Decided on 2nd May 2023 | Supreme Court of India
In Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma v. Union of India and Ors., the Supreme Court of India has upheld the Companies Act 2013 (“Act“) provision that overrides payment of workers’ dues during Liquidation process under the Insolvency and Bankruptcy Code, 2016 (“IBC“).
Karamchari Union (“the Union“) of Moser Baer India Limited, a company in Liquidation, was dissatisfied with the Liquidator’s decision to deny them priority payment of their pension, gratuity, provident fund, and severance pay.
The Union petitioned the Supreme Court to strike down Section 327 (7) of the Act as arbitrary and in violation of Article 21 of the Constitution, which protects the right to a livelihood. The Union argued that the said provision renders meaningless Explanation (II) under Section 53 of IBC, which defines “workmen’s dues”, and prohibits the application of Sections 326 and 327 of the Act, which gave priority to payment of workmen’s dues during winding up of a company.
In accordance with Sections 326 and 327 of the Act, the prioritised payments included workers’ dues, revenues, taxes, and cesses owed by the business to the Union government, a State government, or a local authority. However, the addition of Section 327 (7) to the Act has rendered the afore-mentioned provisions null and void, and in such a case, Section 53 of the IBC, which provides the cascade mechanism, applies.
The Union of India and other respondents asserted that Section 36 of the IBC fully protects gratuity, pension, and provident funds because they are not deemed liquidation assets and therefore the liquidator cannot make a claim on these funds.
The Supreme Court ruled that Section 327 (7) of the Companies Act, 2013 does not violate Article 21 of the Constitution and noted that Sections 326 and 327 shall not apply in the event of liquidation under the IBC. The Supreme Court made it abundantly clear that if a company is being liquidated under the IBC, the distribution of assets will only occur in accordance with the waterfall mechanism outlined in Section 53 of the IBC, subject to Section 36 (4) of the IBC, which provides a structured mathematical formula and establishes a hierarchy in terms of the payment of debts in the order of their priority.
The Supreme Court emphasized the intent behind the creation of the IBC and emphasised that the primary purpose of the Code was to increase investments by facilitating business in order to promote economic stability and employment growth. The Supreme Court opined that everyone, including workers, must make sacrifices in order to achieve the larger objective of company revival and rehabilitation. Further, the ‘waterfall mechanism’ under Section 53 is a well-thought-out formula and the hierarchy created with regards to payments of debts is based on a number of factors; if the provisions are struck down or altered, the resulting instability will have a negative impact on the balance of rights of the company’s various creditors. In addition, it is crucial to avoid adopting a one-sided approach when resolving complex disputes and to examine them holistically.