TMI Blog2023 (7) TMI 831X X X X Extracts X X X X X X X X Extracts X X X X ..... reditor cannot be disputed. Rainbow Papers [ 2022 (9) TMI 317 - SUPREME COURT] did not notice the waterfall mechanism under Section 53 the provision had not been adverted to or extracted in the judgment. Furthermore, Rainbow Papers was in the context of a resolution process and not during liquidation. Section 53, as held earlier, enacts the waterfall mechanism providing for the hierarchy or priority of claims of various classes of creditors. The careful design of Section 53 locates amounts payable to secured creditors and workmen at the second place, after the costs and expenses of the liquidator payable during the liquidation proceedings. However, the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. This design was either not brought to the notice of the court in Rainbow Papers or was missed altogether. In any event, the judgment has not taken note of the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to Central or State Government. The Gujarat Value Added Tax Act, 2003 no doubt creates a charge in respect of amounts due and payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 77 of the Companies Act, 2013. At the same time, the liquidator is directed to decide the claim exercised by PVVNL in the manner required by law. It shall complete the process within 10 weeks from the date of pronouncement of this decision, after providing such opportunity to the appellant, as is necessary under law - Appeal dismissed. - CIVIL APPEAL NOS. 7976 OF 2019 - - - Dated:- 17-7-2023 - S. RAVINDRA BHAT And DIPANKAR DATTA , JJ. For the Appellant : Mr. Pradeep Misra, AOR For the Respondent : Ms. Purti Gupta, AOR Mr. Arvind Kumar Gupta, Adv. Ms. Purti Gupta, Adv. Ms. Henna George, Adv. JUDGMENT S. RAVINDRA BHAT , J 1. The appellant Paschimanchal Vidyut Vitran Nigam Limited (hereinafter, PVVNL ) is aggrieved by an order of the National Company Law Appellate Tribunal (hereinafter, NCLAT ) Company Appeal (AT) (Insolvency) No. 639 of 2018, dated 15.05.2019 which rejected its appeal against an order of the National Company Law Tribunal, Allahabad (hereinafter, NCLT / Adjudicating Authority ), C.A. No. 88/ALD/2018 in CP No. (IB) 23/ALD/2017, dated 21.08.2018 which allowed an application directing the District Magistrate and Tehsildar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed property in its favour so as to enable sale of the property, and after realisation of the property s value, to ensure its distribution in accordance with the relevant provisions of the IBC. The NCLAT also endorsed NCLT s reasoning that PVVNL fell within the definition of operational creditor , which could realize its dues in the liquidation process in accordance with the law. II. PVVNL S ARGUMENTS 6. Mr. Pradeep Mishra, learned advocate for PVVNL, submitted that Sections 173 and 174 of the Electricity Act, 2003 (hereinafter, 2003 Act ) had an overriding effect on all other laws except Consumer Protection Act, 1986; the Atomic Energy Act, 1962; and the Railway Act, 1989. Being a special law relating to all aspects of electricity generation, transmission, distribution and adjudication of disputes it had primacy over all other laws, including the IBC, which was a general law dealing with corporate insolvency implemented much later. In terms of the 2003 Act, and the regulations framed under it, including the Uttar Pradesh Electricity Supply Code, 2005 (hereinafter, 2005 Code ), a special mechanism for recovery of electricity dues existed. The rights of electrici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. Section 3 (30), IBC Such security interest was defined under the IBC as: Right, title or interest or a claim in a property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person. Section 3 (31), IBC 11. Claim in a property section of the definition could be invoked when one secured payment or performance of any obligation under the law. Additionally, the term transfer was defined under the IBC to mean: Includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien. 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 the concept of security interest , all claims, including statutory claims arising in law, against the corporate debtor. Thus, obligations and statutory charges were also security interests . III. LIQ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of taxes subject to the priority embodied in Section 529A. Similarly, priority of debts due to secured creditors and workers was reflected under Section 326 of the Companies Act, 2013. Section 327 made payment of taxes subject to the priority embodied in Section 326. It was urged that Section 26E of the Securitization of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter, SARFAESI Act ) and Section 31B of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter, RDDBFI Act ) accorded priority to secured creditors over other dues. The Full Bench judgment of the Bombay High Court in Jalgaon Janta Shakari Bank Ltd. v. Joint Commissioner of Sales Tax, Nodal 9, Mumbai Anr., Jalgaon Janta Shakari Bank Ltd. v. Joint Commissioner of Sales Tax, Nodal 9, Mumbai Anr., 2022 SCC OnLine Bom 1767 reinforced the priority accorded to secured creditors under Section 26E of SARFAESI Act. 17. Learned counsel submitted that electricity dues did not enjoy any priority, and cited High Court rulings, especially the judgment of the Calcutta High Court in The West Bengal State Electricity Distribution Company Limited v. Sri Vasavi Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a debt, Per Section 3(11), which states that a debt is, A liability of obligation in respect of a claim . A claim is inter alia defined under Section 3(6) as, A right to payment the insolvency resolution process can be triggered when the value of the default crosses the statutory threshold (Section 4); or it may be initiated by the corporate debtor itself or a financial creditor or operational creditor (Section 6). IBC makes a distinction between debts owed to both these classes of creditors. A financial creditor has been defined under Section 5(7) as, A person to whom a financial debt is owed . A financial debt is defined by Section 5(8) as a debt which is disbursed against consideration for the time value of money. On the other hand, an operational creditor is one to whom an operational debt is owed. Operational debt under Section 5(21) is a claim in respect of provision of goods or services . 20. Sections 7 and 8 of the IBC control the initiation of insolvency process by financial creditors and operational creditors respectively. The corporate debtor can contest a debt within a stipulated time period. The Adjudicating Authority has to determine the existence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution plan under sub-section (6) of section 30; or (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 be liquidated in the manner as laid down in this Chapter; (ii) issue a public announcement stating that the corporate debtor is in liquidation; and (iii) require such order to be sent to the authority with which the corporate debtor is registered. (2) Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors 2[approved by not less than sixty-six per cent. of the voting share] to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1). Explanation- For the purposes of this sub-section, it is hereby declared that the committee of creditors may take the decision to liquidate the corporate debtor, any time after its constitution under sub-section (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of course there is no choice in the matter. Again, in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta Ors., Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta Ors., 2019 (16) SCR 275 this court rejected the argument that the NCLT possessed any discretionary jurisdiction with regard to initiation of liquidation proceedings, upon an interpretation of Sections 30, 31(2) and 60(5)(c) of IBC. 23. Upon initiation of liquidation, a liquidator has to be appointed, to carry out the liquidation process and manage other affairs of the corporate debtor. The RP, appointed to conduct the resolution process, is ordinarily appointed as liquidator. The powers and duties of liquidator are prescribed by Section 35 35. Powers and duties of liquidator.-- (1) Subject to the directions of the Adjudicating Authority, the liquidator shall have the following powers and duties, namely:- (a) to verify claims of all the creditors; (b) to take into his custody or control all the assets, property, effects and actionable claims of the corporate debtor; ********************* ********************* (d) to take such measures to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 not limited to encumbered assets; (c) tangible assets, whether movable or immovable; (d) intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights; (e) assets subject to the determination of ownership by the court or authority; (f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter; (g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest; (h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and (i) all proceeds of liquidation as and when they are realised. After the admission of claims, the liquidator has to determine the value of the claims, for the purpose of distribution of assets of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of security interest; (f) any remaining debts and dues; (g) preference shareholders, if any; and (h) equity shareholders or partners, as the case may be. (2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the liquidator. (3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction. Explanation - For the purpose of this section-- (i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and (ii) the term workmen's dues shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013 (18 of 2013). 27. The priority of claims, indicated in the hierarchy of pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o will be the beneficiary of this process as economic growth will increase revenues. Further, efficiency enhancement and consequent greater value capture through the proposed insolvency regime will bring in additional gains to both the economy and the exchequer. **************** ****************** *************** For the remaining creditors who participate in the collective action of Liquidation, the Committee debated on the waterfall of liabilities that should hold in Liquidation in the new Code. Across different jurisdictions, the observation is that secured creditors have first priority on the realizations, and that these are typically paid out net of the costs of insolvency resolution and Liquidation. In order to bring the practices in India in-line with the global practice, and to ensure that the objectives of this proposed Code is met, the Committee recommends that the waterfall in Liquidation should be as follows: 1. Costs of IRP and liquidation. 2. Secured creditors and Workmen dues capped up to three months from the start of IRP. 3. Employees capped up to three months. 4. Dues to unsecured financial creditors, debts payable to workmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other stakeholders. 7.4. On the basis of the above discussion, the Committee agreed that the priority for recovery to secured creditors under Section 53(1)(b)(ii) should be applicable only to the extent of the value of the security interest that is relinquished by the secured creditor. The Committee was of the opinion that this issue stands clarified in terms of the reasoning provided above and does not necessitate any further amendment to the provisions of the Code. 31. The Preamble to the IBC expressly recognizes the shift in the law, with respect to ordering priority of claims, especially with respect to government dues: An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto. 32. In response to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be specified by the Board. (4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it. (5) If in the course of realising a secured asset, any secured creditor faces resistance from the corporate debtor or any person connected therewith in taking possession of, selling or otherwise disposing of the security, the secured creditor may make an application to the Adjudicating Authority to facilitate the secured creditor to realise such security interest in accordance with law for the time being in force. (6) The Adjudicating Authority, on the receipt of an application from a secured creditor under sub-section (5) may pass such order as may be necessary to permit a secured creditor to realise security interest in accordance with law for the time being in force. (7) Where the enforcement of the security interest under sub-section (4) yields an amount by way of proceeds which is in excess of the debts due to the secured creditor, the secured creditor shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the time prescribed (30 days, in Form C or D of Schedule II to the Liquidation Regulations). The liquidator may then, per Section 52 (3), permit the secured creditor to realize such dues as are proved to exist, as security debts. Upon clearance by the liquidator, the secured creditor may proceed to enforce its claim, under Section 52 (4). If there is resistance during the process, the secured creditor may approach the NCLT [Section 52 (5) and (6)]. Upon enforcement, any excess amount realized should be tendered to the liquidator [Section 52 (7)]. 35. It is thus, apparent, that a secured creditor has to take a calculated decision, at the outset of the liquidation process, whether or not to relinquish its secured interest. In case it does so, its dues rank high in the waterfall mechanism. In case it chooses not to relinquish its security interest, and instead proceeds to enforce it without success or is unable to realize all its dues in the process of enforcement, it has to then perforce stand lower in priority, and await distribution of assets upon realization of the liquidation estate, by the liquidator, vis- -vis the balance of its dues. 36. The procedure envisioned, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be specified by the Board. Sub-section (4) to Section 52 of the Code states that the secured creditor may enforce, realise, settle, compromise or deal with the secured asset in accordance with such law as applicable to the security interest being realised and to the secured creditor. The secured creditor is to accordingly apply the proceeds to recover the debts due to him. We need not refer to Sub-section (5) to Section 52 of the Code as it relates to the action which the secured creditor may take if he faces resistance from the corporate debtor or any other person connected therewith in taking possession of, selling or otherwise disposing off the security. Sub-section (6) to Section 52 of the Code applies when an adjudicating authority is in receipt of an application Under Sub-section (5) to Section 52 of the Code. Sub-section (7) to Section 52 of the Code, however, is important as it states that where on enforcement of the security interest, an amount by way of proceeds is in excess of the debts due to the secured creditor, the secured creditor shall account for and pay the excess/surplus amount to the liquidator from enforcement of such secured assets. The amount of insolvency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted and compromised. 70. Clause (a) to Sub-section (1) to Section 53 deals with insolvency resolution process costs and the liquidation costs which are to be paid in full. No grievance or issue can be raised in respect of the said clause. Clause (b) to Sub-section (1) to Section 53 states that the debts due in the form of workmen's dues for a period of twenty four months preceding the liquidation commencement date and the debts owed to the secured creditor in the event such secured creditor has relinquished security in the manner set out in Section 52 of the Code shall rank equally between and amongst the workmen and the secured creditors. The Explanation to Section 53 of the Code states that 'workmen's dues' shall have the same meaning as assigned to it in Section 326 of the Companies Act, 2013. In other words, Explanation to Section 326 of the Companies Act, 2013 has been incorporated and applies to the waterfall mechanism as prescribed in Clause (b) to Sub-section (1) to Section 53 of the Code. What is significant here is that under Clause (b) to Sub-section (1) to Section 53 of the Code, the workmen's dues are for the period of twentyfour months prece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd disrupt the working of the equilibrium as a whole and stasis, resulting in instability. Every change in the waterfall mechanism is bound to lead to cascading effects on the balance of rights and interests of the secured creditors, operational creditors and even the Central and State Governments. Depending upon the facts, in some cases, the waterfall mechanism in the Code may be more beneficial than the hierarchy provided Under Section 326 of the Companies Act, 2013 and vice-versa. Therefore, we hesitate and do not accept the arguments of the Petitioners. 72. The Code is based on the organic evolution of law and is a product of an extensive consultative process to meet the requirements of the Code governing liquidation. It introduced a comprehensive and time-bound framework to maximise the value of assets of all persons and balance the interest of the stakeholders. The guiding principle for the Code in setting the priority of payments in liquidation was to bring the practices in India in line with global practices. In the waterfall mechanism, after the costs of the insolvency resolution process and liquidation, secured creditors share the highest priority along with a defin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions are empowered to frame regulations. Section 50 empowers the State Commissions to frame the Electricity Supply Code to provide for recovery of electricity charges, intervals for billing of electricity charges, disconnection of supply of electricity for non-payment, etc. These provisions in the 2003 Act and the respective Codes form the legal framework for recovery of dues by various kinds of licensees under the 2003 Act. In the present case, the Uttar Pradesh State Commission had framed the 2005 Supply Code. Clause 4.3 (f) (iv) of the 2005 Code is relevant, which inter alia provides as follows: The outstanding dues will be first charge on the assets of the company, and the licensee shall ensure that this is entered in an agreement with new applicant. 41. Clause 6.15 of the 2005 Code enacts that recovery of arrears shall be in accordance with the provisions of the Uttar Pradesh Government Electrical Undertakings (Dues Recovery) Act, 1958: 6.15 Recovery of Arrears (a) The payments due to the Licensee shall be recovered as per provision of Section 56 of the Act, and arrears of land revenue as per the provisions of the U.P. Government Electrical Undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if there is an express provision of law providing for creation of a statutory charge upon the transferee. This court held that the creation of a charge need not necessarily be based on an express provision of the 2003 Act or plenary legislation, but could be created by properly framed regulations authorized under the parent statute. In these circumstances, the argument of PVVNL that by virtue of Clause 4.3(f)(iv) of the Supply Code, read with the stipulations in the agreement between the parties, a charge was created on the assets of the corporate debtor, is merited. A careful reading of the impugned order of the NCLT also reveals that this position was accepted. This is evident from the order of the NCLAT which clarified that PVVNL also came under the definition of secured operational creditor as per law. This finding was not disturbed, but rather affirmed by the impugned order. In these circumstances, the conclusion that PVVNL is a secured creditor cannot be disputed. 44. The counsel for the liquidator had submitted that dues owed to PVVNL were technically owed to the government , and thus occupied a lower position in the order of priority of clearance. The expressio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) in relation to the administration of a Part C State 2[before the commencement of the Constitution (Seventh Amendment) Act, 1956], the Chief Commissioner or the Lieutenant Governor or the Government of a neighbouring State or other authority acting within the scope of the authority given to him or it under article 239 or article 243 of the Constitution, as the case may be; and (iii) in relation to the administration of a Union territory, the administrator thereof acting within the scope of the authority given to him under article 239 of the Constitution . and latter by Section 3 (60). 33(60) State Government , (a) as respects anything done before the commencement of the Constitution, shall mean, in a Part A State, the Provincial Government of the corresponding Province, in a Part B State, the authority or person authorised at the relevant date to exercise executive government in the corresponding Acceding State, and in a Part C State, the Central Government; 1*** (b) as respects anything done 2[after the commencement of the Constitution and before the commencement of the Constitution (Seventh Amendment) Act, 1956] , shall mean, in a Part A State, the G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merate some examples such as Road Transport Corporations, Electricity Boards under the Electricity Supply Act, 1948 and so on. The court observed that: With a view to enable these statutory corporations and companies to carry on the activity which was hitherto carried on by the governments, the relevant properties, assets and liabilities were transferred to such new corporations. They were supposed to operate on business lines, pay taxes and justify their creation and constitution. These corporations, whether created under the statute or registered under the Companies Act are distinct juristic entities owning their own properties, having their own fund, capable of borrowing and lending monies and entering into contracts like any other corporation. In many cases, the entire share capital of these corporations is owned by the Government whether Central or State. In some cases, the major share holding is of the Government with some private share holding as well. In case of some statutory corporations, the enactment creating them did not provide for any share capital, though it was made a body corporate with all the necessary and incidental powers that go with such concept. The In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rge on the property of such dealer or person. The corporate debtor had defaulted in payment of its tax dues and recovery proceedings had been initiated. In the meanwhile, insolvency proceedings had commenced. During the resolution process, the State tax authorities claimed that the dues payable had to be accrued previously and relied upon Section 48, in addition to Section 53 of the IBC. The State contended that the non-obstante clause in the state enactment and the non-obstante clause in the IBC operated at different fields, and the State had to be treated as a secured creditor by virtue of Section 48 of the state act. This was rejected by the NCLT and the NCLAT. However, this court took note of Sections 30 and 31 of the IBC and certain other provisions and held that NCLT had erred in its observations. It was held that: 56. Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman s dues for a period of 24 months precedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act itself. 51. According to the principles of statutory interpretation, when an enactment uses two different expressions, they cannot be construed as having the same meaning. It was held in Member, Board of Revenue v. Anthony Paul Benthall Member, Board of Revenue v. Anthony Paul Benthall (1955) 2 SCR 842 that: When two words of different import are used in a statute, in two consecutive provisions, it would be difficult to maintain that they are used in the same sense This idea is reflected in a subsequent judgment in Brihan Mumbai Mahanagarpalika Anr. v. Willington Sports Club Ors. Brihan Mumbai Mahanagarpalika Anr. v. Willington Sports Club Ors., (2013) (16) SCR 216. 52. The views expressed by the present judgment finds support in the decision reported as Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, 2022 SCC Online SC 1101 . In that case, Section 142A of the Customs Act 1962 was in issue authorities had submitted that dues payable to it were to be treated as first charge on the property of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auses (i.e., Section 173 and 174). The position of law with respect to primacy of the IBC, is identical with the position discussed in Sundaresh Bhatt and Duncan Industries (supra) [refer also: Innoventive Industries (supra), CIT v. Monnet Ispat Energy Ltd. (2018) 18 SCC 786 , Ghanashyam Mishra Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. [2021] 13 SCR 737 , and Jagmohan Bajaj v. Shivam Fragrances Private Limited 2018 SCC OnLine NCLAT 413 ]. 53. In view of the above discussion, it is held that the reliance on Rainbow Papers (supra) is of no avail to the appellant. In this court s view, that judgment has to be confined to the facts of that case alone. D. EFFECT OF SECTION 77 OF THE COMPANIES ACT 54. Lastly, the liquidator had urged that without registration of charge, the same was unenforceable under liquidation proceedings. Section 77 of the Companies Act, 2013 reads as follows: 77. Duty to register charges, etc. (1) It shall be the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, to register the particulars of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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