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2023 (5) TMI 143 - SC - Insolvency and BankruptcyConstitutional Validity of Section 327(7) of the Companies Act, 2013 - statutory claims of the workmen s dues out of the purview of waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016 or not - purposive interpretation to Section 53 of the IBC. Constitutional Validity of Clause 19(a) of the Eleventh Schedule of the IBC pursuant Section 255 of the IBC - violative of Article 14 of the Constitution of India,or not, 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 - HELD THAT - As per Section 327(7), Sections 326 and 327 of the Act, 2013 shall not be applicable in the event of liquidation under the IBC. Sections 326 and 327 of the Act, 2013 provide for preferential payments in a winding up under the provisions of the Act, 2013. However, in view of the introduction of new regime under the IBC, in case of liquidation under IBC, distribution is to be made as per Section 53 of IBC. At this stage, it is required to be noted that IBC has been enacted w.e.f. 28.05.2016 and as per Section 53 of the IBC, the distribution of assets in case of liquidation under the IBC is required to be made - In view of the enactment of IBC 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 as contended on behalf of the petitioner. Merely because under the earlier regime and in case of winding up of a company under the 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 - 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. In case of insolvent companies, for the sake of survival and regeneration, everyone, including the secured creditors and the Central and State Government, are required to make sacrifices. 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, we will not set aside the legislation, solely on the ground that some or marginal sacrifice is to be made by the workers. Difference in the waterfall mechanism provided in the Companies Act, 2013 and the Code - HELD THAT - As per Section 324 of the Companies Act, 2013, all debts payable on a contingency, or all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, are admissible to proof against the company. A just estimate can be made so far as possible in respect of value of such debts or claims as may be subject to any contingency, damages, etc. and do not bear a certain value. Section 326 7 of the Companies Act, 2013 deals with overriding preferential payments which have to be paid in priority to all other debts. These include the workmen debts, and dues of the secured creditor where the secured creditor has realised the secured asset but could not realise the entire amount, or the amount of workmen s portion in his security payable under the law, whichever is less, pari passu with the workmen s dues - the aggregate amount due towards workmen s dues and the amount of debts due to the secured creditors is Rs. 4 lakhs. In this background, when the value of the security of the secured creditors is Rs. 1 lakh, one-fourth of the value of the security, i.e. Rs.25,000/- would be the workmen s portion. To this extent, there is no difficulty or dispute. As noticed below there is hardly any difference in the said hierarchy and the waterfall mechanism under the Code. What is clear from the provision is that the proviso applies in case of winding up of a company to the sums referred to in sub-clauses (i) and (ii) of clause (b) of the Explanation to Section 326 of the Companies Act, 2013 which are payable for a period of two years preceding the winding up order or such other period as may be prescribed - this period of two years is with reference to the date of the winding up order, and not with reference to the date earlier in point of time, that is, when a winding up petition is filed. This restricts the period for which payment under sub-clauses (i) and (ii) to clause (b) of the Explanation to Section 326 of the Companies Act, 2013 would apply. Entire unpaid dues are not covered by the proviso to subsection (1) to Section 326 of the Companies Act, 2013. To protect the interest of the workmen where the secured creditor does not relinquish its security interest to fall under Section 53 of the Code, Regulation 21A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 has been enacted, and it requires that the secured creditor, who opts to realise its security interest as per section 52 of the Code, has to pay as much towards the amount payable under the clause (a) and sub-clause (i) to clause (b) of sub-section (1) to Section 53 of the Code to the liquidator within the time and the manner stipulated therein. The workmen s dues, even when the secured creditor opts to proceed under Section 52 of the Code, are therefore protected in terms of sub-clause (b) of sub-section (1) to Section 53 of the Code. 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 defined period of dues of the workmen - The Code balances the rights of the secured creditors, who are financial institutions in which the general public has invested money, and also ensures that the economic activity and revival of a viable company is not hindered because it has suffered or fallen into a financial crisis. The Code focuses on bringing additional gains to both the economy and the exchequer through efficiency enhancement and consequent greater value capture. 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 law-makers. 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. 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. The writ petition(s) lack merits and the same deserve to be dismissed and are accordingly dismissed.
Issues Involved:
1. Constitutionality of Section 327(7) of the Companies Act, 2013. 2. Applicability of the waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC). 3. Comparative analysis of the treatment of workmen's dues under the Companies Act, 2013, and the IBC. 4. The legislative intent and evolution of insolvency laws in India. Summary: Issue 1: Constitutionality of Section 327(7) of the Companies Act, 2013 The petitioners challenged Section 327(7) of the Companies Act, 2013, arguing it was arbitrary and violative of Article 21 of the Constitution of India. Section 327(7) stipulates that Sections 326 and 327 of the Companies Act, 2013, shall not apply in the event of liquidation under the IBC. The Supreme Court held that this exclusion was necessary to avoid conflicting provisions between the Companies Act and the IBC. The Court found that the exclusion was not arbitrary, as the IBC, enacted in 2016, provided a comprehensive insolvency mechanism distinct from the Companies Act, 2013. Issue 2: Applicability of the Waterfall Mechanism under Section 53 of the IBC The petitioners sought to exclude workmen's dues from the waterfall mechanism under Section 53 of the IBC. Section 53(1)(b) of the IBC ranks workmen's dues for the period of 24 months preceding the liquidation commencement date equally with secured creditors who have relinquished their security. The Court noted that the IBC is a complete code with a distinct objective of reviving companies and ensuring equitable distribution of assets. The Court held that the ranking of workmen's dues under the IBC was not arbitrary or violative of Article 21, as it provided a balanced approach to protect the interests of workmen while ensuring the revival of companies. Issue 3: Comparative Analysis of Workmen's Dues The Court examined the historical context and legislative intent behind the provisions for workmen's dues in the Companies Act, 1956, the Companies Act, 2013, and the IBC. The Companies Act, 2013, provided for overriding preferential payments to workmen, whereas the IBC introduced a different mechanism. The IBC excluded sums due to workmen from provident fund, pension fund, and gratuity fund from the liquidation estate, ensuring their protection. The Court found that the IBC's provisions were a result of an extensive consultative process and aimed at balancing the interests of all stakeholders, including workmen. Issue 4: Legislative Intent and Evolution of Insolvency Laws The Court reviewed the legislative history and the reports of various committees that led to the enactment of the IBC. The IBC was designed to create a time-bound and efficient insolvency resolution process, distinct from the winding-up provisions under the Companies Act, 2013. The Court emphasized the principle of judicial deference to economic legislation, noting that the IBC was a product of a well-considered legislative process aimed at addressing the complexities of insolvency and bankruptcy. Conclusion: The Supreme Court dismissed the writ petitions, upholding the constitutionality of Section 327(7) of the Companies Act, 2013, and the applicability of the waterfall mechanism under Section 53 of the IBC. The Court found that the IBC provided a balanced and equitable framework for the distribution of assets in liquidation, protecting the interests of workmen while ensuring the revival of companies. The Court reiterated the principle of judicial restraint in matters of economic legislation, emphasizing the need for a holistic approach to insolvency and bankruptcy laws.
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