Claim of electricity supplier regarding supply of electricity to be decided by Liquidator, rules SC, Read Judgement

31 Jul 2023

The Hon’ble Supreme Court opined that during an insolvency process, a secured creditor could not realize its dues by initiating the proceedings. This is because Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) enables the imposition of a moratorium period. It was noted that the rights of secured creditors are restored only in the event of failure of the insolvency resolution process at the stage of liquidation.

Further, the Bench examined section 53 and opined that the government dues and operational debts, as per the mechanism, have lower priority than dues owed to the unsecured financial creditors.

Moreover, the secured creditor has to decide at the beginning of the liquidation process whether or not to relinquish its secured interest. If it relinquishes, its dues are ranked higher in the waterfall mechanism. Observing all this, the Supreme Court directed the liquidator to adjudicate on the Appellant’s claims regarding the electricity supply bills.

Brief Facts:

The present appeal has been filed against the NCLAT order vide which the NCLT order was upheld. The NCLT allowed an application directing the District Magistrate to immediately release property previously attached in favour of the Liquidator of the Respondent. The same was done to enable the sale and realisation of the property’s value.

Brief Background:

The parties had entered into an agreement for the supply of electricity. The bills were raised to the Corporate Debtor. However, they remained unpaid. Therefore, the properties were attached. The Corporate Debtor has now become subject to liquidation.

The liquidator alleged that unless the attachment orders were set aside, no one would purchase the property of the Corporate Debtor. Therefore, the NCLAT directed the District Magistrate to release the attached property immediately.

Contentions of the Appellant:

It was argued that Sections 173 and 174 of the Electricity Act, 2003 (hereinafter referred to as “2003 Act”) have an overriding effect on the IBC as IBC is a general law dealing with corporate insolvency.

It was contended that the rights of electricity suppliers could not be made subordinate and subject to the priority of claims under the mechanism of IBC.

Alternatively, it was asserted that the electricity dues were “security interests” in favour of the electricity supplier service providers.

Contentions of the Liquidators:

It was asserted that the government dues were placed in the waterfall mechanism under Section 53(1)(e)(i) of the IBC.

It was argued that the electricity dues did not enjoy priority. Further, there was no creation of security interest in favour of the Appellant.

Observations of the Court:

It was observed that during an insolvency process, a secured creditor could not realize its dues by initiating the proceedings. This is because Section 14(1)(c) enables the imposition of a moratorium period. It was noted that the rights of secured creditors are restored only in the event of failure of the insolvency resolution process at the stage of liquidation.

Further, the Bench examined section 53 and opined that the government dues and operational debts, as per the mechanism, have lower priority than dues owed to the unsecured financial creditors.

Regarding the claims of the Appellant being government dues, it was observed that government participation in the Appellant does not make it a part of the government. The supply of electricity has been liberalized since 2003 now, therefore, private participation as distribution licensees is fairly widespread.

The Top Court ruled that the dues or amounts payable to the Appellant did not fall under Section 53(1)(f) of the IBC.

The decision of the Court:

Based on the aforementioned reasons, the Apex Court accordingly dismissed the appeal and directed the liquidator to adjudicate on the claim of the Appellant.

Case Title: Paschimanchal Vidyut Vitran Nigam Ltd. V. Raman Ispat Private Limited & ors.

Case No.: Civil Appeal Nos.7976 of 2019

Citation: 2023 Latest Caselaw 570 SC

Coram: Hon’ble Justice S. Ravinder Bhat, Hon’ble Justice Mr. Dipankar Datta

Advocate for Appellant: Adv. Mr. Pradeep Mishra

Advocate for Respondent: Adv. Mr. Arvind Kumar Gupta