PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. versus RAMAN ISPAT PRIVATE LIMITED & ORS. on 17 July 2023

[2023] 10 S.C.R. 1221 : 2023 INSC 625

PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD.

v.

RAMAN ISPAT PRIVATE LIMITED & ORS.

(Civil Appeal Nos. 7976 of 2019)

JULY 17, 2023

[S. RAVINDRA BHAT AND DIPANKAR DATTA, JJ.]

Insolvency and Bankruptcy Code, 2016 – ss.238, 53 –Overriding effect of s.238 – Distribution of assets u/s.53 – Duespayable to secured creditors vis-à-vis Central or State Government–Held: s.238, IBC overrides the provisions of the Electricity Act, 2003despite the latter containing two specific provisions which openwith non-obstante clauses (ss.173 and 174) – Provisions of the IBCtreat the dues payable to secured creditors at a higher footing thandues payable to Central or State Government– Electricity Act, 2003– ss.173, 174.

Insolvency and Bankruptcy Code, 2016 – s.53(1)(a)-(f) –Waterfall mechanism – Priority of claims – Order of distribution ofassets – “government dues” – Corporate debtor entered into anagreement with appellant-PVVNL for supply of electricity – PVVNLraised bills for supply of electricity to the corporate debtor butdues remained unpaid – PVVNL attached the corporate debtor’sproperties – The Tehsildar, restrained transfer of property by sale,donation or any other mode, and also created a charge on theproperties – Corporate debtor underwent resolution process whichwas not successful and became subject to liquidation – DistrictCollector issued notice for recovery of outstanding dues – NCLTdirected Tehsildar to immediately release property in favour of theliquidator of the corporate debtor for enabling its sale, and afterrealisation of its value, for distributing the proceeds in accordancewith the IBC – Appeal rejected by NCLAT – PVVNL argued thatrights of electricity suppliers like PVVNL were not subordinate andsubject to the ‘priority of claims’ mechanism under the IBC – Pleaof the liquidator that dues owed to PVVNL were technically owed tothe “government”, and thus occupied a lower position in the orderof priority of clearance – Held:”government dues” is not definedin the IBC – It finds place only in the preamble – However, what

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Aconstitutes such dues is spelt out in the ‘waterfall mechanism’ u/s.53(1)(e), which inter alia states that, “Any amount due to the CentralGovernment and the State Government including the amount to bereceived on account of the Consolidated Fund of India and theConsolidated Fund of the State” ranks lower in priority to the classof creditors described in Clauses (a) to (d) of s.53(1) – There existsBa separate enumeration or specification of the Central Governmentand State Government dues, as a class apart from other creditors,including creditorswho may have secured interest (in respect of whichamounts may be payable tothem) – These dues are distinct and haveto be treated as separate from those owed to secured creditors –CFurther, 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 andpublic – Therefore, dues or amounts payable to PVVNL do not fallwithin the description of s.53(1)(f) – Uttar Pradesh Electricity SupplyCode, 2005 – General Clauses Act, 1897 – ss.3(8), 3(60).DInsolvency and Bankruptcy Code, 2016 – Scheme of –Discussed.

Electricity Act, 2003 – Uttar Pradesh Electricity Supply Code,2005 – Outstanding electricity dues, if a ‘charge’ on assets ofEcorporate debtor – Circumstances in which such a ‘charge’ couldbe constituted in law – Held: In K.C. Ninan v. Kerala State ElectricityBoard, Supreme Court examined such circumstances and held thatthe creation of a charge need not necessarily be based on an expressprovision of the 2003 Act or plenary legislation, but could be createdby properly framed regulations authorized under the parent statuteF– Thus, in the present case, PVVNL rightly argued that by virtue ofClause 4.3(f)(iv) of the Supply Code, read with the stipulations inthe agreement between the parties, a charge was created on theassets of the corporate debtor – Order of the NCLT also revealsthat this position was accepted – This is evident from the order ofGthe NCLAT which clarified that PVVNL also came under thedefinition of ‘secured operational creditor’ as per law – This findingwas affirmed by the impugned order – Therefore, the conclusionthat PVVNL is a secured creditor cannot be disputed – Electricity.

Insolvency and Bankruptcy Code, 2016 – ss.52, 53(1)(e), (f)H– Government debts, operational debts vis-à-vis dues owed to unsecured financial creditors–Rationale for placing securedcreditors who relinquish their security, higher in priority– Held:The priority of claims, indicated in the hierarchy of preferences,under the waterfall mechanism accords government debts [clause(e)] and operational debts [clause (f)] lower priority than duesowed to unsecured financial creditors – Further, debts owed to asecured creditor, whenever such secured creditor “has relinquishedsecurity in the manner set out in s. 52” receive a fairly high priority(immediately after insolvency resolution process costs) – When thesecured creditor does not relinquish security, the priority of claim islower [s.53(1)(e)(ii)] in respect of “any amount unpaid followingthe enforcement of security interest” – Amounts due to thegovernment (i.e., payable into the Consolidated Fund of India orConsolidated Fund of a State) are ranked in the same manner asthose of secured creditors who do not relinquish their security interest[s.53(1)(e)(ii)]– Aforesaid rationale discussed.

Electricity Act, 2003 – ss.50, 56, 181(2)(x) – Uttar PradeshElectricity Supply Code, 2005 – Clause 4.3 (f) (iv), Clause 6.15 –Recovery mechanism under– Discussed– Uttar Pradesh GovernmentElectrical Undertakings (Dues Recovery) Act, 1958.

Insolvency and Bankruptcy Code, 2016 – s.53(1)(f) –Constitution of India – Article 265 – “government dues” – Held:Dues payable or requiring to be credited to the Treasury, such astax, tariffs, etc. which broadly fall within the ambit of Article 265are ‘government dues’ and therefore covered by s.53(1)(f) – Whereas,dues payable to statutory corporations which do not fall within thedescription “amounts due to the central or state government” forinstance amounts payable to corporations created by statutes whichhave distinct juristic entity but whose dues do not constitutegovernment dues payable or those payable into the respectiveConsolidated Funds stand on a different footing.

Companies Act, 2013 – ss.77, 78, 3(31) – Plea of the liquidatorthat without registration of charge u/s.77, the same wasunenforceable under liquidation proceedings – Held: s.78 enactsthat when a company whose property is subject to charge, fails toregister it, the charge holder (or the person entitled to the chargeover the company’s assets) can seek its registration – s.3(31) defines“security interest” in the widest terms – Liquidator cannot urge this A

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Aaspect at this stage, because of the concurrent findings of the NCLTand the NCLAT that PVVNL is a secured creditor – Further, on facts,it is not appropriate to rule on the submissions of the liquidator vis-à-vis the fact of non-registration of charges u/s.77.

Interpretation of Statutes –Insolvency and Bankruptcy Code,B2016 – Gujarat Value Added Tax Act, 2003–Held: When anenactment uses two different expressions, they cannot be construedas having the same meaning – Reliance on Rainbow Papers case isof no avail to the appellant and that judgment is to be confined toits own facts.

CDismissing the appeal, the Court

HELD: 1.1 The priority of claims, indicated in the hierarchyof preferences, under the waterfall mechanism is therefore:Firstly, insolvency resolution process costs and the liquidationcosts; Secondly, workmen’s dues for the period of 24 monthsDpreceding the liquidation commencement date and debts owedto a secured creditor in the event such secured creditor hasrelinquished security; Thirdly, wages and any unpaid dues owedto employees other than workmen for the period of 12 monthspreceding the liquidation commencement date; Fourthly, financialdebts owed to unsecured creditors; Fifthly, any amount due toEthe central government and the state government and debts owedto a secured creditor for any amount unpaid following theenforcement of security interest; Sixthly, any remaining debtsand dues; Seventhly, preference shareholders; and Eighthly equityshareholders or partners. This hierarchy or order of priority thusFaccords government debts [clause (e)] and operational debts[clause (f)] lower priority than dues owed to unsecured financialcreditors.Debts owed to a secured creditor, whenever suchsecured creditor “has relinquished security in the manner setout in section 52” receive a fairly high priority (immediately afterinsolvency resolution process costs), whereas in other cases, i.e.,Gwhen the secured creditor does not relinquish security, the priorityof claim is lower [Section 53 (1) (e) (ii)] in respect of “any amountunpaid following the enforcement of security interest”. Anotherfeature is that amounts due to the government (i.e., payable intothe Consolidated Fund of India or Consolidated Fund of a State)are ranked in the same manner as those of secured creditorsH

who do not relinquish their security interest [Section 53 (1) (e)(ii)]. [Paras 27 and 28][1244-C-G]

1.2 Section 52 gives an option to secured creditors to eitherrelinquish their security interest, in the liquidation process (theprocedure for which is prescribed in Regulations 21 and 21A ofthe Liquidation Regulations), or proceed to enforce it. In case ofthe latter option, the secured creditor has to first indicate itsoption, within the time prescribed (30 days, in Form C or D ofSchedule II to the Liquidation Regulations). The liquidator maythen, per Section 52 (3), permit the secured creditor to realizesuch dues as are proved to exist, as security debts. Uponclearance by the liquidator, the secured creditor may proceed toenforce its claim, under Section 52 (4). If there is resistance duringthe process, the secured creditor may approach the NCLT[Section 52 (5) and (6)]. Upon enforcement, any excess amountrealized should be tendered to the liquidator [Section 52 (7)]. Itis thus, apparent, that a secured creditor has to take a calculateddecision, at the outset of the liquidation process, whether or notto relinquish its secured interest. In case it does so, its duesrank high in the waterfall mechanism. In case it chooses not torelinquish its security interest, and instead proceeds to enforceit without success or is unable to realize all its dues in the processof enforcement, ithas to then perforce stand lower in priority,and await distribution of assets upon realization of the liquidationestate, by the liquidator, vis-à-vis the balance of its dues. Theprocedure envisioned, thus, takes a nuanced approach for therecovery of a secured creditor’s dues. In case they opt torelinquish the security, their priority is ranked high; in case, theyseek to enforce such security, subject to intimation andverification by the liquidator, they can proceed to do so. In theevent of short fall, they rank lower in priority. This appears to bethe reason, as is clear from the explanation provided in responseto comments as a result of Parliamentary debates in 2018, thatsecured creditors opting not to relinquish their security interestare “presumed that such secured creditors have recovered mostof their dues by enforcement of their security outside theliquidation proceedings”.27 There is sound logic in this, becausethose opting to ‘stand out’ and enforce security interest, are A

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Apermitted to do so; in the event of excess recovery, they have tointimate and hand over such excess for distribution in liquidationproceeding; in case they are unable to recover their dues, forsuch of the dues as are outstanding, such secured creditors areranked low. The provisions of the IBC are carefully thought out,and give options to secured creditors, and balance their interestsBwith those of other creditors in a liquidation proceeding.[Paras 34-38][1249-F-G; 1250-A-F; 1251-A-B; 1256-B]

Moser Baer Karamchari Union thr. President MaheshChand Sharma v. Union of India & Ors. (2023) SCCOnLine SC 547 – referred to.

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1.3 By virtue of Section 56 of the 2003 Act, in the event ofany person’s neglect “to pay any charge for electricity or anysum other than a charge for electricity” payable “in respect ofsupply, transmission or distribution or wheeling of electricity tohim” (after a clear fifteen days’ notice in writing) “and withoutDprejudice to his rights to recover such charge or other sum bysuit”, a licensee (including a distribution licensee such as PVVNL)is empowered to disconnect electricity supply to such consumeror person. By virtue of Section 181(2)(x) of the 2003 Act, StateCommissions are empowered to frame regulations. Section 50Eempowers the State Commissions to frame the “Electricity SupplyCode” to provide for recovery of electricity charges, intervalsfor billing of electricity charges, disconnection of supply ofelectricity for non-payment, etc. These provisions in the 2003Act and the respective Codes form the legal framework forrecovery of dues by various kinds of licensees under the 2003FAct. In the present case, the Uttar Pradesh State Commissionhad framed the 2005 Supply Code. Clause 6.15 of the 2005Code enacts that recovery of arrears shall be in accordance withthe provisions of the Uttar Pradesh Government ElectricalUndertakings (Dues Recovery) Act, 1958. [Paras 39-41]G[1256-B-G]

1.4 A recent ruling of this court in K.C. Ninan v. KeralaState Electricity Board examined the circumstances in which sucha ‘charge’ could be constituted in law. This court held that thecreation of a charge need not necessarily be based on an expressHprovision of the 2003 Act or plenary legislation, but could be created by properly framed regulations authorized under theparent statute. In these circumstances, the argument of PVVNLthat by virtue of Clause 4.3(f)(iv) of the Supply Code, read withthe stipulations in the agreement between the parties, a chargewas created on the assets of the corporate debtor, is merited. Acareful reading of the impugned order of the NCLT also revealsthat this position was accepted. This is evident from the order ofthe NCLAT which clarified that PVVNL also came under thedefinition of ‘secured operational creditor’ as per law. This findingwas not disturbed, but rather affirmed by the impugned order. Inthese circumstances, the conclusion that PVVNL is a securedcreditor cannot be disputed. [Paras 42, 43][1258-A-C]

K.C. Ninan v. Kerala State Electricity Board 2023 SCCOnline SC 603 – relied on.

1.4 The counsel for the liquidator had submitted that duesowed to PVVNL were technically owed to the “government”, andthus occupied a lower position in the order of priority of clearance.The expression “government dues” is not defined in the IBC - itfinds place only in the preamble. However, what constitutes suchdues is spelt out in the ‘waterfall mechanism’ under Section53(1)(e), which inter alia states that, “Any amount due to theCentral Government and the State Government including theamount to be received on account of the Consolidated Fund ofIndia and the Consolidated Fund of the State” ranks lower inpriority to the class of creditors described in Clauses (a) to (d) ofSection 53(1). Thus, there exists a separate enumeration orspecification of the Central Government and State Governmentdues, as a class apart from other creditors, including creditorswho may have secured interest (in respect of which amounts maybe payable to them). The repeated reference of lowering of priorityof debts to the government, on account of statutory tax, or otherdues payable to the Central Government or State Government,or amounts payable into the Consolidated Fund on account ofeither government, in the various reports which preceded theenactment of the IBC, as well as its Preamble, means that thesedues are distinct and have to be treated as separate from thoseowed to secured creditors. The Central Government and StateGovernment are defined by the General Clauses Act, 1897. The AB

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Aformer is defined by Section 3(8), 32 and latter by Section 3 (60).[Para 44][1258-D-G]

Shrikant v. Vasantrao & Ors. [2006] 1 SCR 496 –referred to.

1.5 The specific mention of other class of creditors whoseBdues are statutory, such as dues payable to workmen oremployees, “the provident fund, the pension fund, the gratuityfund” under Section 36(4), which excludes these enumeratedamounts from the liquidation, especially clarifies that not all duesowed under statute are treated as ‘government’ dues. In otherwords, dues payable to statutory corporations which do not fallCwithin the description “amounts due to the central or stategovernment” such as for instance amounts payable to corporationscreated by statutes which have distinct juristic entity but whosedues do not constitute government dues payable or those payableinto the respective Consolidated Funds stand on a differentDfooting. Such corporations may be operational creditors or financialcreditors or secured creditors depending on the nature of thetransactions entered into by them with the corporate debtor. Onthe other hand, dues payable or requiring to be credited to theTreasury, such as tax, tariffs, etc. which broadly fall within theambit of Article 265 of the Constitution are ‘government dues’Eand therefore covered by Section 53(1)(f) of the IBC. PVVNLundoubtedly has government participation. However, that doesnot render it a government or a part of the ‘State Government’.Its functions can be replicated by other entities, both private andpublic. The supply of electricity, the generation, transmission,Fand distribution of electricity has been liberalized in terms of the2003 Act barring certain segments. Private entities are entitledto hold licenses. In this context, it has to be emphasized thatprivate participation as distribution licensees is fairly widespread.For these reasons, it is held that in the present case, dues oramounts payable to PVVNL do not fall within the description ofGSection 53(1)(f) of the IBC. [Paras 46, 47][1261-B-G]

Municipal Commissioner of Dum Dum Municipality & Ors.v. Indian Tourism Development Corporation & Ors. 1995(5) SCC 251 : [1995] 2 Suppl. SCR 433 – relied on.

1.6 Section 53 enacts the waterfall mechanism providing forthe hierarchy or priority of claims of various classes of creditors.The careful design of Section 53 locates amounts payable to securedcreditors and workmen at the second place, after the costs andexpenses of the liquidator payable during the liquidationproceedings. However, the dues payable to the government areplaced much below those of secured creditors and even unsecuredand operational creditors. This design was either not brought tothe notice of the court in Rainbow Papers or was missed altogether.In any event, the judgment has not taken note of the provisions ofthe IBC which treat the dues payable to secured creditors at ahigher footing than dues payable to Central or State Government.The Gujarat Value Added Tax Act, 2003 no doubt creates a chargein respect of amounts due and payable or arrears. It would bepossible to hold [in the absence of a specific enumeration ofgovernment dues as in the present case, in Section 53(1)(e)] thatthe State is to be treated as a ‘secured creditor’. However, theseparate and distinct treatment of amounts payable to securedcreditor on the one hand, and dues payable to the government onthe other clearly signifies Parliament’s intention to treat the latterdifferently- and in the present case, having lower priority. Thisintention is also evident from a reading of the preamble to the Actitself. When an enactment uses two different expressions,they cannot be construed as having the same meaning.[Paras 49-51][1262-G-H; 1263-A-E]

State Tax Officer v. Rainbow Papers Ltd. [2022] 13 SCR808 – distinguished.

Brihan Mumbai Mahanagarpalika & Anr. v. WillingtonSports Club & Ors. [2013] 16 SCR 216 – referred to.

1.7 Section 238 of the IBC overrides the provisions of theElectricity Act, 2003 despite the latter containing two specificprovisions which open with non-obstante clauses (i.e., Section173 and 174). [Para 52][1263-F-G]

Sundaresh Bhatt, Liquidator of ABG Shipyard v. CentralBoard of Indirect Taxes and Customs 2022 SCC OnlineSC 1101; Duncans Industries Ltd. v. AJ Agrochem (2019)9 SCC 725 : [2019] 12 SCR 830 – relied on.

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1230SUPREME COURT REPORTS

AInnoventive Industries Ltd. v. ICICI Bank &Anr. [2017]8 SCR 33; CIT v. Monnet Ispat& Energy Ltd. (2018) 18SCC 786; Ghanashyam Mishra & Sons (P) Ltd. v.Edelweiss Asset Reconstruction Co. Ltd. [2021] 13 SCR737; Jagmohan Bajaj v. Shivam Fragrances Private Limited 2018 SCC OnLine NCLAT 413 – referred to.

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1.8 Section 78 enacts, that when a company whose propertyis subject to charge, fails to register it, the charge holder (or theperson entitled to the charge over the company’s assets) canseek its registration. Section 3 (31) of the IBC defines “securityinterest” in the widest terms. In this court’s opinion, the liquidator Ccannot urge this aspect at this stage, because of the concurrentfindings of the NCLT and the NCLAT that PVVNL is a securedcreditor. [Para 55][1266-E]

Board of Trustees, Port of Mumbai v. Indian OilCorporation [1998] 2 SCR 774; Jitender Nath Singh v.DOfficial Liquidator & Ors. [2012] 13 SCR 339; ICICIBank Ltd. v. Sidco Leathers Ltd. [2006] Supp 1 SCR528; Jalgaon Janta Shakari Bank Ltd. v. JointCommissioner of Sales Tax, Nodal 9, Mumbai & Anr.2022 SCC OnLine Bom 1767; The West Bengal StateElectricity Distribution Company Limited v. Sri VasaviEIndustries Limited & Anr. 2022 SCC Online Cal 1918;Union of India & Ors. v. Shah Goverdhan L. KabraTeachers’ College [2002] Supp 3 SCR 220; UCO Bank& Anr. v. Dipak Debbarma & Ors. [2016] 11 SCR 723;Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCCF17 : [2019] 3 SCR 535; K. Shashidhar v. Indian OverseasBank [2019] 3 SCR 845; Committee of Creditors of EssarSteel India Limited v. Satish Kumar Gupta & Ors. [2019]16 SCR 275; Member, Board of Revenue v. Anthony PaulBenthall [1955] 2 SCR 842 – referred to.

The Bankruptcy Law Reforms Committee Report, (2015),Heading 5.5.8- Establishing Priority of Payout inLiquidation; Report of the Insolvency Law Committee(2020)- Heading 7.3- Realisation or Relinquishmentof Security Interest by a Secured Creditor (pg. 76) –referred to.

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PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMANISPAT PRIVATE LIMITED & ORS.

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Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7976of 2019.

From the Judgment and Order dated 15.05.2019 of the NationalFCompany Law Appellate Tribunal in CAAT No. 639 of 2018.

Pradeep Misra, Daleep Dhyani, Bhuwan Nchand, Suraj Singh,Manoj Kumar Sharma, Advs. for the Appellant.

Arvind Kumar Gupta, Ms. Henna George, Ms. Shivani Sharma,Ms. Purti Gupta, Advs. for the Respondents.

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The Judgment of the Court was delivered by

S. RAVINDRA BHAT, J.

1. The appellant Paschimanchal Vidyut Vitran Nigam Limited(hereinafter, “PVVNL”) is aggrieved by an order of the National H

ACompany Law Appellate Tribunal (hereinafter, “NCLAT”)[1] whichrejected its appeal against an order of the National Company LawTribunal, Allahabad (hereinafter, “NCLT”/ “Adjudicating Authority”),[2]which allowed an application directing the District Magistrate andTehsildar, Muzaffarnagar to immediately release property (which waspreviously attached at the request of the appellant) in favour of theBliquidator of the respondent Raman Ispat Pvt. Ltd. (hereinafter, “corporatedebtor”) for enabling its sale, and after realisation of its value, fordistributing the proceeds in accordance with the provisions of theInsolvency and Bankruptcy Code, 2016 (hereinafter, “IBC” / “Code”).

I. FACTSC2. The parties had entered into an agreement on 11.02.2010 forsupply of electricity. Clause 5 of the agreement provided that:

“The outstanding dues will be a charge on the assets of thecompany. Before sale is made, the outstanding dues will beDcleared and, (in) the alternative the deed to agreements/salewill specifically mention the outstanding dues and the methodof its payment.”

3. PVVNL raised bills for supply of electricity to the corporatedebtor from time to time. Since the dues remained unpaid, PVVNLEattached the corporate debtor’s properties by Order No. 1048, dated12.01.2016. The Tehsildar, Muzaffarnagar by Order No. 1423F dated23.01.2016, restrained transfer of property by sale, donation or any othermode, and also created a charge on the properties. The corporate debtorinitially underwent resolution process under the IBC, however that processwas not successful. It therefore became subject to liquidation.F

4. Under the final bill dated 27.01.2017, the total arrears due were4,32,33,883/-. Of this, the District Collector issued notice for recoveryof outstanding dues to the tune of 2,50,14,080/-, by auction of movableand immovable properties located at Khasara No. 0.4710, on 05.03.2018.The liquidator alleged that unless the attachment orders of the DistrictGCollector, Muzaffarnagar and Tehsildar, Muzaffarnagar were set asideby the NCLT, no buyer would purchase the property of the corporatedebtor due to uncertainty about the authority of the liquidator to sell theproperty. The liquidator also took the plea that PVVNL’s claim would 1 Company Appeal (AT) (Insolvency) No. 639 of 2018, dated 15.05.2019.H2 C.A. No. 88/ALD/2018 in CP No. (IB) 23/ALD/2017, dated 21.08.2018.

be classified in order of priority prescribed under Section 53 of the IBC,and PVVNL would be entitled to pro rata distribution of proceeds alongwith the other secured creditors from sale of liquidation assets.

5. The liquidator’s position ultimately led the NCLAT to direct theDistrict Magistrate and Tehsildar, Muzaffarnagar to immediately releasethe 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 inaccordance with the relevant provisions of the IBC. The NCLAT alsoendorsed NCLT’s reasoning that PVVNL fell within the definition of‘operational creditor’, which could realize its dues in the liquidationprocess in accordance with the law.

II. PVVNL’SARGUMENTS

6. Mr. Pradeep Mishra, learned advocate for PVVNL, submittedthat Sections 173 and 174 of the Electricity Act, 2003 (hereinafter, “2003Act”) had an overriding effect on all other laws except ConsumerProtection Act, 1986; the Atomic Energy Act,1962; and the RailwayAct, 1989. Being a special law relating to all aspects of electricity –generation, transmission, distribution and adjudication of disputes– it hadprimacy over all other laws, including the IBC, which was a ‘general’law dealing with corporate insolvency implemented much later. In termsof the 2003 Act, and the regulations framed under it, including the UttarPradesh Electricity Supply Code, 2005 (hereinafter, “2005 Code”), aspecial mechanism for recovery of electricity dues existed. The rightsof electricity suppliers like PVVNL, therefore, were not subordinateand subject to the ‘priority of claims’ mechanism under the IBC.Therefore, PVVNL could opt to independently stay out of the liquidationprocess and recover its dues.

7. Learned counsel relied on the judgment of this court in Boardof Trustees, Port of Mumbai v. Indian Oil Corporation,[3 ]wherein thiscourt had ruled that port dues, under the Major Port Trust Act, 1963overrode all other claims, including those of secured creditors in liquidationproceedings. Learned counsel urged that Section 238 of IBC could notoverride Sections 173 and 174 of the 2003 Act, since the latter (i.e. theElectricity 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, 45and 56) and the 2005 Code (Clauses 4.3 and 6.15), prescribed the 3 Board of Trustees, Port of Mumbai v. Indian Oil Corporation, 1998 (2) SCR 774.

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Amechanism for recovery of electricity charges. The 2003 Act being a‘special Act’ with a non-obstante clause, would have an overriding effectover the ‘general’ IBC law. This mechanism for speedy recovery ofelectricity dues, had to be given full effect. Thus, the provisions of IBCand the priority of claims under it in liquidation proceedings, were separateand applied in respect of other amounts available for distribution, afterBthe recovery of electricity dues were permitted under the 2003 Act and2005 Code.

9. Learned counsel also relied upon the decision of this court inState Tax Officer v. Rainbow Papers Ltd.,[4] in which this court heldthat by virtue of a security interest created in favour of the governmentCfor tax claims under the Gujarat Value Added Tax Act, 2003, tax authoritiesi.e., the government, was a secured creditor under the IBC. This courtheld that if a resolution plan excluded such tax or statutory dues payableto the government, it would not bein conformity with the provisions ofthe IBC and, as such, would not be binding on the State.

D10. Alternatively, the learned counsel submitted that electricitydues were also ‘security interests’ in favour of electricity serviceproviders. He relied on the definition of ‘secured creditor’ which meant“a creditor in favour of whom security interest is created.”[5] Such‘security interest’ was defined under the IBC as:

E“Right, title or interest or a claim in a property, created infavour of, or provided for a secured creditor by a transactionwhich secures payment or performance of an obligation andincludes mortgage, charge, hypothecation, assignment andencumbrance or any other agreement or arrangementFsecuring payment or performance of any obligation of anyperson.”[6]

11. ‘Claim in a property’ section of the definition could be invokedwhen one secured payment or performance of any obligation under thelaw. Additionally, the term “transfer” was defined under the IBC to mean:

G“Includes sale, purchase, exchange, mortgage, pledge, gift,loan or any other form of transfer of right, title, possessionor lien.”[7]

4 State Tax Officer v. Rainbow Papers Ltd., 2022 (13) SCR 808.

5 Section 3 (30), IBC.

6 Section 3 (31), IBC.

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7 Section 3 (34), IBC.

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 theconcept of ‘security interest’, all claims, including statutory claims arisingin law, against the corporate debtor. Thus, obligations and statutorycharges were also ‘security interests’.

III. LIQUIDATOR’SARGUMENTS

13. Mr. Arvind Kumar Gupta, learned advocate appearing for theliquidator, argued that under the IBC, creditors were classified either assecured or unsecured. Further, a highlight of the IBC was the distinctionbetween the financial and operational creditors, and their differentialtreatment with regards to recovery. He submitted that the BankruptcyLaw Reforms Committee Report,2015 and the UNCITRAL LegislativeGuide on Insolvency Law, stipulate that government dues were not givenpriority under the IBC. This formed the backdrop of the legislation. Infact, the Statement of Objects and Reasons to the IBC stipulates alterationin the priority of payment of government dues.

14. It was argued that in terms of Section 52(3), before realizationof security interest by secured creditors, the liquidator had to verify theexistence of security interest from the records maintained by aninformation utility or by such other means as may be specified by theInsolvency and Bankruptcy Board of India (hereinafter, “Board / IBBI”).[8]The existence of a security interest could be proved by a secured creditorin terms of Regulation 21,IBBI (Liquidation Process) Regulations, 2016(hereinafter, “Liquidation Regulations”).

15. Learned counsel submitted that the registration of any chargewas mandatory under Section 77 of the Companies Act, 2013(corresponding to Section 125 of the erstwhile Companies Act, 1956). Itwas highlighted that Section 48 of the Transfer of Property Act, 1882(hereinafter, “TPA”) dealt with priority of rights, and inter-se prioritiesamongst creditors prevailed in the distribution of assets in liquidationproceedings. Counsel referred to this court’s judgments of Jitender NathSingh v. Official Liquidator & Ors.[9]and ICICI Bank Ltd. v. SidcoLeathers Ltd.[10]

8 The Insolvency and Bankruptcy Board of India is established under Section 188 ofthe IBC. Is powersare enumerated under Section 196.

9 Jitender Nath Singh v. Official Liquidator & Ors., 2012 (13) SCR 339.

10 ICICI Bank Ltd. v. Sidco Leathers Ltd., 2006 Supp (1) SCR 528

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A16. It was submitted that government dues were placed in the‘waterfall mechanism’ under Section 53(1)(e)(i) of the IBC. Learnedcounsel emphasized that even under the old Companies Act, 1956, Section529A provided priority to the debts due to the secured creditors and theworkers, and Section 530 made payment of taxes subject to the priorityembodied in Section 529A. Similarly, priority of debts due to securedBcreditors and workers was reflected under Section 326 of the CompaniesAct, 2013.Section 327 made payment of taxes subject to the priorityembodied in Section 326. It was urged that Section 26E of theSecuritization of Financial Assets and Enforcement of Security InterestAct, 2002 (hereinafter, “SARFAESI Act”) and Section 31B of theCRecovery of Debts Due to Banks and Financial Institutions Act, 1993(hereinafter, “RDDBFI Act”) accorded priority to secured creditors overother dues. The Full Bench judgment of the Bombay High Court inJalgaon Janta Shakari Bank Ltd. v. Joint Commissioner of SalesTax, Nodal 9, Mumbai & Anr.,[11 ]reinforced the priority accorded tosecured creditors under Section 26E of SARFAESI Act.D

17. Learned counsel submitted that electricity dues did not enjoyany priority, and cited High Court rulings, especially the judgment of theCalcutta High Court in The West Bengal State Electricity DistributionCompany Limited v. Sri Vasavi Industries Limited & Anr.[12]It wassubmitted that creation of charge under a law was a matter of factEwhich had to be proved. In the present case, the statute (the 2005 Code)merely enabled recovery of electricity dues as though they were recoveryof arrears of revenue. That did not result in the creation of ‘securityinterest’ in favour of the appellant. Moreover, such interest was notregistered in accordance with the Liquidation Regulations and SectionF77 of the Companies Act, 2013.

18. Learned counsel urged that in case of apparent overlappingbetween the two entries, the doctrine of ‘pith and substance’ had to beapplied to find out the true nature of the legislation and the entry withinwhich it fell – reliance was placed on the decisions of Union of IndiaG& Ors. v. Shah Goverdhan L. Kabra Teachers’ College[13] and UCO

11 Jalgaon Janta Shakari Bank Ltd. v. Joint Commissioner of Sales Tax, Nodal 9,Mumbai & Anr., 2022 SCC OnLine Bom 1767.

12 The West Bengal State Electricity Distribution Company Limited v. Sri Vasavi IndustriesLimited & Anr.,2022 SCC Online Cal 1918

13 Union of India & Ors. v. Shah Goverdhan L. Kabra Teachers’ College, (2002) SuppH(3) SCR 220.

Bank & Anr. v. Dipak Debbarma & Ors.[14]. Having regard to thisprinciple, IBC was thus a special law dealing with the entire subjectmatter of insolvency, bankruptcy and winding up of companies. Itsprovisions were later than those of the 2003 Act. Despite Sections 173and 174 of the 2003 Act, by virtue of Section 238 of IBC, the provisionsof the latter would prevail and have overriding effect. It was submittedthat the law under IBC was constantly evolving since its inception in2016. Reliance was placed on Innoventive Industries Ltd. v. ICICIBank & Anr.,[15]and Swiss Ribbons (P) Ltd. v. Union of India[16]whichupheld the IBC, and emphasized the overriding nature of the enactment,by virtue of Section 238.

IV. ANALYSIS

A. SCHEMEOFTHE IBC

19. The IBC was enacted with the objective of unifying the legalregime on commercial insolvency. Upon a corporate debtor’s default[17]in repayment of a debt,[18] the insolvency resolution process can betriggered when the value of the default crosses the statutory threshold(Section 4); or it may be initiated by the corporate debtor itself or afinancial creditor or operational creditor (Section 6). IBC makes adistinction between debts owed to both these classes of creditors. Afinancial creditor has been defined under Section 5(7) as, “A person towhom a financial debt is owed”. A “financial debt” is defined bySection 5(8) as a debt which is disbursed against consideration for thetime value of money. On the other hand, an operational creditor is one towhom an operational debt is owed. “Operational debt” under Section5(21) is “a claim in respect of provision of goods or services”.

20. Sections 7 and 8 of the IBC control the initiation of insolvencyprocess by financial creditors and operational creditors respectively.The corporate debtor can contest a debt within a stipulated time period.The Adjudicating Authority has to determine the existence of a defaultfrom the records of the information utility or on the basis of evidence 14 UCO Bank & Anr. v. Dipak Debbarma & Ors., (2016) (11) SCR 723.

15 Innoventive Industries Ltd. v. ICICI Bank & Anr., (2017) 8 SCR 33.

16 Swiss 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 whenwhole or any part or instalment of the amount of debt has become due and payable andis not paid by the debtor or the corporate debtor, as the case may be”.

18 Per Section 3(11), which states that a debt is, “A liability of obligation in respect ofa ‘claim’”. A ‘claim’ is inter alia defined under Section 3(6) as, “A right to payment”.

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Afurnished by the creditors, and communicate the same to the corporatedebtor – this initiates the resolution process, which must be completedwithin 180 days from the date of admission of the application (Section12), and can be extended beyond 180 days for a further period of notexceeding 90 days if the committee of creditors (hereinafter, “CoC”)by a vote of 75% of voting shares so decides. Speedy resolution thusBforms the mainstay of the entire resolution process. Upon admissionof the application, a moratorium under Section 14 of the Code is to bedeclared by the Adjudicating Authority followed by a publicannouncement indicating the last date for submission of claims, alongwith the details of the interim resolution professional (hereinafter,C“IRP”). The management of the corporate debtor as a going concernon the instructions of the CoC is vested in the IRP (and later under theRP under Section 28), who is a trained person registered under ChapterIV of IBC, per Section 17. The CoC’s decisions have to be taken by avote of not less than 75% of the voting share of financial creditors.Anyone interested or willing to put the corporate debtor back to itsDrails can, under Section 30, submit a resolution plan to the RP, preparedon the basis of an information memorandum. When such a plan isapproved by the CoC, the Adjudicating Authority has to recordsatisfaction of the same – it then becomes binding on the corporatedebtor as well as its employees, members, creditors, guarantors andEother stakeholders. Immediately upon approval of the resolution plan,the moratorium order passed by the Authority under Section 14 ceasesto have effect.

21. When the resolution process does not yield any success, or noapplication is received, and in certain other situations, the corporate debtorFenters into the liquidation phase. This is provided by Section 33 of theIBC, which is extracted below:

“Section 33 - Initiation of liquidation

(1) Where the Adjudicating Authority, —

G(a) before the expiry of the insolvency resolution processperiod or the maximum period permitted for completion ofthe corporate insolvency resolution process under section 12or the fast track corporate insolvency resolution processunder section 56, as the case may be, does not receive aresolution plan under sub-section (6) of section 30; orH

(b) rejects the resolution plan under section 31 for the non-compliance of the requirements specified therein, it shall—

(i) pass an order requiring the corporate debtor to beliquidated in the manner as laid down in this Chapter;

(ii) issue a public announcement stating that the corporatedebtor is in liquidation; and

(iii) require such order to be sent to the authority with whichthe corporate debtor is registered.

(2) Where the resolution professional, at any time during thecorporate insolvency resolution process but beforeconfirmation of resolution plan, intimates the AdjudicatingAuthority of the decision of the committee of creditors2[approved by not less than sixty-six per cent. of the votingshare] to liquidate the corporate debtor, the AdjudicatingAuthority 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 herebydeclared that the committee of creditors may take the decisionto liquidate the corporate debtor, any time after its constitutionunder sub-section (1) of section 21 and before theconfirmation of the resolution plan, including at any timebefore the preparation of the information memorandum.

(3) Where the resolution plan approved by the AdjudicatingAuthority 4[under section 31 or under sub-section (1) ofsection 54L,] is contravened by the concerned corporatedebtor, any person other than the corporate debtor, whoseinterests are prejudicially affected by such contravention, maymake an application to the Adjudicating Authority for aliquidation 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), if theAdjudicating Authority determines that the corporate debtorhas contravened the provisions of the resolution plan, it shallpass a liquidation order as referred to in sub-clauses (i), (ii)and (iii) of clause (b) of sub-section (1).

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(5) Subject to section 52, when a liquidation order has beenpassed, no suit or other legal proceeding shall be institutedby or against the corporate debtor:

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Provided that a suit or other legal proceeding may be institutedby the liquidator, on behalf of the corporate debtor, with theBprior approval of the Adjudicating Authority.

(6) The provisions of sub-section (5) shall not apply to legalproceedings in relation to such transactions as may be notifiedby the Central Government in consultation with any financialsector regulator.

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(7) The order for liquidation under this section shall be deemedto be a notice of discharge to the officers, employees andworkmen of the corporate debtor, except when the businessof the corporate debtor is continued during the liquidationprocess by the liquidator.”

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22. According to the judgment of this court K. Shashidhar v.Indian Overseas Bank[19] the Adjudicating Authority is, “obligated toinitiate liquidation process under Section 33(1) of the I&B Code.”It was also held that the Parliament did not empower the AdjudicatingAuthority “with the jurisdiction or authority to analyse or evaluateEthe commercial decision of the CoC much less to enquire into thejustness of the rejection of the resolution plan by the dissentingfinancial creditors.” Thus, on occurrence of any eventuality specifiedunder Section 33, the liquidation process has to begin, as a matter ofcourse – there is no choice in the matter. Again, in Committee ofCreditors of Essar Steel India Limited v. Satish Kumar Gupta &FOrs.,[20]this court rejected the argument that the NCLT possessed anydiscretionary 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 affairs of theGcorporate debtor. The RP, appointed to conduct the resolution process,is ordinarily appointed as liquidator. The powers and duties of liquidator 19 K. Shashidhar v. Indian Overseas Bank, 2019 (3) SCR 845.

20 Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors.,H2019 (16) SCR 275.

are prescribed by Section 35[21]of the IBC. It includes verification ofclaims of creditors, evaluation of assets of the corporate debtor, carryingon the business of the corporate debtor, taking into consideration theassets of the corporate debtor, etc. The liquidator has to issue a publicannouncement within 5 days from appointment in a prescribed format;the purpose of public announcement is to call upon creditors and otherspersons to submit their claims in relation to the corporate debtor. Thecreditors of the corporate debtor have to send their claims within 30days from the initiation of the liquidation process. After the receipt ofthe claims, the liquidator has to verify the claims submitted by the creditors(Section 39). The liquidator may also ask the creditors to submit anyevidence in relation to their claims for the purpose of verification. Theliquidator is empowered to either admit or reject the claims on the basisof 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 corporatedebtor within 7 days from such decision (Section 40). The liquidator hasto concurrently determine what constitutes the “liquidation estate”.Section 36 (3) lists out the various assets and claims, etc. which formthe liquidation estate.[22]After the admission of claims, the liquidator hasto determine the value of the claims, for the purpose of distribution ofassets of the corporate debtor.

21 "35. Powers and duties of liquidator.— (1) Subject to the directions of the AdjudicatingAuthority, 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 assets, property, effects and actionableclaims of the corporate debtor;********************* *********************

(d) to take such measures to protect and preserve the assets and properties of thecorporate debtor as he considers necessary; (e) to carry on the business of the corporate debtor for its beneficial liquidation as heconsiders necessary; (f) subject to section 52, to sell the immovable and movable property and actionableclaims of the corporate debtor in liquidation by public auction or private contract, withpower to transfer such property to any person or body corporate, or to sell the same inparcels in such manner as may be specified:

Provided that the liquidator shall not sell the immovable and movable property oractionable claims of the corporate debtor in liquidation to any person who is not eligibleto 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 allrights and interests therein as evidenced in the balance sheet of the corporate debtor oran information utility or records in the registry or any depository recording securities A

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A24. In terms of Regulation 47 of the Liquidation Regulations,liquidation proceedings should be completed within 1 year from the dateof 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 creditorBis not permitted to realize its dues by initiating any proceeding. This is byvirtue of Section 14 (1) (c) which enables the imposition of a moratoriumperiod, during which a secured creditor is precluded from bringing anyaction to foreclose, recover or enforce any security interest. Securedcreditors’ rights are restored only in the event of failure of the insolvencyresolution process, at the stage of liquidation.C

B. THE‘WATERFALLMECHANISM’

26. Section 53 of the IBC, which contains the ‘waterfallmechanism’, provides for the order of distribution of assets. It states asfollows:

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“(1) Notwithstanding anything to the contrary contained inany law enacted by the Parliament or any State Legislature for thetime being in force, the proceeds from the sale of the liquidation assetsshall be distributed in the following order of priority and within suchperiod and in such manner as may be specified, namely:—

E(a) the insolvency resolution process costs and the liquidationcosts paid in full; of the corporate debtor or by any other means as may 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 notFlimited to encumbered assets;

(c) tangible assets, whether movable or immovable; (d) intangible assets including but not limited to intellectual property, securities (includingshares held in a subsidiary of the corporate debtor) and financial instruments, insurancepolicies, 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 transactionsGin accordance with this Chapter; (g) any asset of the corporate debtor in respect of which a secured creditor hasrelinquished security interest; (h) any other property belonging to or vested in the corporate debtor at the insolvencycommencement 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 andamong the following:—

(i) workmen’s dues for the period of twenty-four monthspreceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such securedcreditor has relinquished security in the manner set out insection 52;

(c) wages and any unpaid dues owed to employees other thanworkmen for the period of twelve months preceding theliquidation commencement date; (d) financial debts owed to unsecured creditors; (e) the following dues shall rank equally between and amongthe following:-

(i) any amount due to the Central Government and the StateGovernment including the amount to be received on accountof the Consolidated Fund of India and the Consolidated Fundof a State, if any, in respect of the whole or any part of theperiod of two years preceding the liquidation commencementdate;

(ii) debts owed to a secured creditor for any amount unpaidfollowing 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 undersub-section (1) with equal ranking, if disrupting the order ofpriority under that sub-section shall be disregarded by theliquidator.

(3) The fees payable to the liquidator shall be deductedproportionately from the proceeds payable to each classof recipients under sub-section (1), and the proceeds tothe relevant recipient shall be distributed after suchdeduction.

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AExplanation-For the purpose of this section—

(i) it is hereby clarified that at each stage of the distributionof proceeds in respect of a class of recipients that rankequally, each of the debts will either be paid in full, or will bepaid in equal proportion within the same class of recipients,Bif the proceeds are insufficient to meet the debts in full; and

(ii) the term “workmen’s dues” shall have the same meaningas 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,Cunder the waterfall mechanism is therefore: Firstly, insolvency resolutionprocess costs and the liquidation costs; Secondly, workmen’s dues forthe period of 24 months preceding the liquidation commencement dateand debts owed to a secured creditor in the event such secured creditorhas relinquished security; Thirdly, wages and any unpaid dues owed toDemployees other than workmen for the period of 12 months precedingthe liquidation commencement date; Fourthly, financial debts owed tounsecured creditors; Fifthly, any amount due to the central governmentand the state government and debts owed to a secured creditor for anyamount unpaid following the enforcement of security interest; Sixthly,any remaining debts and dues; Seventhly, preference shareholders; andEEighthly equity shareholders or partners. This hierarchy or order ofpriority 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 securedcreditor “has relinquished security in the manner set out in sectionF52” receive a fairly high priority (immediately after insolvency resolutionprocess costs), whereas in other cases, i.e., when the secured creditordoes not relinquish security, the priority of claim is lower [Section 53(1) (e) (ii)] in respect of “any amount unpaid following the enforcementof security interest”. Another feature is that amounts due to theGgovernment (i.e., payable into the Consolidated Fund of India orConsolidated Fund of a State) are ranked in the same manner as thoseof secured creditors who do not relinquish their security interest [Section53 (1) (e) (ii)].

29. The Bankruptcy Law Reforms Committee Report, 2015, whichled to the framing and later enactment of IBC, pertinently stated that:H

PASCHIMANCHAL VIDYUT VITRAN NIGAM LTD. v. RAMANISPAT PRIVATE LIMITED & ORS. [S. RAVINDRA BHAT, J.]

“The Committee has recommended to keep the right of theCentral and State Government in the distribution waterfall inliquidation at a priority below the unsecured financialcreditors in addition to all kinds of secured creditors forpromoting the availability of credit and developing a marketfor unsecured financing (including the development of bondmarkets). In the long run, this would increase the availabilityof finance, reduce the cost of capital, promote entrepreneurshipand lead to faster economic growth. The government also willbe the beneficiary of this process as economic growth willincrease revenues. Further, efficiency enhancement andconsequent greater value capture through the proposedinsolvency regime will bring in additional gains to both theeconomy and the exchequer.”

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“For the remaining creditors who participate in the collectiveaction of Liquidation, the Committee debated on the waterfallof liabilities that should hold in Liquidation in the new Code.Across different jurisdictions, the observation is that securedcreditors have first priority on the realizations, and that theseare typically paid out net of the costs of insolvency resolutionand Liquidation. In order to bring the practices in India in-line with the global practice, and to ensure that the objectivesof this proposed Code is met, the Committee recommends thatthe waterfall in Liquidation should be as follows:

1. Costs of IRP and liquidation.

2. Secured creditors and Workmen dues capped up to threemonths from the start of IRP.

3. Employees capped up to three months.

4. Dues to unsecured financial creditors, debts payable toworkmen in respect of the period beginning twelve monthsbefore the liquidation commencement date and ending threemonths before the liquidation commencement date;

5. Any amount due to the State Government and the CentralGovernment in respect of the whole or any part of the periodof two years before the liquidation commencement date; any A

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Adebts of the secured creditor for any amount unpaid followingthe enforcement of security interest

6. Remaining debt

7. Surplus to shareholders.”[23]

B30. The explanation to this appears in the Report of the InsolvencyLaw Committee (2020):[24]

“7.3. The Committee noted that the Code aims to promote acollective liquidation process, and towards this end, itencourages secured creditors to relinquish their securityinterest, by providing them second-highest priority in therecovery of their dues, as under Section 53(1)(b). Thus, theyare not treated as ordinary unsecured creditors under theCode, as they would have been under the Companies Act,1956. It was noted that, to some extent, this provision intendsto replicate the benefits of security even where it has beenrelinquished, in order to promote overall value maximisation.However, even if secured creditors realise their securityinterest, they would only recover to the extent of their securityinterest, and would claim any excess dues remaining unpaidunder Section 53(1)(e) of the liquidation waterfall. Thus, theCommittee was of the view that this provision could not havebeen intended to provide secured creditors who relinquishtheir security interest, priority of repayment over their entiredebt regardless of the extent of their security interest, as itwould tantamount to respecting a right that has never existed.Further, if the “debts owed to a secured creditor” is notrestricted to the extent of the security, there would be broadscope for misuse of the priority granted under Section52(1)(b), as even creditors who are not secured to the fullextent of their debt would rely on the mere fact of holdingany form of security, to recover the entire amount of theirunpaid dues in priority to all other stakeholders.

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7.4. On the basis of the above discussion, the Committeeagreed that the priority for recovery to secured creditors under 23 The Bankruptcy Law Reforms Committee Report (2015), Heading 5.5.8 – EstablishingPriority of Payout in Liquidation.

24 Report of the Insolvency Law Committee (2020) – Heading 7.3 – Realisation orHRelinquishment of Security Interest by a Secured Creditor (pg. 76).

Section 53(1)(b)(ii) should be applicable only to the extent ofthe value of the security interest that is relinquished by thesecured creditor. The Committee was of the opinion that thisissue stands clarified in terms of the reasoning provided aboveand does not necessitate any further amendment to theprovisions of the Code.”

31. The Preamble to the IBC expressly recognizes the shift in thelaw, with respect to ordering priority of claims, especially with respect togovernment dues:

“An Act to consolidate and amend the laws relating toreorganization and insolvency resolution of corporate persons,partnership firms and individuals in a time bound mannerfor maximization of value of assets of such persons, to promoteentrepreneurship, availability of credit and balance theinterests of the stakeholders including alteration in the orderof priority of payment of Government dues and to establishan Insolvency and Bankruptcy Board of India, and for mattersconnected therewith or incidental thereto.”

32. In response to the comments received on this aspect fromParliamentary Debates on the Amendment Act in the Sixteenth LokSabha Session in 2018, the Report of the Insolvency Law Committeestated:

“Section 53 of the Code places secured creditors who haverelinquished their security above unsecured financialcreditors. Thus, clear distinction has been drawn betweenunsecured and secured creditors who join the liquidationproceedings for the purpose of the payment waterfall in caseof liquidation. Unsecured creditors are ranked above securedcreditors who have unpaid debts following enforcement ofsecurities as it is presumed that such secured creditors haverecovered most of their dues by enforcement of their securityoutside the liquidation proceedings. Moreover, as stated inthe BLRC Report, protection of dues of unsecured creditorsis intentional in order to encourage the market for corporatebonds and other unsecured debt.

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relinquished their security, second only to IRP costs underthe payment waterfall provided in section 53 of the Code.”[25]

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33. The rationale for placing secured creditors who relinquishtheir security, higher in priority, is found upon a conjoint reading of Sections52 and 53. Section 52 reads as follows:

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“Secured creditor in liquidation proceedings.

(1) A secured creditor in the liquidation proceedings may—

(a) relinquish its security interest to the liquidation estate andreceive proceeds from the sale of assets by the liquidator inthe manner specified in section 53; or C

(b) realise its security interest in the manner specified in thissection.

(2) Where the secured creditor realises security interest underclause (b) of sub-section (1), he shall inform the liquidatorDof such security interest and identify the asset subject to suchsecurity interest to be realised.

(3) Before any security interest is realised by the securedcreditor under this section, the liquidator shall verify suchsecurity interest and permit the secured creditor to realise onlyEsuch security interest, the existence of which may be provedeither—

(a) by the records of such security interest maintained by aninformation utility; or (b) by such other means as may be specified by the Board.

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(4) A secured creditor may enforce, realise, settle, compromiseor deal with the secured assets in accordance with such lawas applicable to the security interest being realised and to thesecured creditor and apply the proceeds to recover the debtsdue to it.

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(5) If in the course of realising a secured asset, any securedcreditor faces resistance from the corporate debtor or anyperson connected therewith in taking possession of, sellingor otherwise disposing of the security, the secured creditor H25 Report of the Insolvency Law Committee (2018) (pg. 87).

may make an application to the Adjudicating Authority tofacilitate the secured creditor to realise such security interestin accordance with law for the time being in force.

(6) The Adjudicating Authority, on the receipt of an applicationfrom a secured creditor under sub-section (5) may pass suchorder as may be necessary to permit a secured creditor torealise security interest in accordance with law for the timebeing in force.

(7) Where the enforcement of the security interest under sub-section (4) yields an amount by way of proceeds which is inexcess of the debts due to the secured creditor, the securedcreditor shall—

(a) account to the liquidator for such surplus; and (b) tender to the liquidator any surplus funds received fromthe enforcement of such secured assets.

(8) The amount of insolvency resolution process costs, duefrom secured creditors who realise their security interests inthe manner provided in this section, shall be deducted fromthe proceeds of any realisation by such secured creditors,and they shall transfer such amounts to the liquidator to beincluded in the liquidation estate.

(9) Where the proceeds of the realisation of the secured assetsare not adequate to repay debts owed to the secured creditor,the unpaid debts of such secured creditor shall be paid bythe 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 eitherrelinquish their security interest, in the liquidation process (the procedurefor which is prescribed in Regulations 21 and 21A of the LiquidationRegulations[26]), 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 asecured 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 Central Registry of Securitisation AssetReconstruction and Security Interest of India.

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Asecured 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 creditorto realize such dues as are proved to exist, as security debts. Uponclearance by the liquidator, the secured creditor may proceed to enforceits claim, under Section 52 (4). If there is resistance during the process,Bthe secured creditor may approach the NCLT [Section 52 (5) and (6)].Upon enforcement, any excess amount realized should be tendered tothe liquidator [Section 52 (7)].

35. It is thus, apparent, that a secured creditor has to take acalculated decision, at the outset of the liquidation process, whether orCnot to relinquish its secured interest. In case it does so, its dues rankhigh in the waterfall mechanism. In case it chooses not to relinquish itssecurity interest, and instead proceeds to enforce it without success oris unable to realize all its dues in the process of enforcement, it has tothen perforce stand lower in priority, and await distribution of assetsDupon realization of the liquidation estate, by the liquidator, vis-à-visthe balance of its dues.

36. The procedure envisioned, thus, takes a nuanced approachfor the recovery of a secured creditor’s dues. In case they opt to relinquishthe security, their priority is ranked high; in case, they seek to enforceEsuch security, subject to intimation and verification by the liquidator, theycan 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 providedin 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 theirFdues by enforcement of their security outside the liquidationproceedings”.[27] There is sound logic in this, because those opting to 21A. Presumption of security interest. (1) A secured creditor shall inform the liquidatorof its decision to relinquish its security interest to the liquidation estate or realise itssecurity interest, as the case may be, in Form C or Form D of Schedule II:GProvided that, where a secured creditor does not intimate its decision within thirty daysfrom the liquidation commencement date, the assets covered under the security interestshall be presumed to be part of the liquidation estate.(2) Where a secured creditor proceeds to realise its security interest, it shall pay asmuch towards the amount payable under clause (a) and sub-clause (i) of clause (b) ofsub-section (1) of section 53, as it would have shared in case it had relinquished thesecurity interest.”H27 Supra note 25.

‘stand out’ and enforce security interest, are permitted to do so; in theevent of excess recovery, they have to intimate and hand over suchexcess for distribution in liquidation proceeding; in case they are unableto recover their dues, for such of the dues as are outstanding, suchsecured creditors are ranked low.

37. The recent judgment of this court, in Moser Baer KaramchariUnion thr. President Mahesh Chand Sharma v. Union of India &Ors[28] had dealt with the waterfall provisions of the IBC at length, albeitin the context of priority of claims of workmen’s dues. This court observedas follows:

“66. …Sub-section (1) to Section 52 of the Code gives twooptions to a secured creditor. First, the secured creditor in aliquidation proceeding may relinquish its security interest andreceive the proceeds from the sale of assets by the liquidatorin the manner specified in Section 53 of the Code. The secondoption is to realise the security interest, but in the mannerspecified in Section 52 of the Code. Sub-section (2) to Section52 of the Code states that where the secured creditor realisesthe security interest, he shall inform the liquidator of suchsecurity interest and identify the asset subject to such securityinterest to be realised. The liquidator is to verify the securityinterest and shall permit the secured creditor to realise suchsecurity interest, which is proved either by records of suchsecurity interest maintained by an information utility, or bysuch other means as may be specified by the Board. Sub-section (4) to Section 52 of the Code states that the securedcreditor may enforce, realise, settle, compromise or deal withthe secured asset in accordance with such law as applicableto the security interest being realised and to the securedcreditor. The secured creditor is to accordingly apply theproceeds to recover the debts due to him. We need not refer toSub-section (5) to Section 52 of the Code as it relates to theaction which the secured creditor may take if he facesresistance from the corporate debtor or any other personconnected therewith in taking possession of, selling orotherwise disposing off the security. Sub-section (6) to Section 28 Moser Baer Karamchari Union thr. President Mahesh Chand Sharma v. Union ofIndia & Ors.,2023 SCC OnLine SC 547.

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52 of the Code applies when an adjudicating authority is inreceipt of an application Under Sub-section (5) to Section 52of the Code. Sub-section (7) to Section 52 of the Code,however, is important as it states that where on enforcementof the security interest, an amount by way of proceeds is inexcess of the debts due to the secured creditor, the securedcreditor shall account for and pay the excess/surplus amountto the liquidator from enforcement of such secured assets.The amount of insolvency resolution process costs, due fromsecured creditors who realise their security interests in themanner provided in the section, are to be deducted from theproceeds of any realisation by such secured creditors. Theyare to be transferred and included in the liquidation estate.Sub-section (9) to Section 52 of the Code states that whereproceeds for realisation of the secured assets are not adequateto repay the debts owed to the secured creditor, the unpaiddebts of such secured creditor shall be paid by the liquidatorin the manner specified in Clause (e) to Sub-section (1) toSection 53 of the Code.

67. To protect the interest of the workmen where the securedcreditor does not relinquish its security interest to fall UnderSection 53 of the Code, Regulation 21A of the Insolvencyand Bankruptcy Board of India (Liquidation Process)Regulations, 2016 has been enacted, and it requires that thesecured creditor, who opts to realise its security interest asper Section 52 of the Code, has to pay as much towards theamount payable under the Clause (a) and Sub-clause (i) toClause (b) of Sub-section (1) to Section 53 of the Code to theliquidator within the time and the manner stipulated therein.The workmen’s dues, even when the secured creditor opts toproceed Under Section 52 of the Code, are therefore protectedin terms of Sub-clause (b) of Sub-section (1) to Section 53 ofthe Code.

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69. We now turn our attention to Section 53 of the Code whichbegins with a non-obstante Clause and states thatnotwithstanding anything to the contrary contained in anylaw enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale ofliquidation assets shall be distributed in the order of priority,which is stipulated, and within such period and such manneras may be specified. The consequence of Sub-section (1) toSection 53 of the Code is that it will override the rights ofparties, including the secured creditor, when the said provisionapplies. Section 53 of the Code is the complete andcomprehensive code which ensures collection of assets andthen provides the manner in which the creditors are to bepaid. Even the rights of the secured creditor falling UnderSection 53 of the Code to enforce, realise, settle, compromiseor deal with the secured assets as applicable to the securityinterest are diluted and compromised.

70. Clause (a) to Sub-section (1) to Section 53 deals withinsolvency resolution process costs and the liquidation costswhich are to be paid in full. No grievance or issue can beraised in respect of the said clause. Clause (b) to Sub-section(1) to Section 53 states that the debts due in the form ofworkmen’s dues for a period of twenty four months precedingthe liquidation commencement date and the debts owed to thesecured creditor in the event such secured creditor hasrelinquished security in the manner set out in Section 52 ofthe Code shall rank equally between and amongst theworkmen and the secured creditors. The Explanation to Section53 of the Code states that ‘workmen’s dues’ shall have thesame meaning as assigned to it in Section 326 of theCompanies Act, 2013. In other words, Explanation to Section326 of the Companies Act, 2013 has been incorporated andapplies to the waterfall mechanism as prescribed in Clause(b) to Sub-section (1) to Section 53 of the Code. What issignificant here is that under Clause (b) to Sub-section (1) toSection 53 of the Code, the workmen’s dues are for the period of twenty-four months preceding the liquidationcommencement date. The liquidation commencement date, asdefined in terms of Sub-section (17) to Section 5 of the Code,is much earlier in point of time and need not coincide withthe date of winding up. This is in the interest of the workmen.Clause (i) of Explanation to Section 53 of the Code statesthat where the distribution of proceeds in respect of class of AB

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recipients that rank equally, each of the debts would be paideither in full or would be paid in equal proportion within thesame class of recipients, if the proceeds are insufficient tomeet the debts in full. Ex facie, the Clause is very just andfair. It is to be noted that the wages and unpaid dues owed toemployees other than the workmen fall in Clause (c), whichis below Clause (b) to Sub-section (1) to Section 53 of theCode. They are to be paid wages and unpaid dues only for aperiod of twelve months preceding the liquidationcommencement date, and that too only if surplus funds areavailable after making payment in terms of Clause (a) and(b) of Sub-section (1) to Section 53 of the Code. Clause (d)of Sub-section (1) to Section 53 of the Code relates to financialdebts owed to unsecured creditors. The amounts due to theCentral Government and the State Government, etc., and thedebts owed to a secured creditor for any amount that remainsunpaid following the enforcement of security interest, havebeen clubbed together in Clause (e) of Sub-section (1) toSection 53 of the Code, and have to be ranked equallybetween and among both of them. The remaining debts anddues fall in Clause (f) of Sub-section (1) to Section 53 of theCode. Preference shareholders fall under Clause (g) of Sub-section (1) to Section 53 of the Code, and equity shareholdersor partners fall under Clause (h) of Sub-section (1) to Section53 of the Code. Sub-section (2) to Section 53 of the Codestates that any contractual arrangements between recipientsUnder Sub-section (1) with equal ranking, if disrupting theorder of priority under the said Sub-section will bedisregarded by the liquidator.

71. The waterfall mechanism is based on a structuredmathematical formula, and the hierarchy is created in termsof payment of debts in order of priority with severalqualifications, striking down any one of the provisions orrearranging the hierarchy in the waterfall mechanism maylead to several trips and disrupt the working of the equilibriumas a whole and stasis, resulting in instability. Every changein the waterfall mechanism is bound to lead to cascadingeffects on the balance of rights and interests of the securedcreditors, operational creditors and even the Central and State

Governments. Depending upon the facts, in some cases, thewaterfall mechanism in the Code may be more beneficial thanthe hierarchy provided Under Section 326 of the CompaniesAct, 2013 and vice-versa. Therefore, we hesitate and do notaccept the arguments of the Petitioners.

72. The Code is based on the organic evolution of law and isa product of an extensive consultative process to meet therequirements of the Code governing liquidation. It introduceda comprehensive and time-bound framework to maximise thevalue of assets of all persons and balance the interest of thestakeholders. The guiding principle for the Code in settingthe priority of payments in liquidation was to bring thepractices in India in line with global practices. In the waterfallmechanism, after the costs of the insolvency resolution processand liquidation, secured creditors share the highest priorityalong with a defined period of dues of the workmen. Theunpaid dues of the workmen are adequately and significantlyprotected in line with the objectives sought to be achieved bythe Code and in terms of the waterfall mechanism prescribedby Section 53 of the Code. In either case of relinquishment ornon-relinquishment of the security by the secured creditor,the interests of workmen are protected under the Code. Infact, the secured creditors are taking significant hair-cut andworkmen are being compensated on an equitable basis in ajust and proper manner as per Section 53 of the Code. TheCode balances the rights of the secured creditors, who arefinancial institutions in which the general public has investedmoney, and also ensures that the economic activity and revivalof a viable company is not hindered because it has sufferedor fallen into a financial crisis. The Code focuses on bringingadditional gains to both the economy and the exchequerthrough efficiency enhancement and consequent greater valuecapture. In economic matters, a wider latitude is given to thelaw- maker and the Court allows for experimentation in suchlegislations based on practical experiences and otherproblems seen by the law-makers. In a challenge to suchlegislation, 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 and ex A

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Afacie harsh and unequitable as to classify as manifestlyarbitrary, these would be interfered with by the court.”

38. It is hence clear that the provisions of the IBC are carefullythought out, and give options to secured creditors, and balance theirinterests with those of other creditors in a liquidation proceeding.

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C. RECOVERYMECHANISMUNDERTHE 2003 ACTAND 2005 CODE

39. By virtue of Section 56 of the 2003 Act, in the event of anyperson’s neglect “to pay any charge for electricity or any sum otherthan a charge for electricity” payable “in respect of supply,transmission or distribution or wheeling of electricity to him” (afterCa clear fifteen days’ notice in writing)”and without prejudice to hisrights to recover such charge or other sum by suit”, a licensee(including a distribution licensee such as PVVNL) is empowered todisconnect electricity supply to such consumer or person.

40. By virtue of Section 181(2)(x) of the 2003 Act, StateDCommissions are empowered to frame regulations. Section 50 empowersthe State Commissions to frame the “Electricity Supply Code” to providefor recovery of electricity charges, intervals for billing of electricitycharges, disconnection of supply of electricity for non-payment, etc.These provisions in the 2003 Act and the respective Codes form theElegal framework for recovery of dues by various kinds of licensees underthe 2003 Act. In the present case, the Uttar Pradesh State Commissionhad framed the 2005 Supply Code. Clause 4.3 (f) (iv) of the 2005 Codeis relevant, which inter alia provides as follows:

“The outstanding dues will be first charge on the assets ofFthe company, and the licensee shall ensure that this is enteredin an agreement with new applicant.”

41. Clause 6.15 of the 2005 Code enacts that recovery of arrearsshall be in accordance with the provisions of the Uttar PradeshGovernment Electrical Undertakings (Dues Recovery) Act, 1958:

G“6.15 Recovery of Arrears

(a) The payments due to the Licensee shall be recovered asper provision of Section 56 of the Act, and arrears of landrevenue as per the provisions of the U.P. GovernmentElectrical Undertaking (Dues Recovery) Act, 1958, asamended from time to time.

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(b) Notwithstanding anything contained in any other law forthe time being in force, no sum due from any consumer shallbe recoverable after the period of two years from the datewhen such sum became first due unless such sum has beenshown continuously as recoverable as arrear of charges ofelectricity supplied, and the licensee shall not cut off the supplyof the electricity.

(Explanation: The date from which such charges becomes ‘firstdue’, needs to be correctly interpreted. If as a result of regularmeter reading / inspection of installation of consumer, suchcharges / penalties levied as per this code or tariff schedule,shall become first due after 15 days of receipt of such a billby consumer, and such bill shall be provided to the consumernot later than two billing cycle for that category of consumer).”

42. As previously stated above, the corporate debtor entered intoan agreement with PVVNL for supply of electricity on 11.02.2010 whichprovided that outstanding electricity dues would constitute a ‘charge’ onits assets.[29] This was in accordance with Clause 4.3(f)(iv) of the 2005Code. Clause 8 of the agreement[30] also mentioned that the parties wouldbe governed by the 2003 Act.

43. A recent ruling of this court in K.C. Ninan v. Kerala StateElectricity Board[31]examined 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 premisescannot be made liable for the outstanding dues of the previousowner since electricity arrears do not automatically become acharge over the premises. Such an action is permissible onlywhere the statutory conditions of supply authorise the recoveryof outstanding electricity dues from a subsequent purchaserclaiming fresh connection of electricity, or if there is an expressprovision of law providing for creation of a statutory chargeupon 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 theElectricity Act, 2003 with all its amendments, various other laws of India for the timebeing in force, but not limited to various regulations of UPERC, as applicable to theState of U.P. and shall be subject to the jurisdiction of the Court subordinate to HighCourt of Judicature of Allahabad.”

31 K.C. Ninan v. Kerala State Electricity Board, 2023 SCC Online SC 603.

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AThis court held that the creation of a charge need not necessarilybe based on an express provision of the 2003 Act or plenary legislation,but could be created by properly framed regulations authorized underthe parent statute. In these circumstances, the argument of PVVNLthat by virtue of Clause 4.3(f)(iv) of the Supply Code, read with thestipulations in the agreement between the parties, a charge was createdBon the assets of the corporate debtor, is merited. A careful reading of theimpugned order of the NCLT also reveals that this position was accepted.This is evident from the order of the NCLAT which clarified that PVVNLalso came under the definition of ‘secured operational creditor’ as perlaw. This finding was not disturbed, but rather affirmed by the impugnedCorder. In these circumstances, the conclusion that PVVNL is a securedcreditor cannot be disputed.

44. The counsel for the liquidator had submitted that dues owedto PVVNL were technically owed to the “government”, and thus occupieda lower position in the order of priority of clearance. The expressionD“government dues” is not defined in the IBC - it finds place only in thepreamble. However, what constitutes such dues is spelt out in the‘waterfall mechanism’ under Section 53(1)(e), which inter alia statesthat, “Any amount due to the Central Government and the StateGovernment including the amount to be received on account of theConsolidated Fund of India and the Consolidated Fund of the State”Eranks lower in priority to the class of creditors described in Clauses (a)to (d) of Section 53(1). Thus, there exists a separate enumeration orspecification of the Central Government and State Government dues,as a class apart from other creditors, including creditors who mayhave secured interest (in respect of which amounts may be payableto them). The repeated reference of lowering of priority of debts toFthe government, on account of statutory tax, or other dues payable tothe Central Government or State Government, or amounts payableinto the Consolidated Fund on account of either government, in thevarious reports which preceded the enactment of the IBC, as well asits Preamble, means that these dues are distinct and have to be treatedGas separate from those owed to secured creditors. The CentralGovernment and State Government are defined by the General ClausesAct, 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 theGovernor General or the Governor General in Council, as the case may be; and shallHinclude,—

3 (60).[33] The distinction between the governments has been recognizedand maintained by previous decisions of this court. For instance, inShrikant v. Vasantrao & Ors.,[34] this court underlined that while anentity or corporation may be “State” under Article 12 of the Constitutionof India, nevertheless, its distinct entity, for other purposes, is alwaysmaintained, and fact-dependent:

“Both may answer the definition of ‘State’ under Article 12for the limited purpose of Part-III of the Constitution. Further,the very inclusive definition of ‘State’ under Article 12 byreferring to Government of India, the Government of each of

(i) in relation to functions entrusted under sub-section (1) of section 124 of theGovernment of India Act, 1935, to the Government of a Province, the ProvincialGovernment acting within the scope of the authority given to it under that subsection;and

(ii) in relation to the administration of a Chief Commissioner’s Province, the ChiefCommissioner 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 theauthority given to it under that clause; 1***

(ii) in relation to the administration of a Part C State 2[before the commencement of theConstitution (Seventh Amendment) Act, 1956], the Chief Commissioner or the LieutenantGovernor or the Government of a neighbouring State or other authority acting withinthe scope of the authority given to him or it under article 239 or article 243 of theConstitution, as the case may be; and

(iii) in relation to the administration of a Union territory, the administrator thereofacting 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 PartB State, the authority or person authorised at the relevant date to exercise executivegovernment in the corresponding Acceding State, and in a Part C State, the CentralGovernment; 1***

(b) as respects anything done 2[after the commencement of the Constitution and beforethe commencement of the Constitution (Seventh Amendment) Act, 1956] , shall mean, ina 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 Unionterritory, the Central Government; and shall, in relation to functions entrusted underarticle 258A of the Constitution to the Government of India, include the CentralGovernment acting within the scope of the authority given to it under that article”34 Shrikant v. Vasantrao &Ors ., 2006 (1) SCR 496

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SUPREME COURT REPORTS

Athe States and the local and other authorities, makes it clearthat a ‘State Government’ and a local or other authorities,are different and that they fall under a common definitiononly for the purpose of Part-III of the Constitution. This Courthas consistently refused to apply the enlarged definition of‘State’ given in Part-III (and Part-IV) of the Constitution, forBinterpreting the words ‘State’ or ‘State Government’ occurringin other parts of the Constitution. While the term “State” mayinclude a State Government as also statutory or otherauthorities for the purposes of part-III (or Part- IV) of theConstitution, the term “State Government” in its ordinary senseCdoes not encompass in its fold either a local or statutoryauthority”.

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45. The judgment of this court, in Municipal Commissioner ofDum Dum Municipality & Ors. v. Indian Tourism DevelopmentCorporation & Ors.,[35]noticed that, “In the case of major publicDutilities, statutory corporations were created under differentenactments”, and went on to enumerate some examples such as RoadTransport Corporations, Electricity Boards under the Electricity SupplyAct, 1948 and so on. The court observed that:

“With a view to enable these statutory corporations andEcompanies to carry on the activity which was hitherto carriedon by the governments, the relevant properties, assets andliabilities were transferred to such new corporations. Theywere supposed to operate on business lines, pay taxes andjustify their creation and constitution. These corporations,whether created under the statute or registered under theFCompanies Act are distinct juristic entities owning their ownproperties, having their own fund, capable of borrowing andlending monies and entering into contracts like any othercorporation. In many cases, the entire share capital of thesecorporations is owned by the Government whether CentralGor State. In some cases, the major share holding is of theGovernment with some private share holding as well. In caseof some statutory corporations, the enactment creating themdid not provide for any share capital, though it was made a 35 Municipal Commissioner of Dum Dum Municipality & Ors. v. Indian TourismHDevelopment Corporation & Ors., 1995 (5) SCC 251.

body corporate with all the necessary and incidental powersthat go with such concept. The International AirportsAuthority is one such corporation created under the Act withno share capital but which has its own properties, its ownfund, accounts, employees and capable of lending andborrowing and entering into contracts.”

46. The specific mention of other class of creditors whose duesare statutory, such as dues payable to workmen or employees, “theprovident fund, the pension fund, the gratuity fund” under Section36(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 corporationswhich do not fall within the description “amounts due to the central orstate government” such as for instance amounts payable to corporationscreated by statutes which have distinct juristic entity but whose dues donot constitute government dues payable or those payable into therespective Consolidated Funds stand on a different footing. Suchcorporations may be operational creditors or financial creditors or securedcreditors depending on the nature of the transactions entered into bythem with the corporate debtor. On the other hand, dues payable orrequiring to be credited to the Treasury, such as tax, tariffs, etc. whichbroadly fall within the ambit of Article 265 of the Constitution are‘government dues’ and therefore covered by Section 53(1)(f) of theIBC.

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 ofelectricity has been liberalized in terms of the 2003 Act barring certainsegments. Private entities are entitled to hold licenses. In this context, ithas to be emphasized that private participation as distribution licenseesis 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 ofSection 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 theGujarat Value Added Tax Act, 2003 which enacted that any amountpayable towards tax or penalty by any person would constitute a ‘first A

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Acharge’ on the property of such dealer or person. The corporate debtorhad defaulted in payment of its tax dues and recovery proceedings hadbeen initiated. In the meanwhile, insolvency proceedings had commenced.During the resolution process, the State tax authorities claimed that thedues payable had to be accrued previously and relied upon Section 48, inaddition to Section 53 of the IBC. The State contended that the non-Bobstante clause in the state enactment and the non-obstante clause inthe IBC operated at different fields, and the State had to be treated as a‘secured creditor’ by virtue of Section 48 of the state act. This wasrejected by the NCLT and the NCLAT. However, this court took note ofSections 30 and 31 of the IBC and certain other provisions and held thatCNCLT had erred in its observations. It was held that:

“56. Section 48 of the GVAT Act is not contrary to orinconsistent with Section 53 or any other provisions of theIBC. Under Section 53(1)(b)(ii), the debts owed to a securedcreditor, which would include the State under the GVAT Act,Dare to rank equally with other specified debts including debtson account of workman’s dues for a period of 24 monthspreceding the liquidation commencement date.

57. As observed above, the State is a secured creditor underthe GVAT Act. Section 3(30) of the IBC defines secured creditorEto mean a creditor in favour of whom security interest iscredited. Such security interest could be created by operationof law. The definition of secured creditor in the IBC does notexclude any Government or Governmental Authority.

58. We are constrained to hold that the Appellate AuthorityF(NCLAT) and the Adjudicating Authority erred in law inrejecting the application/appeal of the appellant. As observedabove, delay in filing a claim cannot be the sole ground forrejecting the claim.”

49. Rainbow Papers(supra) did not notice the ‘waterfallGmechanism’ under Section 53 – the provision had not been adverted toor extracted in the judgment. Furthermore, Rainbow Papers (supra)wasin the context of are solution process and not during liquidation. Section53, as held earlier, enacts the waterfall mechanism providing for thehierarchy or priority of claims of various classes of creditors. The carefuldesign of Section 53 locates amounts payable to secured creditors andHworkmen at the second place, after the costs and expenses of the liquidator payable during the liquidation proceedings. However, the duespayable to the government are placed much below those of securedcreditors and even unsecured and operational creditors. This design waseither not brought to the notice of the court in Rainbow Papers(supra)orwas missed altogether. In any event, the judgment has not taken note ofthe provisions of the IBC which treat the dues payable to securedcreditors at a higher footing than dues payable to Central or StateGovernment.

50. The Gujarat Value Added Tax Act, 2003 no doubt creates acharge in respect of amounts due and payable or arrears. It would bepossible to hold [in the absence of a specific enumeration of governmentdues as in the present case, in Section 53(1)(e)] that the State is to betreated as a ‘secured creditor’. However, the separate and distincttreatment of amounts payable to secured creditor on the one hand, anddues payable to the government on the other clearly signifies Parliament’sintention to treat the latter differently - and in the present case, havinglower priority. As noticed earlier, this intention is also evident from areading of the preamble to the Act itself.

51. According to the principles of statutory interpretation, whenan enactment uses two different expressions, they cannot be construedas having the same meaning. It was held in Member, Board of Revenuev. Anthony Paul Benthall[36]that:

“When two words of different import are used in a statute, intwo consecutive provisions, it would be difficult to maintainthat they are used in the same sense…”

This idea is reflected in a subsequent judgment in Brihan MumbaiMahanagarpalika & Anr. v. Willington Sports Club & Ors.[37]

52. The views expressed by the present judgment finds support inthe decision reported as Sundaresh Bhatt, Liquidator of ABG Shipyardv. Central Board of Indirect Taxes and Customs[38]. In that case, Section142A of the Customs Act 1962 was in issue – authorities had submittedthat dues payable to it were to be treated as ‘first charge’ on the property 36 Member, Board of Revenue v. Anthony Paul Benthall(1955) 2 SCR 842.

37 Brihan Mumbai Mahanagarpalika & Anr. v. Willington Sports Club & Ors., (2013)

(16) SCR 216.

38 Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes andCustoms, 2022 SCC Online SC 1101.

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Aof the assessee concerned. In the resolution process, it was argued thatthe 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, may beanswered as under:

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(a) Whether the provisions of the IBC would prevail over theCustoms Act, and if so, to what extent?

The IBC would prevail over the Customs Act, to the extentthat once moratorium is imposed in terms of Sections 14 or33(5) of the IBC as the case may be, the respondent authorityonly has a limited jurisdiction to assess/determine the quantumof customs duty and other levies. The respondent authoritydoes not have the power to initiate recovery of dues by meansof sale/confiscation, as provided under the Customs Act.

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(b) Whether the respondent could claim title over the goodsand issue notice to sell the goods in terms of the Customs Actwhen the liquidation process has been initiated?

Answered in negative.

56. On the basis of the above discussions, following are ourconclusions:

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(ii) After such assessment, the respondent authority has tosubmit its claims (concerning customs dues/operational debt)in terms of the procedure laid down, in strict compliance ofthe time periods prescribed under the IBC, before theadjudicating authority.

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(iii) In any case, the IRP/RP/liquidator can immediately securegoods from the respondent authority to be dealt withappropriately, in terms of the IBC.”

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Similarly, in Duncans Industries Ltd. v. AJ Agrochem[39], Section16G of the Tea Act, 1953 which required prior consent of the CentralGovernment (for initiation of winding up proceedings) was held to beoverridden by the IBC. In a similar manner, it is held that Section 238 ofthe IBC overrides the provisions of the Electricity Act, 2003 despite thelatter containing two specific provisions which open with non-obstanteclauses (i.e., Section 173 and 174). The position of law with respect toprimacy of the IBC, is identical with the position discussed in SundareshBhatt and Duncan Industries (supra) [refer also: InnoventiveIndustries (supra), CIT v. Monnet Ispat & Energy Ltd.[40], GhanashyamMishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.[41],and Jagmohan Bajaj v. Shivam Fragrances Private Limited[42]].

53. In view of the above discussion, it is held that the reliance onRainbow Papers (supra) is of no avail to the appellant. In this court’sview, that judgment has to be confined to the facts of that case alone.

D. EFFECTOF SECTION 77 OFTHE COMPANIESACT

54. Lastly, the liquidator had urged that without registration ofcharge, the same was unenforceable under liquidation proceedings.Section 77 of the Companies Act, 2013reads as follows:

“77. Duty to register charges, etc.—(1) It shall be the duty ofevery company creating a charge within or outside India, onits property or assets or any of its undertakings, whethertangible or otherwise, and situated in or outside India, toregister the particulars of the charge signed by the companyand the charge-holder together with the instruments, if any,creating such charge in such form, on payment of such feesand in such manner as may be prescribed, with the Registrarwithin thirty days of its creation: Provided that the Registrarmay, on an application by the company, allow suchregistration to be made within a period of three hundred daysof such creation on payment of such additional fees as maybe prescribed: Provided further that if registration is not madewithin a period of three hundred days of such creation, thecompany shall seek extension of time in accordance with 39 Duncans 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

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section 87: Provided also that any subsequent registration ofa charge shall not prejudice any right acquired in respect ofany property before the charge is actually registered.

(2) Where a charge is registered with the Registrar under sub-section (1), he shall issue a certificate of registration of suchBcharge in such form and in such manner as may be prescribedto the company and, as the case may be, to the person inwhose favour the charge is created.

(3) Notwithstanding anything contained in any other law forthe time being in force, no charge created by a company shallbe taken into account by the liquidator or any other creditorunless it is duly registered under sub-section (1) and acertificate of registration of such charge is given by theRegistrar under sub-section (2).

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(4) Nothing in sub-section (3) shall prejudice any contract orDobligation for the repayment of the money secured by acharge.”

55. Section 78 enacts, that when a company whose property issubject to charge, fails to register it, the charge holder (or the personentitled to the charge over the company’s assets) can seek its registration.ESection 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 thatPVVNL is a secured creditor.

F56. The record further shows that after the NCLT passed itsorder, the appellant preferred its claim on 10.04.2018. Based on thatapplication, the liquidator had filed an application before the NCLT formodification of its order dated 21.08.2018, and contended that PVVNLalso came under the definition of ‘secured operational creditor’ inrealization of its dues in the liquidation proceedings as per law. TheGapplication sought amendment of the list of stakeholders. The applicationwas allowed. In view of these factual developments, this Court does notconsider it appropriate to rule on the submissions of the liquidator vis-a-vis the fact of non-registration of charges under Section 77 of theCompanies Act, 2013.

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V. CONCLUSION

57. For the above reasons, it is held that the appeal deserves tofail. At the same time, the liquidator is directed to decide the claimexercised by PVVNL in the manner required by law. It shall completethe process within 10 weeks from the date of pronouncement of thisdecision, after providing such opportunity to the appellant, as is necessaryunder law.

58. The appeal is dismissed, subject to the above direction, withoutorder on costs.

Divya Pandey(Assisted by : Shevali Monga, LCRA)

Appeal dismissed.

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