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TMI Blog2022 (4) TMI 888X X X X Extracts X X X X X X X X Extracts X X X X ..... mbai, which was filed against the order passed by the National Company Law Tribunal, Ahmedabad Bench, Ahmedabad (hereinafter referred to as the 'Adjudicating Authority') dated 25.04.2019 not granting any relief to them with regard to their claim relating to salary, which they claimed for the period involving 'Corporate Insolvency Resolution Process' (hereinafter referred to as the 'CIRP') and the prior period, original applicants - workers/employees have preferred the present appeal. 2. That the Corporate Debtor was a private sector Ship Building Yard with its manufacturing activities at Dahej Yard and Surat Yard in Gujarat and having its corporate office at Mumbai. That prior to the initiation of CIRP, the Corporate Debtor had 562 workmen and 93 employees at Dahej; 291 workmen and 99 employees at Surat and 101 employees at its Mumbai Head Office. The appellants herein are the 272 employees and workmen employed at Mumbai Head Office and Dahej Yard of the Corporate Debtor. None of the 201 employees and workmen at Surat Yard are the appellants herein. 3. Vide its order dated 1.8.2017, the Adjudicating Authority admitted an application under Section 7 of the Insolvency and Bankruptc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idator of the Corporate Debtor. While passing the order of liquidation, the Adjudicating Authority also disposed of Company Application No. 348/2017 in view of the order passed in Company Application No. 78/2018 by which the Adjudicating Authority earlier directed to deposit Rs. 2.75 crores towards the dues of the appellants which as such was subject to the final outcome of Company Application No. 348/2017. Therefore, as such, the Adjudicating Authority while disposing of Company Application No. 348/2017 did not grant the relief claimed by the appellants - 272 workers/employees working at Dahej Yard and Mumbai Head Office for their claim relating to salary for the period involving CIRP and the prior period. 4. Feeling aggrieved and dissatisfied with the order passed by the Adjudicating Authority, not granting the relief to the appellants herein with regard to their claim relating to salary/wages, which they claimed for the period involving CIRP and prior period, the appellantsworkmen/employees working at Dahej Yard and Mumbai Head Office preferred Company Appeal No. 605/2019 before the Appellate Tribunal. By the impugned order, the Appellate Tribunal has disposed of the said appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is submitted that therefore when the Corporate Debtor was managed as a going concern, which as such is mandatory under Section 19 of the IB Code and when the operations at Dahej Yard were not suspended, the workmen/employees at Dahej Yard are entitled to at least the wages/salaries during the CIRP period. It is submitted that irrespective of whether the wages/salaries for the period during CIRP are to be qualified as CIRP cost or not, provident fund, gratuity and pension fund are to be paid to the workmen and employees at Dahej Yard under Section 36(4) of the IB Code in priority over other dues, which are also not paid till date. 6.2 It is further submitted that in the present case, throughout the CIRP period, the employees and workmen of Dahej Yard were asked to assemble at ABG Enclave and sign the attendance register since transportation to the yard was discontinued by the RP. It is submitted that throughout the CIRP period, the employees of Mumbai office had regularly attended the office; recorded their attendance with the Attendance Reader installed at the Mumbai office. Learned counsel appearing on behalf of the appellants has relied upon some documents from the paper book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat as per Section 5(13) of the Code, "Insolvency Resolution Process Cost" means any costs incurred by the RP in running the business of the Corporate Debtor as a going concern and any other costs as may be specified by the IBBI - Liquidator. It is submitted that in the present case, vide Circular dated 12.06.2018, the Liquidator had clearly provided the costs on account of employees and workmen under the head "other services in a running business" in Forms I, II and III submitted by the RP with respect to CIRP costs incurred by him. It is submitted that therefore the salaries/wages and the dues payable to the employees/workmen during the CIRP period will be qualified as CIRP costs under Section 5(13) of the IB Code and are liable to be disbursed even prior to the amount distributed under Section 53 of the IB Code. 6.8 It is further submitted that even otherwise the provident fund, gratuity and pension fund amounts remain outside the liquidation under Section 36(4) of the IB Code. It is submitted that the obligation to pay the provident fund, gratuity fund amount would arise as soon as the employees and workmen are deemed to have been discharged under Section 33(7) of the IB Code. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to allow the present appeal. 7. The present appeal is vehemently opposed by Shri Nakul Dewan, learned Senior Advocate appearing on behalf of respondent no.1 - Liquidator of Corporate Debtor. 7.1 Shri Nakul Dewan, learned senior counsel appearing on behalf of the Liquidator of Corporate Debtor has vehemently submitted that the wages and salaries claimed by the appellants who have done no work during the CIRP period and have not assisted the RP/Liquidator during the CIRP, would not fall within the parameters of CIRP costs within the definition of Section 5(13)(c) of the IB Code. 7.2 It is submitted that only 8 employees at the Mumbai location for eight months during the CIRP and workmen/employees from Surat (from August 2017 to October 2017) assisted the RP in providing services required under the CIRP process. It is submitted that the remaining employees and workmen including the appellants herein were not required to and did not perform any services to run the Corporate Debtor during the CIRP period. It is submitted that therefore the COC of the Corporate Debtor rightly did not approve any payments to the appellants as part of the CIRP costs. It is submitted that the wages an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g any order in favour of the workmen/employees. 7.7 It is further submitted that Section 53 of the IB Code sets out the waterfall mechanism in terms of which the dues of the creditors are paid. It is submitted that even the operational creditors fall sixth in line after payment of CIRP dues, dues of Secured Creditors etc. It is submitted that even after the Corporate Debtor goes into liquidation in terms of Section 33 of the IB Code, the dues of the employees and workmen being operational creditors would be paid in last in terms of the waterfall mechanism of Section 53(1)(f) of the IB Code. It is therefore submitted that the respective appellants - workmen/employees are not entitled to any wages/salaries for the period during CIRP as CIRP costs, as claimed by them. 7.8 Shri Nakul Dewan, learned Senior Advocate appearing on behalf of respondent no.1 - RP/Liquidator has further submitted that the costs incurred during the CIRP period by the Corporate Debtor/RP will qualify as CIRP costs only with respect to costs incurred by the RP running the company as a going concern under Section 5(13) (c) of the IB Code and in a case where the same has been approved by the COC under Regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing concern, since (i) the Corporate Debtor was never a going concern and (ii) the Dahej Yard was not in operation since June, 2015 and (iii) Operations at the Surat Shipyard were completely shut from October, 2017. It is submitted that therefore the appellants who are the workmen of the Dahej Yard and employees of the Mumbai Head Office, cannot claim any amounts towards wages/salaries for the CIRP period, since no work/services were rendered by them, except for the critical Mumbai employees whose salaries were ratified by the COC during the first COC meeting. 7.13 Making the above submissions, it is submitted that the wages and salaries of the workmen/employees at Dahej Yard and the employees at Mumbai Head Office, except those who worked during the CIRP period, cannot be included and/or considered as CIRP costs and therefore they have to be paid as per the waterfall mechanism mentioned in Section 53(1)(b) & (c) of the IB Code. 7.14 It is submitted that therefore the respective workmen employed at Dahej Yard and some of the employees employed at Mumbai Head Office were required to submit their individual claims and they have to establish before the RP/Liquidator that in fact the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssional and provide access to such documents and records of the corporate debtor as may be required by the interim resolution professional; (d) the financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the interim resolution professional in relation to such accounts and furnish all information relating to the corporate debtor available with them to the interim resolution professional. (2) The interim resolution professional vested with the management of the corporate debtor shall- (a) act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents, if any; (b) take such actions, in the manner and subject to such restrictions, as may be specified by the Board; (c) have the authority to access the electronic records of corporate debtor from information utility having financial information of the corporate debtor; (d) have the authority to access the books of account, records and other relevant documents of corporate debtor available with government authorities, statutory auditors, accountants and such other persons as [may be specified; and] [(e) be responsible for complying with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ittee of creditors; (g) prepare the information memorandum in accordance with section 29; (h) invite prospective resolution applicants, who fulfil such criteria as maybe laid down by him with the approval of committee of the creditors, having regard to the complexity and scale of operations of the business of the corporate debtor and such other conditions as may be specified by the Board, to submit a resolution plan or plans. (i) present all resolution plans at the meetings of the committee of creditors; (j) file application for avoidance of transactions in accordance with Chapter-III, if any; and (k) such other actions as may be specified by the Board. Section 33(7) 33(7). The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator. Section 36(4) Section 36 (4) Liquidation Estate - (4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: - (a) assets owned by a third party which are in posse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the period of two years preceding the liquidation commencement date; (ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest; (f) any remaining debts and dues; (g) preference shareholders, if any; and (h) equity shareholders or partners, as the case may be. (2) Any contractual arrangements between recipients under sub-section(1) with equal ranking, if disrupting the order of priority under that subsection shall be disregarded by the liquidator. (3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction. Explanation. -For the purpose of this section- (i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and (ii) the term "workmen's dues" shall have the same meaning as assigned to it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actment of the IB Code, the winding up proceedings in case of insolvency are to be governed by the provisions of the IB Code and the provisions of the IB code only shall be applicable to deal with the winding up proceedings as the IB Code is a complete Code in itself. That thereafter, an amendment w.e.f. 15.11.2016 has been brought in under Section 327 (7) of 2013 Act wherein it has been clarified that the provisions of Section 326 and Section 327 of the 2013 Act will not be applicable in the event of liquidation under the IB Code. 8.2.3 In case of any insolvency, in a winding up of a company under Section 326 and 327 of the Companies Act, the workmen dues are to be paid as under: - * workmen's portion in the security shall be paid in priority to all other debts. * however, workmen's dues (given in (b)(i) and (ii) payable for the period of 24 months, shall be paid in priority to all other debts (including debts due to secured creditors). This means that wages/salary for the period of 24 months is over and above every other claim/debts (including debts due to secured creditors). * workmen's dues include Provident Fund, Pension Fund and Gratuity Fund or any other Fund for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In light of the same, the Section 36 of the Code has clearly given outright protection to workmen's dues under Provident Fund, Pension Fund and Gratuity Fund which is not treated as liquidation assets and liquidator has no claim over such funds. Therefore, this share of workmen's dues has consciously been taken outside the liquidation process. 8.2.6 In light of the above statutory provisions under the IB Code and the legislative history, the claims of the workmen/employees towards wages/salaries prior to CIRP and during the CIRP are required to be considered. 9. It cannot be disputed that as per Section 5(13) of the IB Code, "insolvency resolution process costs" shall include any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern. It is also true that Section 20 of the IB Code mandates that the interim resolution professional/resolution professional is to manage the operations of the corporate debtor as a going concern and in case during the CIRP the corporate debtor was a going concern, the wages/salaries of such workmen/employees who actually worked, shall be included in the CIRP costs and in case of liquidation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g concern. It is seriously disputed that the respective appellants - workmen/employees employed at Dahej Yard and Mumbai Head Office actually worked during the CIRP. It is true that while submitting the claims towards CIRP costs, the RP has not submitted the claims towards the wages/salaries of the appellants, however, still the claims submitted/to be submitted by the appellants will have to be adjudicated upon and considered by the Liquidator and the Liquidator has to adjudicate and consider, (i) whether the Corporate Debtor was a going concern during the CIRP; (ii) how many workmen/employees actually worked during the CIRP while the Corporate Debtor was a going concern. If on adjudication of the claims made by the respective workmen/employees, if it is established and proved that during CIRP, the Corporate Debtor was a going concern and the concerned workmen/employees actually worked during the CIRP when the Corporate Debtor was a going concern, the wages and salaries of such workmen/employees to be included in the CIRP costs as defined under Section 5(13) of the IB Code and they will have to be paid such wages/salaries as per Section 53(1)(a) of the IB Code as part of the CIRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund", from the ambit of "liquidation estate assets". Therefore, Section 53(1) of the IB Code shall not be applicable to such dues, which are to be treated outside the liquidation process and liquidation estate assets under the IB Code. Thus, Section 36(4) of the IB Code has clearly given outright protection to workmen's dues under provident fund, gratuity fund and pension fund which are not to be treated as liquidation estate assets and the Liquidator shall have no claim over such dues. Therefore, the concerned workmen/employees shall be entitled to provident fund, gratuity fund and pension fund from such funds which are specifically kept out of liquidation estate assets and as per Section 36(4) of the IB Code, they are not to be used for recovery in the liquidation. 14. In view of the above and for the reasons stated above, it is held as under: i) that the wages/salaries of the workmen/employees of the Corporate Debtor for the period during CIRP can be included in the CIRP costs provided it is established and proved that the Interim Resolution Professional/Resolution Professional managed the operations of the corporate debtor as a going concern during the CIRP and that the co ..... 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