Decided on 17 July 2023 | Supreme Court of India
In Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited & Others (Civil Appeal Nos. 7976 of 2019), the Hon’ble Supreme Court of India reversed its previous decision of September 2022 in the matter of State Tax Officer v. Rainbow Papers Ltd 2022 (13) SCR 808 (“Rainbow judgment”). In the Rainbow judgment, it was established that the State, through the creation of a ‘security interest’ under the Gujarat Value Added Tax, held the status of a ‘secured creditor’ as defined by the Insolvency and Bankruptcy Code, 2016 (“IBC”).
The parties Paschimanchal Vidyut Vitran Nigam Ltd. (“PVVNL”) and Raman Ispat Private Limited (“RIPL”) had entered into an agreement regarding the supply of electricity, which included provisions to ensure the settlement of outstanding dues. PVVNL periodically issued invoices for the electricity supplied to RIPL. As the dues remained unpaid, PVVNL seized RIPL’s properties.
This action was restrained by the Tehsildar, Muzaffarnagar which imposed restrictions on property transfer through sale, donation, or other means, effectively placing a charge on the property. Initially, RIPL underwent an insolvency resolution process under the IBC, which ultimately proved unsuccessful, leading to its liquidation.
The District Collector issued a notice to recover the outstanding dues through the auction of movable and immovable assets. The liquidator of RIPL then approached the National Company Law Tribunal (“NCLT”) seeking the release of the property to facilitate its sale. The proceeds would be used to clear the debts following the guidelines of the IBC. The NCLT granted this application.
Subsequently, PVVNL appealed this decision to the National Company Law Appellate Tribunal (“NCLAT”). However, the NCLAT dismissed the appeal. PVVNL then appealed to the Hon’ble Supreme Court, seeking to overturn the NCLAT’s decision. Their aim was to regain control of the attached property to settle their outstanding dues in full, rather than on a pro rata basis as suggested by the liquidator.
PVVNL challenged the NCLAT’s ruling on two main grounds. First, they argued that Sections 173 and 174 of the Electricity Act, 2003, held precedence over the Insolvency and Bankruptcy Code, 2016. They asserted that the IBC was a general law addressing insolvency matters broadly, whereas the Electricity Act constituted a specific law. Citing the generalia specialibus non derogant doctrine, PVVNL contended that the 2003 Act, being a ‘special Act’ with a non-obstante clause, should take precedence over the ‘general’ IBC legislation.
Their second argument relied on the precedent set by the Rainbow judgment, where the Hon’ble Supreme Court had deemed the debts owed to the state government to be that of a secured creditor, elevating their priority in debt clearance during liquidation under Section 53 of the IBC.
The Supreme Court dismissed PVVNL’s arguments. The Court ruled that Section 238 of the IBC bestowed an overriding effect upon it, even in the face of the non-obstante clause in the Electricity Act, 2003. Consequently, Sections 173 and 174 of the Electricity Act held no sway, and given that the company was already under moratorium, the IBC process should proceed.
Additionally, the Court overturned the notion established in the Rainbow judgment. The Court stated that the Rainbow judgment had disregarded the waterfall mechanism outlined in Section 53 of the IBC. The Court found fault with the reasoning behind the earlier decision and highlighted its potential negative impact on investments in entities indebted to government bodies. Thus, it reverted to the previous status of the waterfall mechanism and ordered the liquidator of RIPL to settle the PVVNL’ dues as per the provisions of the IBC.
This decision provided a sense of respite to various creditors, particularly those representing banks and financial institutions, who had previously expressed unhappiness with the verdict rendered in the Rainbow Papers case. Furthermore, the principle of according preferential treatment to government dues, as highlighted in the earlier ruling, cast a shadow over the participation of prospective buyers in the intricate process of corporate resolution.
The overarching goal of insolvency proceedings revolves around maximizing asset realization to facilitate the repayment of debts to all creditors in a fair and equitable manner. But elevating the priority of government debts brings with it the risk of dissuading interested parties from actively engaging in the resolution proceedings.
In this context, the judgment not only rectified the legal understanding but also addressed the practical implications of debt priority. By overturning the earlier decision’s stance on government dues, the Court sought to reinstate a balanced and consistent approach to debt settlement within the framework of the IBC and to foster a more conducive environment for investment and participation in the resolution process.