Moser Baer Karamchari Union VS Union Of India And Ors (Case Summary)
In another constitutional challenge to Insolvency and Bankruptcy Code, 2016, the Supreme Court in Moser Baer Karamchari Union vs Union of India and ORs (Writ Petition (C) No. 421 of 2019) has held that waterfall distribution to stakeholders under Section 53 is valid.
The said Writ Petition was filed for declaring Clause 19 (a) of Eleventh Schedule of Insolvency and Bankruptcy code, 2016 and Section 327 (7) of the Companies Act, 2013 as unconstitutional.
BACKGROUND OF THE CASE
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.
Section 326 and Section 327 of the Companies Act deal with preferential payments to certain creditors in winding up process. Section 271 of the Companies Act deals with situations wherein winding up process of a company can be initiated. One of the grounds of initiating winding up petition under Section 271 was inability of pay debts. After enactment of Insolvency and Bankruptcy Code, 2016 this ground has been deleted from the Insolvency and Bankruptcy Code, 2016 but winding up on other grounds are as yet to be initiated under provisions of Companies Act, 2013. In such cases distribution to creditors have to be made as per Section 326 and Section 327. On the other hand distribution under liquidation proceedings under Insolvency and Bankruptcy Code, 2016 has to be made as per Section 53 of the Code.
Distribution to workmen distribution under Section 326 & 327 of the Companies Act, 1956 is to some extent different in comparison to Section 53 of the Insolvency and Bankruptcy Code, 2016. Under the Insolvency and Bankruptcy Code, workmen dues for 24 months preceding Liquidation Commencement Date along with Secured Creditor have been given highest priority in distribution waterfall after payment of CIRP and Liquidation Cost.
Under Section 326 of the Companies Act, workmen dues has been the highest priority alongwith secured creditors but there is no limit of only 24 months. Further dues of workmen on account of wages, salary and accrued holidays have to be paid within a period of 30 days of sale of assets.
The Petitioners has challenged this different distribution regime before the Hon’ble Supreme Court.
FINDING OF THE SUPREME COURT
The Supreme Court found did not find any merit in the Writ Petition and dismissed the same. The Supreme Court observed that objectives of Companies Act and Insolvency and Bankruptcy Code are very different. The two enactments deal with two distinct situations and in our opinion, they cannot be equated when we examine whether there is discrimination or violation of Article 14 of the Constitution of India. Companies Act does not deal with insolvency and bankruptcy on the ground of inability to pay debts. Under Section 271 of the Companies Act, even a financial sound company can be wound up. For revival and rehabilitation of a company, sacrifices from all the stakeholder are required including that of workmen.
The Supreme Court noted that interest of workmen has been reasonably protected under the IBC. After the costs of Insolvency Resolution Process and Liquidation, secured creditors share the highest priority along with a defined period of dues of the workmen. 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.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.