Case Number: Writ Petition(C) No. 421 of 2019, Writ Petition(C) No. 777 of 2020, Writ Petition(C) No. 712 of 2020

Judges Name: Hon’ble Judges M. R. Shah J.

Order dated: 02.05.2023

Facts of the Case:

1. The case involves a writ petition filed under Article 32 of the Constitution of India by the Moser Baer Karamchari Union. The petitioners are seeking to challenge the constitutionality of Section 327(7) of the Companies Act, 2013(Act), and the application of the waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC). They argue that these provisions are arbitrary and violate Article 21 of the Constitution. 
2. The petitioners also seek a writ of mandamus to exclude the statutory claims of “workmen’s dues” from the waterfall mechanism and to interpret Section 53 of the IBC in a way that allows them to receive their dues of 24 months without delay. They have prayed to declare Clause 19(a) of IBC as unreasonable and violative or Art. 14 of the Constitution as its existence puts a statutory bar on the application of S. 326 and 327 of the Companies Act, 2013 to the liquidation proceedings under IBC. 
3. The petitioners are seeking a declaration that the distribution of workmen’s dues as outlined in Section 53(1)(b)(i) of the Insolvency and Bankruptcy Code (IBC) is unreasonable and violates Article 14 of the Indian Constitution. They argue that this provision limits the payment of workmen’s dues to a maximum of twenty-four months prior to the liquidation order and ranks these dues equally with secured creditors if the secured creditors have relinquished their security under Section 52 of the IBC. 
4. The petitioners also requested that the settlement of workmen’s dues should follow the reasonable principles outlined in Section 326 of the Companies Act, even in the case of liquidation under the IBC. 
5. The Companies Act, 1956, through the Companies (Amendment) Bill, 1985 sought to introduce the proviso to sub-section (1) of Section 529 for overriding preferential payments and workmen’s portion to ensure distribution of company resources to workers. 
6. The Companies Act, 2013, retained the structure but made amendments to prioritize workmen’s dues, excluding certain funds from the liquidation estate. In the waterfall, secured creditors shall share highest priority along with a defined period of workmen dues. 
7. The Insolvency and Bankruptcy Code (IBC) introduced a different waterfall mechanism, ranking secured creditors and workmen’s dues for 2 years preceding liquidation commencement date pari passu. The IBC’s provisions were based on the recommendations of the Bankruptcy Law Reforms Committee and the Joint Committee, ensuring protection for workmen’s interests in line with the objectives of the IBC. 
8. The Petitioner submits that the IBC focuses on reviving the company and resorting to liquidation only as a last option. The IBC has evolved through a consultative process, with workmen’s dues being reviewed and increased over time. These dues now rank equally with secured creditors who surrender their security. The legislature has chosen to cap workmen’s dues at 24 months prior to liquidation. The Pension Fund, Gratuity Fund, and Provident Fund are excluded from the liquidation estate to protect the social safety net of the workers. 
9. The Respondent contends that Section 325 of the Companies Act, 2013, which dealt with the winding up of insolvent companies, was omitted on November 15, 2016, with the introduction of the Insolvency and Bankruptcy Code (IBC). Currently, the winding up proceedings in case of insolvency are governed by the IBC. 
10. In case of winding up under the Companies Act, 2013, according to Sections 326 and 327, workmen’s portion in the security is given priority over other debts, and workmen’s dues for a period of 24 months have top priority. The IBC introduced a waterfall mechanism similar to Section 530 of the Companies Act, 1956. Workmen’s dues are given top priority in the distribution of sale proceeds of liquidation assets under Section 53 of the IBC. 
11. The liquidation process is covered under Chapter III of the IBC (Sections 33 to 54). Section 36 of the IBC specifies certain payouts that are not included in the liquidation estate assets, including payments due to workmen from Provident Fund, Pension Fund, and Gratuity Fund. Moreover, liquidation costs, which include the salary and wages of workmen during the liquidation process, are prioritized and paid in full. Workmen’s dues for 24 months are paid along with secured creditors’ dues in case of relinquishment of security. 
12. A challenge has been made to Section 53 of the IBC on the grounds of Article 14 of the Constitution of India, alleging that workmen are at a disadvantageous position compared to the provisions of the Companies Act, 1956 and the Companies Act, 2013. The Respondent state that objective of the IBC is to unlock sick and insolvent companies, revive them, and maximize the value of assets for all stakeholders. Liquidation costs cover the wages and salary of workmen during the liquidation process. The Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 provide a mechanism for workmen and employee claims. 
13. The position of workmen and secured creditors being at equal footing under Section 53 of the IBC is applicable only in cases where the secured creditor has relinquished its security. Secured creditors who realize their security interest contribute to the payment of workmen’s dues. The IBC aims to promote a collective liquidation process, encourage secured creditors to relinquish their security interest, and maximize overall value. 
14. The Respondent submitted that the IBC protects the rights and interests of workmen, and their compensation is equitable. The ranking of workmen and secured creditors is not arbitrary or unconstitutional. The IBC strikes a balance between stakeholders, including the Central Government, in the recovery of statutory dues to enable value maximization and revive unhealthy companies. 
15. Laws relating to the economy should be viewed with greater latitude than laws touching civil rights, as observed by the court in previous cases.

Hon’ble Supreme Court Observed/ Held as Follows:

• The court held that the writ petitions lack merit and they are accordingly dismissed, and upholds the constitutional validity of the Code and concludes that it passes constitutional muster, highlighting the ongoing nature of amendments and monitoring by the government. The Companies Act, 2013, does not address insolvency and bankruptcy issues comprehensively like the Code does. 
• The Code aims to revive corporate debtors, maximize the use of economic assets, and provide an effective legal framework to enhance credit viability for banks and financial institutions. It recognizes the financial impact on secured creditors and the need for economic growth and fresh investments in the industry to prevent job loss, insolvencies, and bankruptcies. 
• The court emphasizes that economic matters require a holistic approach and deference to legislative judgment, as economic legislation deals with complex problems that do not have one-sided solutions.(BALCO Employees Union v. Union of India, (2002) 2 SCC 333) 
• It is necessary to exclude the applicability of Sections 326 and 327 of the Act in light of the enactment of the IBC. This exclusion cannot be considered arbitrary, as contended by the petitioner.