Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma vs Union of India and Ors.

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 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 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 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 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]

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 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.