The Supreme Court expounded that the Legislature made a conscious decision to exclude the sums such as provident fund, pension fund and gratuity fund out of workmen dues and to put workmen dues for 24 months preceding the liquidation date at an equal pedestal with the dues owed to the secured creditor. This decision cannot be claimed to be unconstitutional.
It was categorically held that workman and secured creditor can be kept at an equal footing only when secured creditor has relinquished its security and the same it the part of the sage of the liquidation pool.
The broader goal of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) is to explore whether the Corporate Debtor can be revived or not and if nor then economic assets have to be maximized and hence, the waterfall mechanism should be seen in light of this. Conflicting interest have to be balanced when economics are involved.
Lastly, the Bench highlighted the difference between the waterfall mechanism given in the Companies Act, 2013 and the IBC stating that waterfall mechanism is based on structured mathematical formula and therefore, the hierarchy is created in terms of payment of debts. Striking off any one thing would disbalance the entire structure and disrupt the working as interest of all the stakeholders would get affected. Further, the waterfall mechanism as envisaged under the IBC is way more beneficial than the one in Companies Act, 2013.
Brief Facts:
The present writ petition has been filed to challenge the constitutional validity of Section 327(7) of the Companies Act, 2013 as being violative of Article 21 of the Constitution. Further, it has been prayed to exclude the statutory claims of the workmen’s dues from the waterfall mechanism under Section 53 of the IBC. It has been sought to declare Clause 19(a) of the 11th Schedule of the IBC as unconstitutional as it violates Article 14 of the Constitution. Lastly, it has been prayed that settlement of workmen dues be done as per Section 326 even in the event of liquidation.
Contentions of the Amicus Curiae (Petitioners):
Taking support of the legislative history of the Companies Act, 1956, it was submitted that the workmen have charge over property of the security of every secured creditor to the extent of the dues of the workmen and therefore, workmen’s dues rank pai passu with the debts owed to secured creditors.
Regarding IBC, it was submitted that Section 53 ranks workmen dues for a period of 2 years preceding the liquidation commencement date and debts owed to secured creditors in even of them relinquishing their security pari passu, which is contrary to what was recommended by the Joint Committee Recommendations before the IBC came into force
It was contended that Section 53 Explanation (ii) of IBC shall define workmen’s dues as the meaning has been assigned under Section 326 of the Companies Act, 2013.
It was alleged that in various judicial pronouncements, the Court has noted that Section 53 of IBC was not unconstitutional as it follows reasonable classification when it comes to Financial and Operational Creditors. Further, it was argued that after consultative process, the Legislature decided to cap the workmen dues to a period of 24 months prior to liquidation commencement date. The changes made through the IBC to existing scheme of Companies Act, 2013 would therefore not be unconstitutional.
Contentions of the Respondents:
It was submitted that the Section 326 and 327 of the Companies Act, 2013 would only apply if there was winding up under the said Act. Further, as per IBC, workmen dues are given top priority in the waterfall mechanism. There are certain payouts that are not to be included in the liquidation estate such as provident fund, pension fund and gratuity fund.
Further, it was asserted that IBC was introduced as a Code which confirmed with international practices and consolidated many laws on insolvency subject. The process under IBC is critical for economic coordination between the parties who patake in or are bound by the process.
It was argued that the share of workmen dues pertaining to provident fund, pension fund and gratuity fund was consciously taken out to give effect to a larger economic goal.
Further, it was contended that the interest of workmen is protected irrespective of relinquishment of the security by the secured creditor.
Observations of the Court:
It was firstly observed that after IBC’s enactment, it became necessary to amend the Companies Act, 2013 as there could not be 2 different legislations regarding winding up or liquidation of company. Therefore, excluding application of Section 326 and 327 of the Companies Act, 2013 cannot be said to be arbitrary.
Further, it was ruled that merely because under the previous Companies Act, 2013 the dues of workmen were pari passu with security creditor, the same cannot be claimed now. The parties are to be governed under IBC in case of liquidation of company and hence, IBC rules would apply.
It was expounded that the Legislature made a conscious decision to exclude the sums out of workmen dues and to put workmen dues for 24 months preceding the liquidation date at an equal pedestal with the dues owed to the secured creditor. This decision cannot be claimed to be unconstitutional.
Further, it was opined that the object and purpose of IBC is different from the Companies Act and therefore the two cannot be compared.
It was categorically held that workman and secured creditor can be kept at an equal footing only when secured creditor has relinquished its security and the same it the part of the sage of the liquidation pool.
The broader goal of IBC is to explore whether the Corporate Debtor can be revived or not and if nor then economic assets have to be maximized and hence, the waterfall mechanism should be seen in light of this. Conflicting interest have to be balanced when economics are involved.
Lastly, the Bench highlighted the difference between the waterfall mechanism given in the Companies Act, 2013 and the IBC stating that waterfall mechanism is based on structured mathematical formula and therefore, the hierarchy is created in terms of payment of debts. Striking off any one thing would disbalance the entire structure and disrupt the working as interest of all the stakeholders would get affected. Further, the waterfall mechanism as envisaged under the IBC is way more beneficial than the one in Companies Act, 2013.
The decision of the Court:
Based on the aforementioned reasoning, the Supreme Court accoridngly dismissed the writ petition.
Case Title: Moser Baer Karamchari Union Thr. V. Union of India & Ors. with other connected matters
Coram: Hon’ble Justice M.R. Shah, Hon’be Justice Sanjiv Khanna
Case No.: Writ Petition (C) No. 421 of 2019
Citation: 2023 Latest Caselaw 425 SC
Advocates for Petitioners: Advs, Shri K.V.Viswanathan, Shri Gopal Sankaranarayanan
Advocate for Respondent: Adv. Shri Balbir Singh
Read Judgement @LatestLaws.com
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