The Supreme Court held that the electricity dues do not enjoy any specific priority under the Insolvency and Bankruptcy Code (IBC) and are subject to the priority of claims prescribed under the IBC's "waterfall mechanism" in the distribution of assets during liquidation.
The Division Bench of the Supreme Court comprising Justices S. Ravindra Bhat and Dipankar Datta was hearing an Appeal on Monday filed by the Paschimanchal Vidyut Vitran Nigam Limited against an order of the NCLAT. The Supreme Court bench observed that the electricity dues were not considered as 'security interests' and was subject to the priority of claims prescribed under the IBC.
In a significant Supreme Court judgment, the appellant, Paschimanchal Vidyut Vitran Nigam Limited (PVVNL), challenged the rejection of its appeal against an order by the National Company Law Tribunal (NCLT). The NCLT's order allowed the release of the attached property in favour of the liquidator of Raman Ispat Pvt. Ltd. (the corporate debtor) for the purpose of enabling its sale and distribution of proceeds under the Insolvency and Bankruptcy Code, 2016 (IBC).
The background of the case revealed that PVVNL and the corporate debtor had an agreement for electricity supply, and the unpaid dues resulted in a charge on the corporate debtor's assets. Subsequently, PVVNL attached these properties, which ultimately led to the liquidation of the corporate debtor due to an unsuccessful resolution process. The liquidator claimed that PVVNL's dues should be classified under the priority system of claims prescribed by the IBC for distribution.
PVVNL argued that the Electricity Act, 2003, held an overriding effect on the IBC, providing a separate mechanism for the recovery of electricity dues. They contended that the IBC could not supersede the special provisions of the Electricity Act.
On the other hand, the liquidator argued that the IBC's priority system did not give precedence to government dues, including electricity dues, and that government dues were placed in the "waterfall mechanism" under Section 53 of the IBC. According to the liquidator, electricity dues did not enjoy any specific priority under the IBC.
The Supreme Court meticulously analyzed the provisions of the IBC and emphasized that the initiation of liquidation proceedings was mandatory under specific conditions. The liquidation process involves the appointment of a liquidator, verification of claims, and the distribution of assets among creditors. The court firmly held that the provisions of the IBC had an overriding effect, making the liquidation process subject to the priority of claims as prescribed by the IBC.
The Supreme Court further elucidated on the priority of claims during insolvency resolution and liquidation. According to Section 14(1)(c) of the IBC, a moratorium period is imposed during which secured creditors are prohibited from initiating any action to foreclose, recover, or enforce any security interest.
The 'waterfall mechanism' provided under Section 53 of the IBC outlines the order of priority for the distribution of proceeds from the sale of liquidation assets. The priority of claims is as follows:
Insolvency resolution process costs and liquidation costs.
Dues owed to workmen for the preceding 24 months and debts owed to a secured creditor who has relinquished security.
Wages and unpaid dues owed to employees (excluding workmen) for the preceding 12 months.
Financial debts owed to unsecured creditors.
Dues owed to the Central and State Governments, including unpaid amounts to secured creditors following the enforcement of security.
Any remaining debts and dues.
Preference shareholders (if any).
Equity shareholders or partners.
The Supreme Court clarified that secured creditors who relinquish their security interest have higher priority in the distribution of assets, while those who enforce their security interest without full recovery have lower priority.
The Supreme Court emphasized that the IBC aims to encourage collective liquidation and promote unsecured financing, which is why unsecured financial creditors have higher priority than government debts. The court also highlighted that secured creditors have the option to either relinquish their security interest or proceed with enforcement, leading to different priority levels based on their choice.
In conclusion, the Supreme Court upheld the NCLAT's decision, ruling in favour of the liquidator and confirming that electricity dues were not considered as "security interests" and were subject to the priority of claims prescribed under the IBC. The judgment provided clarity on the order of priority for distributing assets during liquidation and presented reasoning for the distinction between different types of creditors based on their actions during the insolvency process. The Supreme Court's decision reinforces the effectiveness and comprehensiveness of the IBC in handling insolvency and liquidation proceedings while protecting the interests of various stakeholders involved.
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