Insolvency and Bankruptcy Code prevails over Electricity Act

The Supreme Court (SC) recently held that the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC), override those of the Electricity Act, 2003 (act), so far as they relate to the recovery of electricity debts.

In Paschimanchal Vidyut Vitran Nigam Limited v Raman Ispat Private Limited and Ors, the distribution company (PVVNL) obtained an order, as provided by the power purchase agreement (PPA), for the attachment of the properties of Raman Ispat Private Limited (Raman). This followed the failure of Raman to discharge its debts relating to the supply of electricity under the PPA.

The National Company Law Tribunal, the adjudicating authority, allowed an application by the liquidator of Raman directing the District Magistrate and Tehsildar, or land revenue officer, to release the property in favour of the liquidator to enable its sale. After the realisation of its value, the proceeds would be distributed according to the provisions of the IBC. The appellate tribunal upheld the order and PVVNL appealed to the SC.

PVVNL argued that the act and the regulations thereunder, including the Uttar Pradesh Electricity Supply Code, 2005 (2005 code), created a special mechanism for the recovery of electricity debts. Clause 4.3(f)(iv) of the 2005 code provided for the creation of a charge over the assets of a company in favour of the provider if the company defaulted on its debts. PVVNL further argued that as the act was earlier and particular legislation dealing with all aspects of electricity, it prevailed over the IBC. The latter is a later enacted general law dealing with insolvency. The appellant also relied on the court’s own judgment in State Tax Officer v Rainbow Papers Ltd (Rainbow Papers), which held that by a security interest created in favour of the government for tax claims under the Gujarat Value Added Tax Act, 2003, the government was a secured creditor under the IBC.

The liquidator argued that the IBC was a special law dealing with the insolvency, bankruptcy and winding up of companies, enacted later than the act. By virtue of section 238 of the IBC, the IBC took precedence over the act. Further, government debts were dealt with under the waterfall mechanism of section 53(1)(e)(i) of the IBC, lower in priority than those of secured creditors. The liquidator contended that the 2005 code only provided for the recovery of electricity debts as if they were arrears of revenue and did not create security interests.

The SC held that PVVNL fell into the category of secured creditors as determined by the adjudicating and appellate authorities. It further held that the IBC overrides the provisions of the act, confirming the IBC’s primacy. This decision is consistent with its earlier judgments in Duncans Industries Ltd v AJ Agrochem and Sundaresh Bhatt, Liquidator of ABG Shipyard v Central Board of Indirect Taxes and Customs.

Moreover, the SC clarified which debts are “government dues”. Debts payable or to be credited to the treasury, such as taxes and tariffs broadly falling within the ambit of article 265 of the constitution, are government dues. The court ruled that the judgment in Rainbow Papers ignored the waterfall mechanism in section 53 of the IBC and was not to be regarded as an authority. In Rainbow Papers, the court overlooked the separate and distinct treatment of amounts payable to secured creditors on the one hand, and the debts payable to the government on the other. This clearly showed parliament’s intention to treat the two differently. This is also clear in the preamble of the IBC.

This judgment follows earlier cases in which the courts have repeatedly held that the IBC takes precedence over other statutes. The SC emphasised the overriding nature of the IBC by virtue of section 238. In the light of this judgment, companies involved in the supply of electricity must take into account the provisions of the IBC when entering into agreements. They should bear in mind the possibility of contract counterparts entering the corporate insolvency resolution processes (CIRP) or liquidation. The IBC brought about significant changes of attitude on the part of financial creditors and promoters. Operational creditors, especially in the power sector, should be equally aware that previously available statutory protections may no longer cover them should debtors enter CIRPs or liquidation under the IBC.

Mani Gupta is a senior partner and Aman Choudhary is a senior associate at Sarthak Advocates & Solicitors.

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