Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited & Ors.
S. RAVINDRA BHAT, J.
1. The appellant Paschimanchal Vidyut Vitran Nigam Limited
(hereinafter, “PVVNL”) is aggrieved by an order of the National
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS.
Company Law Appellate Tribunal (hereinafter, “NCLAT ”)1 which
rejected its appeal against an order of the National C ompany Law
Tribunal, Allahabad (hereinafter, “NCLT”/ “Adjudicating Authority”),2
which allowed an application directing the District M agistrate 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 provisi ons of the
Insolvency and Bankruptcy Code, 2016 (hereinafter, “IBC” / “Code”).
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 wi ll 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 corp orate
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 corpor ate
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
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, d ated 21.08.2018.
1233
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 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 defi nition 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 Railw ay
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 n ot subordinate
and subject to the ‘priority of claims’ mechanism und er 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, 1 963
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 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), pres cribed the
3Board of Trustees, Port of Mumbai v. Indian Oil Corporation, 1998 (2) SCR 774.
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
mechanism for recovery of electricity charges. The 2003 Act b eing a
‘special Act’ with a non-obstante clause, would have an overriding effect
over the ‘general’ IBC law. This mechanism for speedy r ecovery 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. Thi s court
held that if a resolution plan excluded such tax or statutory dues payable
to the government, it would not bein conformity with the provisions of
the IBC and, as such, would not be binding on the State.
10. Alternatively, the learned counsel submitted that electri city
dues were also ‘security interests’ in favour of ele ctricity service
providers. He relied on the definition of ‘secured creditor’ which meant
“a creditor in favour of whom security interest is creat ed.”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, assignmen t and
encumbrance or any other agreement or arrangement
securing payment or performance of any obligation o f 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, pledg e, gift,
loan or any other form of transfer of right, title, possession
or lien.” 7
4State Tax Officer v. Rainbow Papers Ltd., 2022 (13) SCR 808.
5 Section 3 (30), IBC.
6 Section 3 (31), IBC.
7 Section 3 (34), IBC.
1235
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 stat utory
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 di fferential
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 main tained by an
information utility or by such other means as may be specif ied 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 A ct, 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
8 The Insolvency and Bankruptcy Board of India is es tablished under Section 188 of
the IBC. Is powersare enumerated under Section 196.
9Jitender Nath Singh v. Official Liquidator & Ors., 2012 (13) SCR 339.
10ICICI Bank Ltd. v. Sidco Leathers Ltd ., 2006 Supp (1) SCR 528
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
16. It was submitted that government dues were placed in t he
‘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 sec ured
creditors and workers was reflected under Section 326 of the Companies
Act, 2013.Section 327 made payment of taxes subject to the p riority
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 3 1B of the
Recovery of Debts Due to Banks and Financial Institutions A ct, 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 Commission er 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 & A nr.12 It was
submitted that creation of charge under a law was a mat ter 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
11 Jalgaon Janta Shakari Bank Ltd. v. Joint Commission er of Sales Tax , Nodal 9,
Mumbai & Anr., 2022 SCC OnLine Bom 1767.
12The West Bengal State Electricity Distribution Company Limited v. Sri Vasavi Industries
Limited & Anr.,2022 SCC Online Cal 1918
13Union of India & Ors. v. Shah Goverdhan L. Kabra Teachers’ College, (2002) Supp
(3) SCR 220.
1237
Bank & Anr. v. Dipak Debbarma & Ors. 14. Having regard to this
principle, IBC was thus a special law dealing with the enti re subject
matter of insolvency, bankruptcy and winding up of comp anies. 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 ince ption 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 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 default17
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 c reditors. 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 credit ors 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
14UCO Bank & Anr. v. Dipak Debbarma & Ors., (2016) (11) SCR 723.
15Innoventive Industries Ltd. v. ICICI Bank & Anr ., (2017) 8 SCR 33.
16Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17.
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”.
18Per 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”.
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
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 peri od of not
exceeding 90 days if the committee of creditors (hereina fter, “CoC”)
by a vote of 75% of voting shares so decides. Speedy resolution t hus
forms the mainstay of the entire resolution process. U pon admission
of the application, a moratorium under Section 14 of th e 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 professiona l (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 fina ncial creditors.
Anyone interested or willing to put the corporate debt or 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 o n 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 completi on of
the corporate insolvency resolution process under section 12
or the fast track corporate insolvency resolution p rocess
under section 56, as the case may be, does not rece ive a
resolution plan under sub-section (6) of section 30; or
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(b) rejects the resolution plan under section 31 for the non-
compliance of the requirements specified therein, it s hall—
(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 co rporate
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 t he
corporate insolvency resolution process but before
confirmation of resolution plan, intimates the Adju dicating
Authority of the decision of the committee of credi tors
2[approved by not less than sixty-six per cent. of th e voting
share] to liquidate the corporate debtor, the Adjud icating
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 he reby
declared that the committee of creditors may take the deci sion
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 a ny time
before the preparation of the information memorandum.
(3) Where the resolution plan approved by the Adjud icating
Authority 4[under section 31 or under sub-section ( 1) of
section 54L,] is contravened by the concerned corpo rate
debtor, any person other than the corporate debtor, whose
interests are prejudicially affected by such contravention, may
make an application to the Adjudicating Authority f or 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), i f the
Adjudicating Authority determines that the corporate d ebtor
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).
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
(5) Subject to section 52, when a liquidation order has been
passed, no suit or other legal proceeding shall be i nstituted
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 t o legal
proceedings in relation to such transactions as may be notifi ed
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, employ ees and
workmen of the corporate debtor, except when the bu siness
of the corporate debtor is continued during the liq uidation
process by the liquidator.”
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 enquir e 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 mat ter of
course – there is no choice in the matter. Again, i n Committee of
Creditors of Essar Steel India Limited v. Satish Ku mar 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 affair s of the
corporate debtor. The RP, appointed to conduct the resolution process,
is ordinarily appointed as liquidator. The powers and duties of liquidator
19K. Shashidhar v. Indian Overseas Bank , 2019 (3) SCR 845.
20Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors.,
2019 (16) SCR 275.
1241
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 considera tion the
assets of the corporate debtor, etc. The liquidator has to issue a pu blic
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 r eceipt of
the claims, the liquidator has to verify the claims submitted by the creditors
(Section 39). The liquidator may also ask the creditors to subm it 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.22After 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.
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 ass ets, property, effects and actionable
claims of the corporate debtor;
********************* *********************
(d) to take such measures to protect and preserve t he 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 an d 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 imm ovable and movable property or
actionable claims of the corporate debtor in liquidation to any person who is not eligible
to be a resolution applicant;”
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
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
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.
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 interes t. 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 ‘wate rfall
mechanism’, provides for the order of distribution of assets. It states as
follows:
“(1) Notwithstanding anything to the contrary contain ed in
any law enacted by the Parliament or any State Legislature fo r the
time being in force, the proceeds from the sale of the liquidation assets
shall be distributed in the following order of priority a nd 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;
of the corporate debtor or by any other means as ma y 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.”
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(b) the following debts which shall rank equally between and
among the following:—
(i) workmen’s dues for the period of twenty-four mo nths
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 se t out in
section 52;
(c) wages and any unpaid dues owed to employees other than
workmen for the period of twelve months preceding t he
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 pa rt of the
period of two years preceding the liquidation commencement
date;
(ii) debts owed to a secured creditor for any amount un paid
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.
(2) Any contractual arrangements between recipients under
sub-section (1) with equal ranking, if disrupting the ord er of
priority under that sub-section shall be disregarde d by the
liquidator.
(3) The fees payable to the liquidator shall be ded ucted
proportionately from the proceeds payable to each c lass
of recipients under sub-section (1), and the procee ds to
the relevant recipient shall be distributed after s uch
deduction.
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
Explanation-For the purpose of this section—
(i) it is hereby clarified that at each stage of the distri bution
of proceeds in respect of a class of recipients tha t rank
equally, each of the debts will either be paid in full, or wi ll be
paid in equal proportion within the same class of recipie nts,
if the proceeds are insufficient to meet the debts in ful l; 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 sec ured creditor
does not relinquish security, the priority of claim is lower [Section 53
(1) (e) (ii)] in respect of “any amount unpaid following 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:
1245
“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 finan cial
creditors in addition to all kinds of secured credi tors for
promoting the availability of credit and developing a marke t
for unsecured financing (including the development o f bond
markets). In the long run, this would increase the availabilit y
of finance, reduce the cost of capital, promote entrepreneurship
and lead to faster economic growth. The government also w ill
be the beneficiary of this process as economic grow th will
increase revenues. Further, efficiency enhancement and
consequent greater value capture through the propos ed
insolvency regime will bring in additional gains to both the
economy and the exchequer.”
************* ************* *************
“For the remaining creditors who participate in the colle ctive
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 t hese
are typically paid out net of the costs of insolvency re solution
and Liquidation. In order to bring the practices in India in-
line with the global practice, and to ensure that the obje ctives
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 t hree
months from the start of IRP.
3. Employees capped up to three months.
4. Dues to unsecured financial creditors, debts pay able to
workmen in respect of the period beginning twelve m onths
before the liquidation commencement date and ending th ree
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 p eriod
of two years before the liquidation commencement date; any
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
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 en d, it
encourages secured creditors to relinquish their se curity
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 und er the
Code, as they would have been under the Companies A ct,
1956. It was noted that, to some extent, this provision intend s
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 se curity
interest, they would only recover to the extent of their sec urity
interest, and would claim any excess dues remaining unpaid
under Section 53(1)(e) of the liquidation waterfall. Thu s, the
Committee was of the view that this provision could not have
been intended to provide secured creditors who reli nquish
their security interest, priority of repayment over the ir entire
debt regardless of the extent of their security int erest, as it
would tantamount to respecting a right that has never existe d.
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 Sect ion
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 Comm ittee
agreed that the priority for recovery to secured creditors under
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) – He ading 7.3 – Realisation or
Relinquishment of Security Interest by a Secured Cr editor (pg. 76).
1247
Section 53(1)(b)(ii) should be applicable only to the extent of
the value of the security interest that is relinqui shed 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 t he
provisions of the Code. ”
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 t o
reorganization and insolvency resolution of corporate persons,
partnership firms and individuals in a time bound m anner
for maximization of value of assets of such persons, to pr omote
entrepreneurship, availability of credit and balance the
interests of the stakeholders including alteration in t he 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 Committ ee
stated:
“Section 53 of the Code places secured creditors who ha ve
relinquished their security above unsecured financi al
creditors. Thus, clear distinction has been drawn b etween
unsecured and secured creditors who join the liquid ation
proceedings for the purpose of the payment waterfall in case
of liquidation. Unsecured creditors are ranked above secured
creditors who have unpaid debts following enforceme nt of
securities as it is presumed that such secured creditor s have
recovered most of their dues by enforcement of their security
outside the liquidation proceedings. Moreover, as s tated in
the BLRC Report, protection of dues of unsecured cre ditors
is intentional in order to encourage the market for corporate
bonds and other unsecured debt.
With respect to dues of workmen, they have been pla ced at
the highest priority along with secured creditors w ho have
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
relinquished their security, second only to IRP cos ts 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 ma y—
(a) relinquish its security interest to the liquidation estate and
receive proceeds from the sale of assets by the liqu idator in
the manner specified in section 53; or
(b) realise its security interest in the manner specifi ed in this
section.
(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 v erify 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 maintaine d 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 l aw
as applicable to the security interest being realised and to the
secured creditor and apply the proceeds to recover the d ebts
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
25 Report of the Insolvency Law Committee (2018) (pg. 87).
1249
may make an application to the Adjudicating Authori ty 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 credi tor to
realise security interest in accordance with law for the time
being in force.
(7) Where the enforcement of the security interest unde r sub-
section (4) yields an amount by way of proceeds which is in
excess of the debts due to the secured creditor, the se cured
creditor shall—
(a) account to the liquidator for such surplus; and
(b) tender to the liquidator any surplus funds receive d from
the enforcement of such secured assets.
(8) The amount of insolvency resolution process cos ts, due
from secured creditors who realise their security int erests in
the manner provided in this section, shall be deducte d from
the proceeds of any realisation by such secured cre ditors,
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 a ssets
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 e ither
relinquish their security interest, in the liquidation process (the procedure
for which is prescribed in Regulations 21 and 21A of the L iquidation
Regulations26), or proceed to enforce it. In case of the latter option, the
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
(c) proof of registration of charge with the Centra l Registry of Securitisation Asset
Reconstruction and Security Interest of India.
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
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 tendere d 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 enforcem ent, 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 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 t heir
dues by enforcement of their security outside the l iquidation
proceedings”.27 There is sound logic in this, because those opting to
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 it s 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 sha red in case it had relinquished the
security interest.”
27Supra note 25.
1251
‘stand out’ and enforce security interest, are permitted to do s o; in the
event of excess recovery, they have to intimate and hand ov er such
excess for distribution in liquidation proceeding; in case they are unable
to recover their dues, for such of the dues as are outstan ding, 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 &
Ors28 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 t wo
options to a secured creditor. First, the secured creditor in a
liquidation proceeding may relinquish its security intere st and
receive the proceeds from the sale of assets by the liqu idator
in the manner specified in Section 53 of the Code. The secon d
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 realis es
the security interest, he shall inform the liquidato r of such
security interest and identify the asset subject to such sec urity
interest to be realised. The liquidator is to verify the se curity
interest and shall permit the secured creditor to realise s uch
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 se cured
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 ap ply 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 fa ces
resistance from the corporate debtor or any other p erson
connected therewith in taking possession of, sellin g or
otherwise disposing off the security. Sub-section (6) to Sec tion
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
28Moser Baer Karamchari Union thr. President Mahesh C hand Sharma v. Union of
India & Ors.,2023 SCC OnLine SC 547.
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 C ode,
however, is important as it states that where on enforce ment
of the security interest, an amount by way of procee ds is in
excess of the debts due to the secured creditor, the se cured
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, du e from
secured creditors who realise their security intere sts in the
manner provided in the section, are to be deducted from t he
proceeds of any realisation by such secured credito rs. They
are to be transferred and included in the liquidation es tate.
Sub-section (9) to Section 52 of the Code states that where
proceeds for realisation of the secured assets are not adequat e
to repay the debts owed to the secured creditor, th e unpaid
debts of such secured creditor shall be paid by the liquidat or
in the manner specified in Clause (e) to Sub-sectio n (1) to
Section 53 of the Code.
67. To protect the interest of the workmen where the secur ed
creditor does not relinquish its security interest to fall U nder
Section 53 of the Code, Regulation 21A of the Insol vency
and Bankruptcy Board of India (Liquidation Process)
Regulations, 2016 has been enacted, and it requires that th e
secured creditor, who opts to realise its security in terest as
per Section 52 of the Code, has to pay as much towards th e
amount payable under the Clause (a) and Sub-clause ( i) to
Clause (b) of Sub-section (1) to Section 53 of the Code to th e
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 Legislat ure for
1253
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 asse ts and
then provides the manner in which the creditors are to be
paid. Even the rights of the secured creditor fallin g Under
Section 53 of the Code to enforce, realise, settle, compromi se
or deal with the secured assets as applicable to the security
interest are diluted and compromised.
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-sect ion
(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 h ave the
same meaning as assigned to it in Section 326 of th e
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. W hat is
significant here is that under Clause (b) to Sub-section (1) t o
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 wor kmen.
Clause (i) of Explanation to Section 53 of the Code states
that where the distribution of proceeds in respect of cl ass of
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
recipients that rank equally, each of the debts would be pai d
either in full or would be paid in equal proportion within the
same class of recipients, if the proceeds are insuf ficient to
meet the debts in full. Ex facie, the Clause is very j ust and
fair. It is to be noted that the wages and unpaid dues owed to
employees other than the workmen fall in Clause (c), w hich
is below Clause (b) to Sub-section (1) to Section 5 3 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. Claus e (d)
of Sub-section (1) to Section 53 of the Code relates to financia l
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 intere st, have
been clubbed together in Clause (e) of Sub-section (1) to
Section 53 of the Code, and have to be ranked equal ly
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 S ub-
section (1) to Section 53 of the Code, and equity shareholde rs
or partners fall under Clause (h) of Sub-section (1) to Section
53 of the Code. Sub-section (2) to Section 53 of th e Code
states that any contractual arrangements between reci pients
Under Sub-section (1) with equal ranking, if disrupti ng the
order of priority under the said Sub-section will b e
disregarded by the liquidator.
71. The waterfall mechanism is based on a structured
mathematical formula, and the hierarchy is created in te rms
of payment of debts in order of priority with sever al
qualifications, striking down any one of the provis ions or
rearranging the hierarchy in the waterfall mechanis m may
lead to several trips and disrupt the working of the equilibri um
as a whole and stasis, resulting in instability. Ever y change
in the waterfall mechanism is bound to lead to casc ading
effects on the balance of rights and interests of th e secured
creditors, operational creditors and even the Central and Stat e
1255
Governments. Depending upon the facts, in some case s, the
waterfall mechanism in the Code may be more beneficial than
the hierarchy provided Under Section 326 of the Companie s
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 m eet 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 o f the
stakeholders. The guiding principle for the Code in setting
the priority of payments in liquidation was to brin g the
practices in India in line with global practices. In the water fall
mechanism, after the costs of the insolvency resolution proc ess
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 c reditor,
the interests of workmen are protected under the Co de. In
fact, the secured creditors are taking significant hair-c ut 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, w ho are
financial institutions in which the general public has inves ted
money, and also ensures that the economic activity and revival
of a viable company is not hindered because it has su ffered
or fallen into a financial crisis. The Code focuses on bringin g
additional gains to both the economy and the excheq uer
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 oth er
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 a nd ex
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
facie harsh and unequitable as to classify as manif estly
arbitrary, these would be interfered with by the court.”
38. It is hence clear that the provisions of the IBC are ca refully
thought out, and give options to secured creditors, and balance the ir
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 hi m” (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 emp owered 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 bill ing 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 as sets of
the company, and the licensee shall ensure that this is ente red
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 U ttar Pradesh
Government Electrical Undertakings (Dues Recovery) Act, 1958:
“6.15 Recovery of Arrears
(a) The payments due to the Licensee shall be recove red as
per provision of Section 56 of the Act, and arrears of land
revenue as per the provisions of the U.P. Governmen t
Electrical Undertaking (Dues Recovery) Act, 1958, a s
amended from time to time.
1257
(b) Notwithstanding anything contained in any other law for
the time being in force, no sum due from any consumer sha ll
be recoverable after the period of two years from t he date
when such sum became first due unless such sum has been
shown continuously as recoverable as arrear of charg es 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 consum er, such
charges / penalties levied as per this code or tariff sche dule,
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 agreement30 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 Board31examined 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 previ ous
owner since electricity arrears do not automatically becom e a
charge over the premises. Such an action is permissible only
where the statutory conditions of supply authorise the re covery
of outstanding electricity dues from a subsequent pur chaser
claiming fresh connection of electricity, or if there is an express
provision of law providing for creation of a statutory charge
upon the transferee.”
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 regulati ons 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.”
31K.C. Ninan v. Kerala State Electricity Board, 2023 SCC Online SC 603.
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
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 properly framed regulations authoriz ed under
the parent statute. In these circumstances, the argument o f PVVNL
that by virtue of Clause 4.3(f)(iv) of the Supply Code, read w ith 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’ a s 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 exp ression
“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 enum eration or
specification of the Central Government and State Go vernment dues,
as a class apart from other creditors, including cred itors who may
have secured interest (in respect of which amounts m ay be payable
to them). The repeated reference of lowering of priority of debt s to
the government, on account of statutory tax, or other dues p ayable to
the Central Government or State Government, or amounts payable
into the Consolidated Fund on account of either governm ent, in the
various reports which preceded the enactment of the IBC , as well as
its Preamble, means that these dues are distinct an d have to be treated
as separate from those owed to secured creditors. T he Central
Government and State Government are defined by the General Clauses
Act, 1897. The former is defined by Section 3(8),32 and latter by Section
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,—
1259
3 (60).33 The distinction between the governments has been recognized
and maintained by previous decisions of this court. For inst ance, 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 Art icle 12
for the limited purpose of Part-III of the Constituti on. Further,
the very inclusive definition of ‘State’ under Arti cle 12 by
referring to Government of India, the Government of each of
(i) in relation to functions entrusted under sub-se ction (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 C ommissioner’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”
34Shrikant v. Vasantrao &Ors ., 2006 (1) SCR 496
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
the States and the local and other authorities, makes it clear
that a ‘State Government’ and a local or other autho rities,
are different and that they fall under a common def inition
only for the purpose of Part-III of the Constitution. This Cou rt
has consistently refused to apply the enlarged defi nition 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 oth er
authorities for the purposes of part-III (or Part- I V) of the
Constitution, the term “State Government” in its ordinary sense
does not encompass in its fold either a local or st atutory
authority”.
45. The judgment of this court, in Municipal Commissioner of
Dum Dum Municipality & Ors. v. Indian Tourism Devel opment
Corporation & Ors., 35 noticed that, “In the case of major public
utilities, statutory corporations were created unde r 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, ass ets and
liabilities were transferred to such new corporatio ns. They
were supposed to operate on business lines, pay tax es and
justify their creation and constitution. These corp orations,
whether created under the statute or registered und er the
Companies Act are distinct juristic entities owning the ir own
properties, having their own fund, capable of borrowing an d
lending monies and entering into contracts like any other
corporation. In many cases, the entire share capital of th ese
corporations is owned by the Government whether Cen tral
or State. In some cases, the major share holding is of the
Government with some private share holding as well. In ca se
of some statutory corporations, the enactment creati ng them
did not provide for any share capital, though it was made a
35 Municipal Commissioner of Dum Dum Municipality & Or s. v. Indian Tourism
Development Corporation & Ors., 1995 (5) SCC 251.
1261
body corporate with all the necessary and incidental powers
that go with such concept. The International Airpor ts
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 an d
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 employe es, “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 government dues payable or those payab le 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 i nto by
them with the corporate debtor. On the other hand, dues paya ble or
requiring to be credited to the Treasury, such as tax, tariffs, etc. which
broadly fall within the ambit of Article 265 of the Constitut ion are
‘government dues’ and therefore covered by Section 53(1)(f) of t he
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 amou nt
payable towards tax or penalty by any person would constitute a ‘ first
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
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 ac t. This was
rejected by the NCLT and the NCLAT. 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 o r
inconsistent with Section 53 or any other provision s of the
IBC. Under Section 53(1)(b)(ii), the debts owed to a secured
creditor, which would include the State under the GVA T Act,
are to rank equally with other specified debts including d ebts
on account of workman’s dues for a period of 24 mon ths
preceding the liquidation commencement date.
57. As observed above, the State is a secured creditor u nder
the GVAT Act. Section 3(30) of the IBC defines secured creditor
to mean a creditor in favour of whom security inter est 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 Author ity
(NCLAT) and the Adjudicating Authority erred in law in
rejecting the application/appeal of the appellant. As obse rved
above, delay in filing a claim cannot be the sole groun d 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 are solution process and not during liquidation. Section
53, as held earlier, enacts the waterfall mechanism providi ng 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 exp enses of the
1263
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 Cent ral or State
Government.
50. The Gujarat Value Added Tax Act, 2003 no doubt creates a
charge in respect of amounts due and payable or arrears. I t 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 t he 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 al so 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, i n
two consecutive provisions, it would be difficult to ma intain
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 & Or s.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 Customs38. 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
36Member, Board of Revenue v. Anthony Paul Benthall(1955) 2 SCR 842.
37Brihan Mumbai Mahanagarpalika & Anr. v. Willington Sports Club & Ors., (2013)
(16) SCR 216.
38Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and
Customs, 2022 SCC Online SC 1101.
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
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:
“55. For the sake of clarity following questions, m ay 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 authori ty
only has a limited jurisdiction to assess/determine the quantum
of customs duty and other levies. The respondent aut hority
does not have the power to initiate recovery of dues by me ans
of sale/confiscation, as provided under the Customs A ct.
(b) Whether the respondent could claim title over the g oods
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 authori ty
only has a limited jurisdiction to assess/determine the quantum
of customs duty and other levies. The respondent aut hority
does not have the power to initiate recovery of dues by me ans
of sale/confiscation, as provided under the Customs A ct.
(ii) After such assessment, the respondent authorit y has to
submit its claims (concerning customs dues/operational de bt)
in terms of the procedure laid down, in strict complia nce of
the time periods prescribed under the IBC, before t he
adjudicating authority.
(iii) In any case, the IRP/RP/liquidator can immediately secure
goods from the respondent authority to be dealt wit h
appropriately, in terms of the IBC.”
1265
Similarly, in Duncans Industries Ltd. v. AJ Agrochem39, 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 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. Lt d.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 COMPANIESACT
54. Lastly, the liquidator had urged that without registration of
charge, the same was unenforceable under liquidation proc eedings.
Section 77 of the Companies Act, 2013reads 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 I ndia, 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 suc h fees
and in such manner as may be prescribed, with the Registrar
within thirty days of its creation: Provided that the Registr ar
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 creatio n, the
company shall seek extension of time in accordance with
39Duncans Industries Ltd. v. AJ Agrochem, (2019) 9 SCC 725.
40 (2018) 18 SCC 786
41 [2021] 13 SCR 737
42 2018 SCC OnLine NCLAT 413
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]
section 87: Provided also that any subsequent registration of
a charge shall not prejudice any right acquired in respect o f
any property before the charge is actually registered.
(2) Where a charge is registered with the Registrar under s ub-
section (1), he shall issue a certificate of registration o f such
charge in such form and in such manner as may be prescribe d
to the company and, as the case may be, to the pers on 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 (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 b y 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 t hat
PVVNL is a secured creditor.
56. The record further shows that after the NCLT pass ed 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 operatio nal 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.
1267
V. CONCLUSION
57. For the above reasons, it is held that the appeal de serves to
fail. At the same time, the liquidator is directed to dec ide the claim
exercised by PVVNL in the manner required by law. It shall complete
the process within 10 weeks from the date of pronouncement o f this
decision, after providing such opportunity to the appellant, as is necessary
under law.
58. The appeal is dismissed, subject to the above direction, without
order on costs.
Divya Pandey Appeal dismissed.
(Assisted by : Shevali Monga, LCRA)
PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMAN
ISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]