goods and issue notice
to sell the goods in terms of the Customs Act when the liquidation process has
been initiated?
Answered in negative.
56. On the basis of the above discussions, following are our conclusions:
(i) Once moratorium is imposed in terms of Sections 14 or 33(5) of the IBC
as the case may be, the respondent authority only has a limited jurisdiction
to assess/determine the quantum of customs duty and other levies. The
respondent authority does not have the power to initiate recovery of dues by
means of sale/confiscation, as provided under the Customs Act.
(ii) After such assessment, the respondent authority has to submit its claims
(concerning customs dues/operational debt) in terms of the procedure laid
down, in strict compliance of the time periods prescribed under the IBC,
before the adjudicating authority.
(iii) In any case, the IRP/RP/liquidator can immediately secure goods from
the respondent authority to be dealt with appropriately, in terms of the IBC.”
Similarly, in Duncans Industries Ltd. v. AJ Agrochem
39
, 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). The position of law
with respect to primacy of the IBC, is identical with the position discussed in
39
Duncans Industries Ltd. v. AJ Agrochem, (2019) 9 SCC 725.
33
Sundaresh Bhatt and Duncan Industries (supra) [refer also: Innoventive
Industries (supra), CIT v. Monnet Ispat & Energy Ltd.
40
, Ghanashyam Mishra &
Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.
41
, and Jagmohan Bajaj
v. Shivam Fragrances Private Limited
42
].
53. In view of the above discussion, it is held that the reliance on Rainbow
Papers (supra) 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.
D. EFFECT OF SECTION 77 OF THE COMPANIES ACT
54. Lastly, the liquidator had urged that without registration of charge, the same
was unenforceable under liquidation proceedings. Section 77 of the Companies
Act, 2013 reads as follows:
“77. Duty to register charges, etc.—(1) It shall be the duty of every company
creating a charge within or outside India, on its property or assets or any of
its undertakings, whether tangible or otherwise, and situated in or outside
India, to register the particulars of the charge signed by the company and the
charge-holder together with the instruments, if any, creating such charge in
such form, on payment of such fees and in such manner as may be prescribed,
with the Registrar within thirty days of its creation: Provided that the
Registrar may, on an application by the company, allow such registration to
be made within a period of three hundred days of such creation on payment
of such additional fees as may be prescribed: Provided further that if
registration is not made within a period of three hundred days of such
creation, the company shall seek extension of time in accordance with section
87: Provided also that any subsequent registration of a charge shall not
prejudice any right acquired in respect of any property before the charge is
actually registered.
(2) Where a charge is registered with the Registrar under sub-section (1), he
shall issue a certificate of registration of such charge in such form and in such
manner as may be prescribed to the company and, as the case may be, to the
person in whose favour the charge is created.
(3) Notwithstanding anything contained in any other law for the time being
in force, no charge created by a company shall be taken into account by the
liquidator or any other creditor unless it is duly registered under sub-section
40
(2018) 18 SCC 786
41
[2021] 13 SCR 737
42
2018 SCC OnLine NCLAT 413
34
(1) and a certificate of registration of such charge is given by the Registrar
under sub-section (2).
(4) Nothing in sub-section (3) shall prejudice any contract or obligation for
the repayment of the money secured by a charge.”
55. 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.
56. 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.
V. CONCLUSION
57. For the above reasons, it is held that the appeal deserves to fail. 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.
35
58. The appeal is dismissed, subject to the above direction, without order on
costs.
……………… ….……………..……J.
[S. RAVINDRA BHAT]
……………………………….. ..…..J.
[DIPANKAR DATTA]
NEW DELHI
JULY 17, 2023.
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