The IBC Prevails: Examining the Overriding Effect of the Insolvency and Bankruptcy Code, 2016, over the Electricity Act, 2003

The Supreme Court has held that, in liquidation proceedings, the Insolvency and Bankruptcy Code, 2016 prevails over the Electricity Act, 2003 where their provisions conflict. This article examines the decision in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat (P) Ltd. and its implications for electricity dues, security interests and the Section 53 liquidation waterfall.

1. The Hon’ble Supreme Court, in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat (P) Ltd., (2023) 10 SCC 60, examined the interplay between the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Electricity Act, 2003, and recognised the overriding effect of the IBC in matters governed by its provisions. Accordingly, in the event of liquidation under the IBC, outstanding electricity dues cannot claim priority over the claims of secured creditors or other creditors in a manner inconsistent with the statutory waterfall prescribed under Section 53 of the IBC. The judgment thus affirms that the distribution of the liquidation estate must be undertaken in accordance with the priority mechanism stipulated under the IBC, notwithstanding the provisions of the Electricity Act, 2003.

Facts of the Case

1. Supply of Electricity and Outstanding Dues: The electricity board supplied electricity to Raman Ispat Private Limited (“Corporate Debtor”), which was undergoing liquidation proceedings. Under the terms of the agreement between the parties, any outstanding electricity dues were purportedly to constitute a “charge” over the assets of the Corporate Debtor. The Corporate Debtor subsequently defaulted in payment of its electricity dues, pursuant to which the electricity board attached certain properties of the Corporate Debtor.
2. Order of the NCLT: During the liquidation proceedings, the NCLT, Allahabad Bench, directed the release of the attached properties in favour of the Liquidator, thereby enabling the Liquidator to take possession of and realise the value of such properties in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
3. Appeal before the NCLAT: Aggrieved by the aforesaid order, the electricity board preferred an appeal before the National Company Law Appellate Tribunal (“NCLAT”). It contended that the outstanding electricity dues constituted a security interest in respect of the Corporate Debtor’s assets, relying upon the relevant definitions of “secured creditor” and “transfer” under the IBC. The electricity board further contended that the recovery of its outstanding dues was governed by the Electricity Act, 2003, which, according to it, would prevail over the provisions of the IBC.
4. Proceedings before the Supreme Court: The NCLAT rejected the appeal preferred by the electricity board. Aggrieved by the decision of the NCLAT, the electricity board approached the Hon’ble Supreme Court, challenging the finding that its claim in respect of the outstanding electricity dues could not prevail over the provisions governing the liquidation process under the IBC.

Ruling of the Supreme Court

1. The principal issues before the Hon’ble Supreme Court were whether a “security interest” created by operation of law could be treated at par with the security interest of a secured creditor having priority under the IBC, and whether, in the event of a conflict, the provisions of the IBC would prevail over those of the Electricity Act, 2003.
2. The Hon’ble Supreme Court examined the scheme of insolvency and liquidation under the IBC, including the statutory waterfall mechanism prescribed under Section 53 for distribution of the assets of a corporate debtor undergoing liquidation.
3. The Court held that the electricity dues claimed by a statutory electricity distribution corporation, which was neither the Central Government nor a State Government, could not be treated as “government dues” falling within Section 53(1)(e)(i) of the IBC. The Court further clarified that merely because a statutory authority is empowered under a statute to create or enforce a charge over the assets of the corporate debtor, such charge would not, by itself, confer upon the authority the status or priority of a secured creditor under the liquidation waterfall contemplated by the IBC.
4. The Electricity Board had relied upon the decision of the Hon’ble Supreme Court in STO v. Rainbow Papers Ltd., (2023) 9 SCC 545 (“Rainbow Papers”), wherein statutory dues of the Government were held to constitute secured debt in the context of the statutory framework considered therein. However, the Supreme Court distinguished Rainbow Papers, observing that the said decision concerned the Corporate Insolvency Resolution Process (“CIRP”), whereas the case before it concerned liquidation proceedings. The Court emphasised that the specific waterfall mechanism under Section 53 of the IBC governs the distribution of assets in liquidation and must be applied accordingly.
5. The Court also examined Section 52 of the IBC, which permits a secured creditor, in liquidation, to either relinquish its security interest to the liquidation estate and participate in the distribution under Section 53, or realise its security interest in the manner prescribed under the IBC. A secured creditor relinquishing its security interest participates in the distribution in accordance with the priority contemplated under Section 53.
6. The Court further observed that government dues have deliberately been placed lower in the statutory waterfall under Section 53, reflecting the legislative intent to accord them a lower priority than the claims of secured creditors and other specified categories of creditors. The statutory scheme therefore treats government dues distinctly from debts owed to secured and unsecured creditors.
7. Accordingly, the Hon’ble Supreme Court held that, in the context of liquidation proceedings under the IBC, the provisions of the IBC prevail over the recovery mechanism contemplated under the Electricity Act, 2003. The Electricity Act cannot be relied upon to circumvent or alter the statutory priority and distribution mechanism prescribed under Sections 52 and 53 of the IBC. The decision thus reinforces the overriding effect of the IBC in matters concerning the distribution of the assets of a corporate debtor undergoing liquidation.

Conclusion

1. In conclusion, the IBC, by virtue of Section 238, has an overriding effect over inconsistent provisions of the Electricity Act. Therefore, any statutory or security interest created under the Electricity Act cannot override the priority and distribution mechanism prescribed under Section 53 of the IBC. The IBC consequently prevails in matters of insolvency and distribution of the corporate debtor’s assets.