# MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH CHAND SHARMA v. UNION OF INDIA AND ORS

- **Citation:** [2023] 6 S.C.R. 85
- **Court:** Supreme Court of India
- **Decided:** 2023-05-02
- **Bench:** M. R. Shah, Sanjiv Khanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/moser-baer-karamchari-union-thr-president-mahesh-chand-sharma-v-union-of-india-37221
- **Pages:** 50

## Headnote

Companies Act, 2013: s. 327(7) - Constitutional validity -
Held: s. 327(7) provides that ss. 326 and 327 shall not be applicable
in the event of liquidation under the IBC, in view of the enactment
of IBC and it applies with respect to the liquidation of a company
under the IBC, thus, s. 327(7) cannot be said to be arbitrary and/or
violative of Art. 21 - In case of liquidation of a company under
IBC, the provisions of s. 53 IBC and other provisions of the IBC
shall be applicable as the company is ordered to be liquidated or
wound up under the provisions of IBC - Distribution of the assets
shall have to be made as per s. 53 IBC subject to s. 36(4) IBC - As
per s. 53(1)(b) the workmen's dues for the period of twenty-four
months preceding the liquidation commencement date shall rank
equally between the workmen and the secured creditor in the event
such secured creditor has relinquished security - Thus, the same
cannot be said to be arbitrary and violative of Art. 21 - Insolvency
and Bankruptcy Code, 2016 - ss. 53 and 36(4).
Insolvency and Bankruptcy Code, 2016: s. 53 - Waterfall
mechanism under - Held: Waterfall mechanism is based on a
structured mathematical formula, and the hierarchy is created in
terms of payment of debts in order of priority with several
qualifications - Striking down any one of the provisions or
rearranging the hierarchy in the waterfall mechanism may lead to
several trips and 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 - In the waterfall
mechanism, after the costs of the insolvency resolution process and
liquidation, secured creditors share the highest priority along with
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a defined period of dues of the workmen - Unpaid dues of the
workmen are adequately and significantly protected in line with the
objectives sought to be achieved by the Code and in terms of the
waterfall mechanism prescribed by s.53.
Dismissing the writ petitions, the Court
HELD: 1.1 In view of the enactment of Insolvency and
Bankruptcy Code, 2016 and Section 53 of the IBC, it
necessitated to amend the Act, 2013. As per Sub-Section (7) of
Section 327, Sections 326 and 327 shall not be applicable in the
event of liquidation under the IBC. The object and purpose of
amending the Act, 2013 and to exclude Sections 326 and 327 in
the event of liquidation under the IBC seems to be that there
may not be two different provisions with respect to winding up/
liquidation of a company. Therefore, in view of the enactment of
IBC, it necessitated to exclude the applicability of Sections 326
and 327 of the Act, 2013 which cannot be said to be arbitrary.
[Para 6][111-E-F]
1.2. Sub-Section (7) of Section 327 shall be applicable in
case of liquidation of a company under the IBC. In case of
liquidation of a company under IBC, the provisions of Section 53
of the IBC and other provisions of the IBC shall be applicable as
the company is ordered to be liquidated or wound up under the
provisions of IBC. Therefore, merely because under the earlier
regime and in case of winding up of a company under the
Companies Act, 1956/2013, the dues of the workmen may have
pari passu with that of the secured creditor, the petitioner cannot
claim the same benefit in case of winding up/liquidation of the
company under IBC. The parties shall be governed by the
provisions of the IBC in case of liquidation of a company under
the provisions of the IBC. [Para 6.1][111-G-H; 112-A-B]
1.3. Section 53 of the IBC provides for distribution of the
assets in case of liquidation of a company under IBC. As per
Section 53(1)(b) the workmen's dues for the period of twentyfour months preceding the liquidation commencement date shall
rank equally between the workmen and t

## Text

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MOSER BAER KARAMCHARI UNION THR. PRESIDENT
MAHESH CHAND SHARMA
v.
UNION OF INDIA AND ORS.
(Writ Petition (C) No. 421 of 2019)
MAY 02, 2023
[M. R. SHAH AND SANJIV KHANNA, JJ.]
Companies Act, 2013: s. 327(7) - Constitutional validity -
Held: s. 327(7) provides that ss. 326 and 327 shall not be applicable
in the event of liquidation under the IBC, in view of the enactment
of IBC and it applies with respect to the liquidation of a company
under the IBC, thus, s. 327(7) cannot be said to be arbitrary and/or
violative of Art. 21 - In case of liquidation of a company under
IBC, the provisions of s. 53 IBC and other provisions of the IBC
shall be applicable as the company is ordered to be liquidated or
wound up under the provisions of IBC - Distribution of the assets
shall have to be made as per s. 53 IBC subject to s. 36(4) IBC - As
per s. 53(1)(b) the workmen's dues for the period of twenty-four
months preceding the liquidation commencement date shall rank
equally between the workmen and the secured creditor in the event
such secured creditor has relinquished security - Thus, the same
cannot be said to be arbitrary and violative of Art. 21 - Insolvency
and Bankruptcy Code, 2016 - ss. 53 and 36(4).
Insolvency and Bankruptcy Code, 2016: s. 53 - Waterfall
mechanism under - Held: Waterfall mechanism is based on a
structured mathematical formula, and the hierarchy is created in
terms of payment of debts in order of priority with several
qualifications - Striking down any one of the provisions or
rearranging the hierarchy in the waterfall mechanism may lead to
several trips and 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 - In the waterfall
mechanism, after the costs of the insolvency resolution process and
liquidation, secured creditors share the highest priority along with
[2023] 6 S.C.R. 85
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a defined period of dues of the workmen - Unpaid dues of the
workmen are adequately and significantly protected in line with the
objectives sought to be achieved by the Code and in terms of the
waterfall mechanism prescribed by s.53.
Dismissing the writ petitions, the Court
HELD: 1.1 In view of the enactment of Insolvency and
Bankruptcy Code, 2016 and Section 53 of the IBC, it
necessitated to amend the Act, 2013. As per Sub-Section (7) of
Section 327, Sections 326 and 327 shall not be applicable in the
event of liquidation under the IBC. The object and purpose of
amending the Act, 2013 and to exclude Sections 326 and 327 in
the event of liquidation under the IBC seems to be that there
may not be two different provisions with respect to winding up/
liquidation of a company. Therefore, in view of the enactment of
IBC, it necessitated to exclude the applicability of Sections 326
and 327 of the Act, 2013 which cannot be said to be arbitrary.
[Para 6][111-E-F]
1.2. Sub-Section (7) of Section 327 shall be applicable in
case of liquidation of a company under the IBC. In case of
liquidation of a company under IBC, the provisions of Section 53
of the IBC and other provisions of the IBC shall be applicable as
the company is ordered to be liquidated or wound up under the
provisions of IBC. Therefore, merely because under the earlier
regime and in case of winding up of a company under the
Companies Act, 1956/2013, the dues of the workmen may have
pari passu with that of the secured creditor, the petitioner cannot
claim the same benefit in case of winding up/liquidation of the
company under IBC. The parties shall be governed by the
provisions of the IBC in case of liquidation of a company under
the provisions of the IBC. [Para 6.1][111-G-H; 112-A-B]
1.3. Section 53 of the IBC provides for distribution of the
assets in case of liquidation of a company under IBC. As per
Section 53(1)(b) the workmen's dues for the period of twentyfour months preceding the liquidation commencement date shall
rank equally between the workmen and the secured creditor in
the event such secured creditor has relinquished security in the
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manner set out in Section 52. Therefore, workmen's dues for the
period of twenty-four months preceding the liquidation
commencement date shall have pari passu with the dues of secured
creditor. At this stage, it is required to be noted that as per Section
36(4) of IBC, all sums due to any workman or employee from the
provident fund, the pension fund and the gratuity fund shall not
be included in the liquidation estate assets and shall not be used
for the recovery in the liquidation. Therefore, a conscious decision
has been taken by the Parliament/Legislature in its wisdom to
keep out of all sums due to any workman/employee from the
provident fund, the pension fund and the gratuity fund from the
liquidation estate assets [as per Section 36(4)] and that the
workmen's dues for the period of twenty-four months preceding
the liquidation commencement date shall rank equally between
the workmen's dues to the said extent and the dues to the secured
creditor. Therefore, the same cannot be said to be arbitrary and
violative of Article 21 of the Constitution of India. [Para 6.2][112B-F]
1.4 As per the settled position of law, IBC is a complete
Code and the object and purpose of IBC is altogether different
than that of the Act, 1956/2013. The IBC is a new insolvency
mechanism, therefore, the provisions under the IBC cannot be
compared with that of the earlier regime, namely, the Companies
Act, 1956/2013. [Para 6.2][112-F]
1.5 The legislature has now removed clause (a) to Section
271 of the Companies Act, 2013, when a company is unable to
pay the debts, and clause (d) to Section 271 of the Companies
Act, 2013, when a company is directed to be wound up under the
Chapter XIX of the Companies Act, 2013. In fact, Chapter XIX of
the Companies Act 2013 was deleted/omitted in terms of Act No.
31 of 2016 and the Eleventh Schedule in the Code, with effect
from 15th November 2016. The Code, as enacted, is a separate
and consolidated enactment specifically relating to and dealing
with companies which are insolvent and unable to pay dues, and
envisages a procedure with a mandate to first explore possibility
of rehabilitation and revival of the company, and the dissolution/
winding up as the last call. This is significant and completely
replaces the then existing framework for insolvency and
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bankruptcy resolution that was inadequate, ineffective and guilty
of causing undue delays. The enactment of the Code and the
amendments thereafter are a consequence of detailed
consultation and deliberations by several committees,
commissions and experts , in a matter which deals with the
economy of the country as a whole. [Para 7.2, 7.3][115-A-E]
1.6 The waterfall mechanism now prescribed in the Code
with reference to the workmen's dues is a well-considered and
thought-out decision. The waterfall mechanism and the hierarchy
prescribed to the workmen's dues should be seen in the overall
objective of the Code, which is to explore whether the corporate
debtor can be revived so that jobs are not lost, the use of economic
assets is maximised, and there is an effective legal framework
which enhances the viability of credit in the hands of banks and
financial institutions. The Code recognises the financial impact
on secured creditors or financial institutions dealing with public
money, as their economic health is equally important for the
general public as well as the national economy. Unless there is
economic growth and fresh investments in the industry,
employment opportunities will not be available, which would in
turn lead to economic woes, insolvencies and bankruptcies. These
are all complex economic matters wherein various conflicting
interests have to be balanced, and a holistic rather than a onesided, approach is to be taken. Each opinion may have merit, but
the court can hardly substitute its own wisdom or view for that of
the legislature, especially when the enactment is the outcome of
a thought-out and ruminated review on complex fiscal and
commercial challenges facing the economy. [Para 8][116-B-F]
1.7 The Companies Act, 2013 does not deal with insolvency
and bankruptcy when the companies are unable to pay their debts
or the aspects relating to the revival and rehabilitation of the
companies and their winding up if revival and rehabilitation is
not possible. In principle, it cannot be doubted that the cases of
revival or winding up of the company on the ground of insolvency
and inability to pay debts are different from cases where companies
are wound up under Section 271 of the Companies Act 2013. The
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two situations are not identical. Under Section 271 of the
Companies Act, 2013, even a running and financially sound
company can also be wound up for the reasons in clauses (a) to
(e). The reasons and grounds for winding up under Section 271
of the Companies Act, 2013 are vastly different from the reasons
and grounds for the revival and rehabilitation scheme as envisaged
under the Code. The two enactments deal with two distinct
situations and they cannot be equated when it is examined
whether there is discrimination or violation of Article 14 of the
Constitution of India. The workmen also have a stake and benefit
from the revival of the company, and therefore unless it is found
that the sacrifices envisaged for the workmen, which certainly
form a separate class, are onerous and burdensome so as to be
manifestly unjust and arbitrary, the legislation will not be set aside,
solely on the ground that some or marginal sacrifice is to be made
by the workers. The submission is rejected that to find out
whether there was a violation of Article 14 of the Constitution of
India or whether the right to life under Article 21 Constitution of
India was infringed, this Court must word by word examine the
waterfall mechanism envisaged under the Companies Act, 2013,
where the company is wound up in terms of grounds (a) to (e) of
Section 271 of the Companies Act, 2013; and the rights of the
workmen when the insolvent company is sought to be revived,
rehabilitated or wound up under the Code. The grounds and
situations in the context of the objective and purpose of the two
enactments are entirely different. [Para 9][123-A-G]
1.8 Section 53 of the Code which begins with a non-obstante
clause and states that notwithstanding anything to the contrary
contained in any law enacted by the Parliament or any State
Legislature for the time being in force, the proceeds from the
sale of liquidation assets shall be distributed in the order of
priority, which is stipulated, and within such period and such
manner as may be specified. The consequence of sub-section (1)
to Section 53 of the Code is that it will override the rights of
parties, including the secured creditor, when the said provision
applies. Section 53 of the Code is the complete and
comprehensive code which ensures collection of assets and then
provides the manner in which the creditors are to be paid. Even
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the rights of the secured creditor falling under Section 53 of the
Code to enforce, realise, settle, compromise or deal with the
secured assets as applicable to the security interest are diluted
and compromised. [Para 15][131-C-E]
1.9 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 twenty four
months preceding the liquidation commencement date. [Para
15.1][131-E-H; 132-A]
1.10 The waterfall mechanism is based on a structured
mathematical formula, and the hierarchy is created in terms of
payment of debts in order of priority with several qualifications,
striking down any one of the provisions or rearranging the
hierarchy in the waterfall mechanism may lead to several trips
and 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. [Para 16][132-G-H; 133A]
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1.11. In the waterfall mechanism, after the costs of the
insolvency resolution process and liquidation, secured creditors
share the highest priority along with a defined period of dues of
the workmen. The unpaid dues of the workmen are adequately
and significantly protected in line with the objectives sought to
be achieved by the Code and in terms of the waterfall mechanism
prescribed by Section 53 of the Code. In either case of
relinquishment or non-relinquishment of the security by the
secured creditor, the interests of workmen are protected under
the Code. In fact, the secured creditors are taking significant
hair-cut and workmen are being compensated on an equitable
basis in a just and proper manner as per Section 53 of the Code.
In economic matters, a wider latitude is given to the lawmaker
and the Court allows for experimentation in such legislations based
on practical experiences and other problems seen by the lawmakers. In a challenge to such legislation, the Court does not
adopt a doctrinaire approach. Some sacrifices have to be always
made for the greater good, and unless such sacrifices are prima
facie apparent and ex facie harsh and unequitable as to classify as
manifestly arbitrary, these would be interfered with by the court.
[Para 17][133-C-G]
1.12 As Sub-section (7) of Section 327 of the Act, 2013
provides that Sections 326 and 327 of the Act, 2013 shall not be
applicable in the event of liquidation under the IBC, which has
been necessitated in view of the enactment of IBC and it applies
with respect to the liquidation of a company under the IBC,
Section 327(7) of the Act, 2013 cannot be said to be arbitrary
and/or violative of Article 21 of the Constitution of India. In case
of the liquidation of a company under the IBC, the distribution of
the assets shall have to be made as per Section 53 of the IBC
subject to Section 36(4) of the IBC, in case of liquidation of
company under IBC. [Para 18][133-H; 134-A-B]
Manish Kumar v. Union of India and Anr. (2021) 5 SCC
1; Swiss Ribbons Private Limited and Anr. v. Union of
India and Ors. (2019) 4 SCC 17 : [2019] 3 SCR 535;
Small Scale Industrial Manufacturers Association
(Registered) v. Union of India and Ors. (2021) 8 SCC
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH
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511; Committee of Creditors of Essar Steel India Limited
v. Satish Kumar Gupta and Ors. (2020) 8 SCC 531 :
[2019] 16 SCR 275; Ghanashyam Mishra and Sons
Private Limited v. Edelweiss Asset Reconstruction
Company Limited (2021) 9 SCC 657; Allahabad Bank
v. Canara Bank and Anr. (2000) 4 SCC 406 : [2000] 2
SCR 1102; Andhra Bank v. Official Liquidator and Anr.
(2005) 5 SCC 75 : [2005] 2 SCR 776; Innoventive
Industries Limited v. ICICI Bank and Anr. (2018) 1 SCC
407 : [2017] 8 SCR 33; Arcelormittal India Private
Limited v. Satish Kumar Gupta and Ors. (2019) 2 SCC
1 : [2018] 12 SCR 362; Arun Kumar Jagatramka v.
Jindal Steel and Power Limited and Anr. (2021) 7 SCC
474; Sesh Nath Singh and Anr. v. Baidyabati
Sheoraphuli Co-operative Bank Limited and Anr. (2021)
7 SCC 313; R.K. Garg v. Union of India and Ors. (1981)
4 SCC 675 : [1982] 1 SCR 947; Rustom Cavasjee
Cooper v. Union of India (1970) 1 SCC 248 : [1970] 3
SCR 530; Delhi Science Forum and Ors. v. Union of
India and Anr. (1996) 2 SCC 405 : [1996] 2 SCR 767;
BALCO Employees' Union (Regd.) v. Union of India and
Ors. (2002) 2 SCC 333 : [2001] 5 Suppl. SCR 511;
Employees Provident Fund Commissioner v. Official
Liquidator of Esskay Pharmaceuticals Limited (2011)
10 SCC 727 : [2011] 15 SCR 336; Bhupinder Singh v.
Unitech Limited (2022) 8 SCC 749; Swiss Ribbons
Private Limited and Another. v. Union of India and
Others (2019) 4 SCC 17 : [2019] 3 SCR 535 - referred
to.
Case Law Reference
(2021) 5 SCC 1
referred to
Para 3.15
[2019] 3 SCR 535
referred to
Para 3.15
(2021) 8 SCC 511
referred to
Para 3.15
[2019] 16 SCR 275
referred to
Para 3.17
(2021) 9 SCC 657
referred to
Para 3.18
[2000] 2 SCR 1102
referred to
Para 3.19
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[2005] 2 SCR 776
referred to
Para 3.19
[2017] 8 SCR 33
referred to
Para 4.9
[2018] 12 SCR 362
referred to
Para 4.9
(2021) 7 SCC 474
referred to
Para 4.9
(2021) 7 SCC 313
referred to
Para 4.9
[1982] 1 SCR 947
referred to
Para 4.20
[1970] 3 SCR 530
referred to
Para 4.21
[1996] 2 SCR 767
referred to
Para 4.21
[2001] 5 Suppl. SCR 511
referred to
Para 4.21
[2019] 3 SCR 535
referred to
Para 8
[2011] 15 SCR 336
referred to
Para 11
(2022) 8 SCC 749
referred to
Para 11
CIVIL ORIGINAL JURISDICTION: Writ Petition (C) No. 421
of 2019.
Under Article 32 of The Constitution of India.
With
Writ Petition (C) Nos. 777 and 712 of 2020.
K.V. Viswanathan, Sr. Adv., Aravind Raj, P. Venkataraman,
Amarthya Sharan, Rahul Sangwan, Chanakya Dwivedi, Advs. (Amici
Curiae)
Gopal Sankaranarayanan, Sr. Adv., Ujjal Banerjee, Swapnil Gupta,
Dinkar Singh, Gagan Garg, Rohit Singh, Ms. Aditi Gupta, Deepak Goel,
Advs. for the Petitioner.
Balbir Singh, ASG, Naman Tandon, Ms. Surbhi Singh, Samarvir
Singh, Ms. Sagarika Kaul, Ms. Monica Benjamin, K. Gurumurthy,
Ms. Aakanksha Kaul, Navanjay Mahapatra, Kanu Agrawal, T.S. Sabarish,
Arvind Kumar Sharma, Sanchar Anand, Arvind Kumar, Prahlad Narayan
Singh, Mrs. Lara Siddiqui, Devendra Singh, Ankur Mittal, Ms. Meera
Murali, Ms. Aishwarya Pandey, Ms. Pallavi Pratap, Ms. Prachi Pratap,
Prashant Pratap, Ms. Neema, Advs. for the Respondents.
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH
CHAND SHARMA v. UNION OF INDIA
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The Judgment of the Court was delivered by
M. R. SHAH, J.
Writ Petition (C) No. 421 of 2019
1. By way of this writ petition under Article 32 of the Constitution
of India, filed by the writ petitioner - Moser Baer Karamchari Union
have prayed for an appropriate writ, direction or order striking down
Section 327(7) of the Companies Act, 2013 (hereinafter referred to as
"Act, 2013") as arbitrary and violative of Article 21 of the Constitution
of India.
It is also prayed to issue an appropriate writ, direction or order in
the nature of Mandamus so as to leave the statutory claims of the
"workmen's dues" out of the purview of waterfall mechanism under
Section 53 of the Insolvency and Bankruptcy Code, 2016 (hereinafter
referred to either as "IBC" or "Code").
It is further prayed to issue an appropriate writ in the nature of
Mandamus by giving a purposive interpretation to Section 53 of the IBC
and pass necessary directions which will enable the petitioners to get
their dues of 24 months released without any further delay.
Writ Petition (C) Nos. 777 and 712 of 2020
1.1 By way of these writ petitions under Article 32 of the
Constitution of India, the respective writ petitioners have prayed that
Clause 19(a) of the Eleventh Schedule of the IBC pursuant Section 255
of the IBC, be declared as unreasonable and violative of Article 14 of
the Constitution of India as Clause 19(a) of the Eleventh Schedule of the
IBC inserts sub-section (7) in Section 327 of the Companies Act, 2013,
which puts statutory bar on the application of Sections 326 and 327 of
the Companies Act, 2013, to the liquidation proceedings under the IBC.
It is further prayed that sub-section (7) of Section 327 of the
Companies Act, 2013, be declared as unreasonable and violative of Article
14 of the Constitution of India as sub-section (7) of Section 327 of the
Companies Act, 2013, which was inserted in Section 327 of the
Companies Act, 2013 pursuant to Section 255 and the Eleventh Schedule
of the Insolvency and Bankruptcy Code, 2016, Act 31 of 2016, creates
unreasonable classification for the distribution of legitimate dues of
workmen in the event of liquidation of the Company under the IBC and
liquidation of Company under the provisions of the Companies Act, 2013.
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It is also prayed that distribution of the workmen's due as
envisaged under Section 53(1)(b)(i) of the IBC, be declared as
unreasonable and violative of Article 14 of the Constitution of India, as
Section 53(1)(b)(i) of the IBC limits the workmen's dues payable to
workmen to twenty-four months only preceding the date of order of
Liquidation and then rank the said workmen's dues equally with the
secured creditors in the events such secured creditors has relinquished
security in the manner set out in Section 52 of the IBC.
It is further prayed that settlement of Workmen Dues should be
done in accordance with the reasonable principles laid down under Section
326 even in the event of liquidation under the IBC.
2. Shri K.V. Viswanathan, learned Senior Advocate has appeared
as Amicus Curiae. Shri Gopal Sankaranarayanan, learned Senior
Advocate, has appeared on behalf of the petitioner(s). Shri Balbir Singh,
learned ASG has appeared on behalf of the respondent-Union of India.
3. Shri K.V. Viswanathan, learned Senior Advocate has first of
all taken us to the legislative history of the Companies Act and the
Preferential Payments and also the framing of the Insolvency and
Bankruptcy Code.
3.1 It is submitted that the Companies Act, 1956, as it existed
prior to the Companies (Amendment) Act, 1985, did not provide for any
"overriding preferential payments" to any party. It is submitted that in
1985, the Companies (Amendment) Bill, 1985 sought to introduce the
proviso to sub-section (1) of Section 529, definition of "workmen",
"workmen's dues" and "workmen's portion" through insertion of Section
529(3) and the "overriding preferential payments" through Section 529A.
3.2 It is submitted that the Statement of Objects and Reasons for
bringing these changes into effect was to ensure that the resources of
the company are distributed even to workers whose labour and effort
form a part of the capital of the Company. Resultantly, through Companies
(Amendment) Act, 1985, the idea of "workmen's portion" and the
"overriding preferential payments" were introduced and crystallised in
the Companies Act, 1956.
3.3 It is submitted that a cumulative reading of Section 529 and
Section 529-A of the Companies Act, 1956 indicates that firstly, the
security of every secured creditor is deemed to be subject to a pari
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passu charge in favour of the appellant - workmen, to the extent of the
workmen's portion. Secondly, when the secured creditor opts to realise
his security, so much of the debt due to such secured creditor as could
not be realised by him by virtue of the proviso or the amount of workmen's
portion in his security, whichever is less, will rank pari passu with the
workmen's dues. Thirdly, the workmen's dues and debts of secured
creditor as described in Section 529(1) Proviso (c) get overriding
preferential payment and rank pari passu. These debts are payable in
full, unless the assets are insufficient to meet them, in which case they
shall abate in equal proportions.
3.4 It is submitted that Section 530, when it provides for
"Preferential Payments", restricts Government dues to a period of 12
months and wages or salary of an employee to a period not exceeding 4
months within 12 months next before the relevant date, subject to limit in
sub-section (2) of Section 530(1)(b).
3.5 It is submitted that prior to enactment of the Companies Act,
2013, there were several Committees that were set-up in order to consider
the proposals for reformation of the Companies Act, 1956. It is submitted
that two of these Committees and their proposals are indicative of the
issues that were sought to be addressed through a new, refurbished
legislation. In the year 2000, the Report of the High-Level Committee
on Law relating to Insolvency and Winding Up of Companies was
submitted under the chairmanship of Justice V. Balakrishna Eradi
(popularly known as "Eradi Committee"). On consideration of various
suggestions received by it, the Eradi Committee inter alia recommended
that appropriate legislative action must be taken to ensure that the claims
of all "employees of a company" and its secured creditors are ranked
pari passu. Thereafter, in 2005, the Report of Expert Committee on
Company Law, 2005 was submitted under the chairmanship of Dr.
Jamshed J. Irani. The Irani Committee, on consideration of proposals
before it, recommended that the status of secured creditors should be
pari passu with "employees" in respect of their claims after payment
of claims related to costs and expenses of administration of liquidation.
3.6 It is submitted that the focus of these two Committees was
on bringing the claims of "employees of a company" pari passu with
the secured creditors, when the existing provision as on that day only
specified that "workmen's dues" would rank pari passu with secured
creditors. It is submitted that these two Reports were followed by the
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introduction of the Companies Bill, 2009 which retained the same structure
as that of Section 529, 529-A and 530 of the Companies Act, 1956. It is
submitted that it was clear that the recommendations qua ranking of
dues of "employees of a company" were not accepted as the existing
structure had been retained. It is submitted that however, this Companies
Bill, 2009 lapsed and, therefore, the same was not given effect to.
3.7 It is submitted that thereafter, again, the Companies Bill, 2011
was introduced, which was then referred to a Standing Committee. The
Report of the Standing Committee of 15th Lok Sabha on Companies
Bill, 2011 notes the legislative changes made to the Companies Act,
1956 and the Companies Bill, 2009. It is submitted that this indicates that
Section 326, which was being introduced in lieu of Section 529-A of
Companies Act, 1956, will now include a proviso to Section 326(1) and
amendment to Section 326(2) to ensure that wages/salaries payable to
workmen for a period of 2 years is protected in the case of winding up.
The rationale given for this legislative change was to protect interest of
workmen in case of winding up. It is submitted that resultantly, the
Companies Act, 2013, as enacted, while mostly retaining the structure
of Section 529 and 529-A of the Companies Act, 1956, introduced the
proviso to Section 326(1) and also modified Section 326(2).
3.8 It is submitted that the consequence of this change was that
while workmen's dues and dues owed to secured creditors as per Section
325(1) Proviso (c) ranked pari passu, the wages and salaries due to
workmen for a period of 2 years preceding winding up order, shall be
paid in priority to all other debts, within a period of 30 days of sale of
assets and shall be subject to such charge over the security of secured
creditors as may be prescribed. Importantly, the Government Dues and
wages or salary owned to employees remained restricted to periods as
they were in the Companies Act, 1956. It is submitted that another
important aspect to be noted is that the definition of "workmen's dues"
includes the Pension Fund, Gratuity Fund and the Provident Fund amounts
and there was no exclusion of the said amounts in the case of liquidation.
It is submitted that therefore, the position of law regarding "overriding
preferential payments" and "preferential payments", as per the
Companies Act, 1956 and the Companies Act, 2013, is that workmen
have a charge over the property of the security of every secured creditor
to the extent of workmen's portion, the workmen's dues rank pari passu
with the debts owed to secured creditors and specifically wages or salary
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due to workmen for a period of 2 years preceding the winding up order
shall be paid in priority to all other debts.
3.9 That thereafter, Shri K.V. Viswanathan, learned Senior
Advocate and Amicus Curiae has taken us to the framing of the IBC. It
is submitted that the Bankruptcy Law Reforms Committee submitted its
Report on 04.11.2015. The said Report discussed the changes that are
to be made to the existing regime of insolvency and bankruptcy
proceedings and inter alia provided for reasons as to why changes
were being made to the existing position of law. It is submitted that
important parts of the Bankruptcy Law Reforms Committee (BLRC)
Report may be summarized as follows:
i.
The Committee noted that operational creditors will include
workmen and employees whose past payments are due.
ii.
Further, the Committee notes that the Central and State
Government dues will be kept at a priority below the
unsecured financial creditors in addition to all kinds of
secured creditors.
iii.
The Committee also categorically notes that liquidation under
the new regime will have an irreversible, time-bound process
with defined payout prioritisation. In the waterfall, secured
creditors shall share highest priority along with a defined
period of workmen dues.
iv.
Thereafter, the Committee, in order to bring the law in India
in line with global practice, established the priority of payout
in liquidation and drafting instructions were accordingly
given. As proposed, the costs of IRP and Liquidation would
rank first. After that, secured creditors and workmen dues
capped up to 3 months from the start of IRP will be given
pari passu priority. This was to be followed by dues to
employees capped up-to 3 months. As the next tier,
workmen dues for 9 month period beginning 12 months
before liquidation commencement date and ending 3 months
before liquidation commencement date were to rank along
with dues to unsecured financial creditors.
v.
The Committee also notes that there was some debate on
whether priority given to workmen in Companies Act, 2013
should be retained in the new Code.
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3.10 It is submitted that thus, the BLRC Report recommended a
waterfall mechanism that was different from the Companies Act, 1956
and the Companies Act, 2013, with due cognizance of the position of
law as it existed then. It is submitted that having reviewed the position of
law and in view of the objects sought to be achieved through the IBC,
the BLRC Report recommended that workmen's dues will be capped at
3 months and will have pari passu priority with secured creditors and
thereafter, the remaining dues will rank along with unsecured creditors.
3.11 It is submitted that the IBC was introduced as a Bill in 2015.
It is submitted that Section 36, as introduced in the Bill, provided for
formation of the liquidation estate. Section 36(4)(a)(iii), as introduced in
the Bill, stated that the contributions in respect of employee pensions
alone would be excluded from the liquidation estate assets and would
not be used for recovery in liquidation. Section 53, as introduced in the
Bill, provided for the waterfall mechanism for payout in case of liquidation.
Section 53(1)(b)(i) and (ii) ranked debts owed to secured creditors in
the event of them relinquishing security and workmen's dues for a period
of 12 months preceding liquidation commencement date, pari passu. It
is submitted that in terms of the waterfall mechanism, this was therefore
a step further than the path suggested by the BLRC Report since the
workmen's dues were to rank pari passu for a defined period of 12
months. It is submitted that however, thereafter, the IBC, when introduced
as a Bill, was then referred to a Joint Committee. The Joint Committee
on Insolvency and Bankruptcy Code, 2015 of the 16th Lok Sabha
submitted its report in April, 2016. It is submitted that the Joint Committee
Report made two important recommendations in regard to the provisions
contained in the Bill. Firstly, after noting representations from the
workmen and employees, it was recommended that the Provident Fund,
Pension Fund and Gratuity Fund are to be excluded from the liquidation
estate assets under Section 36, since they provide the social safety net
to the workmen and employees. Secondly, after consideration of the
representations that workmen dues are to be paid as per the scheme
contained in the Companies Act, 2013, the Joint Committee
recommended that since the dues owed to Governments are being paid
in respect of two years preceding liquidation commencement date, the
workmen's dues must also be paid for a period of two years, instead of
the existing period of 12 months, preceding liquidation commencement
date. It is submitted that this was recommended keeping in mind that the
workers are the "nerve centre of any company" and that their interests
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were to be protected. It is submitted that keeping in view the Joint
Committee Recommendations, the IBC was brought into force. It is
submitted that Section 36(4)(a)(iii) of the IBC now excludes all sums
due to any workman or employee from the Provident Fund, Pension
Fund and Gratuity Fund from being included in the liquidation estate
assets. It is further submitted that Section 53(1)(b)(i) and (ii) of the IBC
now ranks workmen's dues for a period of 2 years preceding the
liquidation commencement date and the debts owed to secured creditors
in event of them relinquishing their security pari passu. It is submitted
that dues owed to the employees are placed in Section 53(1)(c), confined
to a period of 12 months, and the dues to Central Government and State
Government are placed in Section 53(1)(e)(i), confined to a period of 2
years and below that of the unsecured creditors. It is submitted that the
result, therefore, is that the position and waterfall mechanism as provided
for in the Companies Act, 1956 and the Companies Act, 2013 has now
been altered after application of mind and resultantly, the workmen's
dues have been capped at 24 months preceding the liquidation
commencement date. The changes introduced from the erstwhile regime
have been so done on the basis of an organic evolution of law and
consultative process, after due consideration of the requirements of a
new Code governing liquidation.
3.12 It is submitted that Section 53 Explanation (ii) of IBC states
that the term "workmen's dues" shall have the same meaning as assigned
to it in Section 326 of the Companies Act, 2013. It is submitted that
thereafter, the Eleventh Schedule to the IBC proposes Amendments to
be made to Companies Act, 2013. It is submitted that importantly, Clause
18 of the Schedule omits erstwhile Section 325 of the Companies Act,
2013. It is submitted that Clause 19 of the Schedule amends Section 326
of Companies Act, 2013. Thereafter, Clause 20 of the Schedule inserts
Section 327(7) to the Companies Act, 2013 which states that Section
326 and Section 327 shall not be applicable in the event of liquidation
under the IBC. A conjoint reading of Section 53 Explanation (ii) of IBC
and Section 327(7) of Companies Act, 2013 would indicate that only the
meaning of "workmen's dues" is incorporated by reference into the IBC.
However, the waterfall mechanism, as has been fully altered by the IBC
will apply to these "workmen's dues" and not the waterfall mechanism
contained in Section 326 of Companies Act, 2013. It is submitted that
the reason for introduction of Section 327(7) of Companies Act, 2013 is
only to exclude the application of waterfall mechanism and the modalities
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contained in the Companies Act, 2013 which has now been changed
through the IBC. It is submitted that therefore, the argument that the
waterfall mechanism from the Companies Act, 2013 must apply even
under the IBC, would be wholly untenable and unworkable.
3.13 It is submitted that subsequently, the Insolvency Law
Committee submitted its report in 2018 under the chairmanship of Mr.
Injeti Srinivas. The Report contained summary responses of the
Committee to the comments and issues raised with respect to the IBC.
It is submitted that importantly, all questions that raised the issue of
workmen's dues either being unfairly ranked with secured creditors or
that workmen's dues were not protected under the IBC, the Committee
noted that the interests of workmen were protected in line with the Objects
sought to be achieved by the IBC.
3.14 It is further submitted that therefore, the legislature through
the IBC has attempted to overhaul the existing system of law and provide
for a different modality through which liquidation would function. It is
submitted that under the Companies Act, 2013, the waterfall mechanism
and preferential payments were being made, keeping in mind the scheme
of winding up of a Company. It is submitted that admittedly, workmen's
dues were given pari passu priority with secured creditors of a defined
kind and the wages and salaries owed for two years preceding the Order
of winding up was to get absolute priority. It is further submitted that on
the contrary, the scheme of the IBC is different from that of the Companies
Act, 2013. It is submitted that the focus, in the IBC, is to revive the
Company and it is only as a matter of last resort that liquidation
envisaged. In liquidation, from the time of the BLRC Report, the focus
has been on defined payout prioritisation and organically, the workmen's
dues have increased from 3 months to 12 months and now to 24 months
to rank pari passu with secured creditors who relinquish their security.
It is submitted that this evolution of the IBC has been as a result of a
consultative process, the position of workmen's dues has been reviewed
at multiple occasions and the legislature, in its wisdom, has opted to cap
it to a period of 24 months prior to liquidation commencement date. It is
further submitted that the Pension Fund, Gratuity Fund and Provident
Fund are left out of the liquidation estate, in a bid to protect the social
safety net of the workmen. Therefore, the changes made through the
IBC, to the existing scheme under the Companies Act, 2013 would not
be unconstitutional.
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3.15 Shri K.V.