Moser Baer Karamchari Union Vs Union of India (Supreme Court of India)
By way of this writ petition under Article 32 of the Constitution of India, the petitioner – union has sought for an appropriate writ, direction or order striking down Section 327(7) of the Companies Act, 2013 as arbitrary and violative of Article 21 of the Constitution of India. The petitioner has also sought for an appropriate direction so as to leave the statutory claims of the “workmen’s dues” out of the purview of waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016. 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.
At this stage, it is required to be noted that Sub-Section (7) of Section 327 of which the vires are under challenge, shall be applicable in case of liquidation of a company under the IBC. Meaning thereby, in case of liquidation of a company under IBC, the provisions of Section 53 of the IBC and other provisions of the IBC shall be applicable as the company is ordered to be liquidated or wound up under the provisions of IBC. Therefore, 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 pani 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.
Section 53 of the Code which begins with a non-obstante clause and states that notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of liquidation assets shall be distributed in the order of priority, which is stipulated, and within such period and such manner as may be specified. The consequence of sub-section (1) to Section 53 of the Code is that it will override the rights of parties, including the secured creditor, when the said provision applies. Section 53 of the Code is the complete and comprehensive code which ensures collection of assets and then provides the manner in which the creditors are to be paid. Even the rights of the secured creditor falling under Section 53 of the Code to enforce, realise, settle, compromise or deal with the secured assets as applicable to the security interest are diluted and compromised.
Clause (a) to sub-section (1) to Section 53 deals with insolvency resolution process costs and the liquidation costs which are to be paid in full. No grievance or issue can be raised in respect of the said clause. Clause (b) to sub-section (1) to Section 53 states that the debts due in the form of workmen’s dues for a period of twenty four months preceding the liquidation commencement date and the debts owed to the secured creditor in the event such secured creditor has relinquished security in the manner set out in Section 52 of the Code shall rank equally between and amongst the workmen and the secured creditors. The Explanation to Section 53 of the Code states that ‘workmen’s dues’ shall have the same meaning as assigned to it in Section 326 of the Companies Act, 2013. In other words, Explanation to Section 326 of the Companies Act, 2013 has been incorporated and applies to the waterfall mechanism as prescribed in clause (b) to sub-section (1) to Section 53 of the Code. What is significant here is that under clause (b) to sub-section (1) to Section 53 of the Code, the workmen’s dues are for the period of twenty four months preceding the liquidation commencement date. The liquidation commencement date, as defined in terms of sub-section (17) to Section 5 of the Code, is much earlier in point of time and need not coincide with the date of winding up. This is in the interest of the workmen. Clause (i) of Explanation to Section 53 of the Code states that where the distribution of proceeds in respect of class of recipients that rank equally, each of the debts would be paid either in full or would be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full. Ex facie, the clause is very just and fair. It is to be noted that the wages and unpaid dues owed to employees other than the workmen fall in clause (c), which is below clause (b) to sub-section (1) to Section 53 of the Code. They are to be paid wages and unpaid dues only for a period of twelve months preceding the liquidation commencement date, and that too only if surplus funds are available after making payment in terms of clause (a) and (b) of sub-section (1) to Section 53 of the Code. Clause (d) of sub-section (1) to Section 53 of the Code relates to financial debts owed to unsecured creditors. The amounts due to the Central Government and the State Government, etc., and the debts owed to a secured creditor for any amount that remains unpaid following the enforcement of security interest, have been clubbed together in clause (e) of subsection (1) to Section 53 of the Code, and have to be ranked equally between and among both of them. The remaining debts and dues fall in clause (f) of sub-section (1) to Section 53 of the Code. Preference shareholders fall under clause (g) of sub-section (1) to Section 53 of the Code, and equity shareholders or partners fall under clause (h) of sub-section (1) to Section 53 of the Code. Sub-section (2) to Section 53 of the Code states that any contractual arrangements between recipients under subsection (1) with equal ranking, if disrupting the order of priority under the said sub-section will be disregarded by the liquidator.
The waterfall mechanism is based on a structured mathematical formula, and the hierarchy is created in terms of payment of debts in order of priority with several qualifications, striking down any one of the provisions or rearranging the hierarchy in the waterfall mechanism may lead to several trips and disrupt the working of the equilibrium as a whole and stasis, resulting in instability. Every change in the waterfall mechanism is bound to lead to cascading effects on the balance of rights and interests of the secured creditors, operational creditors and even the Central and State Governments. Depending upon the facts, in some cases, the waterfall mechanism in the Code may be more beneficial than the hierarchy provided under Section 326 of the Companies Act, 2013 and vice-versa. Therefore, we hesitate and do not accept the arguments of the petitioners.
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 unpaid dues of the workmen are adequately and significantly protected in line with the objectives sought to be achieved by the Code and in terms of the waterfall mechanism prescribed by Section 53 of the Code. In either case of relinquishment or non-relinquishment of the security by the secured creditor, the interests of workmen are protected under the Code. In fact, the secured creditors are taking significant hair-cut and workmen are being compensated on an equitable basis in a just and proper manner as per Section 53 of the Code. 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.
In view of the above and for the reasons stated above and 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.
In view of the above and for the reasons stated above, the writ petition(s) lack merits and the same deserve to be dismissed and are accordingly dismissed.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
1. By way of this writ petition under Article 32 of the Constitution of India, filed by the writ petitioner – Moser Baer Karamchari Union have prayed for an appropriate writ, direction or order striking down Section 327(7) of the Companies Act, 2013 (hereinafter referred to as “Act, 2013”) as arbitrary and violative of Article 21 of the Constitution of India.
It is also prayed to issue an appropriate writ, direction or order in the nature of Mandamus so as to leave the statutory claims of the “workmen’s dues” out of the purview of waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to either as “IBC” or “Code”).
It is further prayed to issue an appropriate writ in the nature of Mandamus by giving a purposive interpretation to Section 53 of the IBC and pass necessary directions which will enable the petitioners to get their dues of 24 months released without any further delay.
Writ Petition (C) Nos. 777 and 712 of 2020
1.1 By way of these writ petitions under Article 32 of the Constitution of India, the respective writ petitioners have prayed that Clause 19(a) of the Eleventh Schedule of the IBC pursuant Section 255 of the IBC, be declared as unreasonable and violative of Article 14 of the Constitution of India 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.
It is further prayed that sub-section (7) of Section 327 of the Companies Act, 2013, be declared as unreasonable and violative of Article 14 of the Constitution of India as sub-section (7) of Section 327 of the Companies Act, 2013, which was inserted in Section 327 of the Companies Act, 2013 pursuant to Section 255 and the Eleventh Schedule of the Insolvency and Bankruptcy Code, 2016, Act 31 of 2016, creates unreasonable classification for the distribution of legitimate dues of workmen in the event of liquidation of the Company under the IBC and liquidation of Company under the provisions of the Companies Act, 2013.
It is also prayed that distribution of the workmen’s due as envisaged under Section 53(1)(b)(i) of the IBC, be declared as unreasonable and violative of Article 14 of the Constitution of India, as Section 53(1)(b)(i) of the IBC limits the workmen’s dues payable to workmen to twenty-four months only preceding the date of order of Liquidation and then rank the said workmen’s dues equally with the secured creditors in the events such secured creditors has relinquished security in the manner set out in Section 52 of the IBC.
It is further prayed that settlement of Workmen Dues should be done in accordance with the reasonable principles laid down under Section 326 even in the event of liquidation under the IBC.
2. Shri K.V. Viswanathan, learned Senior Advocate has appeared as Amicus Curiae. Shri Gopal Sankaranarayanan, learned Senior Advocate, has appeared on behalf of the petitioner(s). Shri Balbir Singh, learned ASG has appeared on behalf of the respondent-Union of India.
3. Shri K.V. Viswanathan, learned Senior Advocate has first of all taken us to the legislative history of the Companies Act and the Preferential Payments and also the framing of the Insolvency and Bankruptcy Code.
3.1 It is submitted that the Companies Act, 1956, as it existed prior to the Companies (Amendment) Act, 1985, did not provide for any “overriding preferential payments” to any party. It is submitted that in 1985, the Companies (Amendment) Bill, 1985 sought to introduce the proviso to sub-section (1) of Section 529, definition of “workmen”, “workmen’s dues” and “workmen’s portion” through insertion of Section 529(3) and the “overriding preferential payments” through Section 529-A.
3.2 It is submitted that the Statement of Objects and Reasons for bringing these changes into effect was to ensure that the resources of the company are distributed even to workers whose labour and effort form a part of the capital of the Company. Resultantly, through Companies (Amendment) Act, 1985, the idea of “workmen’s portion” and the “overriding preferential payments” were introduced and crystallised in the Companies Act, 1956.
3.3 It is submitted that a cumulative reading of Section 529 and Section 529-A of the Companies Act, 1956 indicates that firstly, the security of every secured creditor is deemed to be subject to a pani passu charge in favour of the appellant – workmen, to the extent of the workmen’s portion. Secondly, when the secured creditor opts to realise his security, so much of the debt due to such secured creditor as could not be realised by him by virtue of the proviso or the amount of workmen’s portion in his security, whichever is less, will rank pani passu with the workmen’s dues. Thirdly, the workmen’s dues and debts of secured creditor as described in Section 529(1) Proviso (c) get overriding preferential payment and rank pani passu. These debts are payable in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.
3.4 It is submitted that Section 530, when it provides for “Preferential Payments”, restricts Government dues to a period of 12 months and wages or salary of an employee to a period not exceeding 4 months within 12 months next before the relevant date, subject to limit in sub-section (2) of Section 530(1)(b).
3.5 It is submitted that prior to enactment of the Companies Act, 2013, there were several Committees that were set-up in order to consider the proposals for reformation of the Companies Act, 1956. It is submitted that two of these Committees and their proposals are indicative of the issues that were sought to be addressed through a new, refurbished legislation. In the year 2000, the Report of the High-Level Committee on Law relating to Insolvency and Winding Up of Companies was submitted under the chairmanship of Justice V. Balakrishna Eradi (popularly known as “Eradi Committee”). On consideration of various suggestions received by it, the Eradi Committee inter alia recommended that appropriate legislative action must be taken to ensure that the claims of all “employees of a company” and its secured creditors are ranked pari passu. Thereafter, in 2005, the Report of Expert Committee on Company Law, 2005 was submitted under the chairmanship of Dr. Jamshed J. Irani. The Irani Committee, on consideration of proposals before it, recommended that the status of secured creditors should be pari passu with “employees” in respect of their claims after payment of claims related to costs and expenses of administration of liquidation.
3.6 It is submitted that the focus of these two Committees was on bringing the claims of “employees of a company” pari passu with the secured creditors, when the existing provision as on that day only specified that “workmen’s dues” would rank pari passu with secured creditors. It is submitted that these two Reports were followed by the introduction of the Companies Bill, 2009 which retained the same structure as that of Section 529, 529-A and 530 of the Companies Act, 1956. It is submitted that it was clear that the recommendations qua ranking of dues of “employees of a company” were not accepted as the existing structure had been retained. It is submitted that however, this Companies Bill, 2009 lapsed and, therefore, the same was not given effect to.
3.7 It is submitted that thereafter, again, the Companies Bill, 2011 was introduced, which was then referred to a Standing Committee. The Report of the Standing Committee of 15th Lok Sabha on Companies Bill, 2011 notes the legislative changes made to the Companies Act, 1956 and the Companies Bill, 2009. It is submitted that this indicates that Section 326, which was being introduced in lieu of Section 529-A of Companies Act, 1956, will now include a proviso to Section 326(1) and amendment to Section 326(2) to ensure that wages/salaries payable to workmen for a period of 2 years is protected in the case of winding up. The rationale given for this legislative change was to protect interest of workmen in case of winding up. It is submitted that resultantly, the Companies Act, 2013, as enacted, while mostly retaining the structure of Section 529 and 529-A of the Companies Act, 1956, introduced the proviso to Section 326(1) and also modified Section 326(2).
3.8 It is submitted that the consequence of this change was that while workmen’s dues and dues owed to secured creditors as per Section 325(1) Proviso (c) ranked pani passu, the wages and salaries due to workmen for a period of 2 years preceding winding up order, shall be paid in priority to all other debts, within a period of 30 days of sale of assets and shall be subject to such charge over the security of secured creditors as may be prescribed. Importantly, the Government Dues and wages or salary owned to employees remained restricted to periods as they were in the Companies Act, 1956. It is submitted that another important aspect to be noted is that the definition of “workmen’s dues” includes the Pension Fund, Gratuity Fund and the Provident Fund amounts and there was no exclusion of the said amounts in the case of liquidation. It is submitted that therefore, the position of law regarding “overriding preferential payments” and “preferential payments”, as per the Companies Act, 1956 and the Companies Act, 2013, is that workmen have a charge over the property of the security of every secured creditor to the extent of workmen’s portion, the workmen’s dues rank pani passu with the debts owed to secured creditors and specifically wages or salary due to workmen for a period of 2 years preceding the winding up order shall be paid in priority to all other debts.
3.9 That thereafter, Shri K.V. Viswanathan, learned Senior Advocate and Amicus Curiae has taken us to the framing of the IBC. It is submitted that the Bankruptcy Law Reforms Committee submitted its Report on 04.11.2015. The said Report discussed the changes that are to be made to the existing regime of insolvency and bankruptcy proceedings and inter alia provided for reasons as to why changes were being made to the existing position of law. It is submitted that important parts of the Bankruptcy Law Reforms Committee (BLRC) Report may be summarized as follows:
i. The Committee noted that operational creditors will include workmen and employees whose past payments are due.
ii. Further, the Committee notes that the Central and State Government dues will be kept at a priority below the unsecured financial creditors in addition to all kinds of secured creditors.
iii. The Committee also categorically notes that liquidation under the new regime will have an irreversible, time-bound process with defined payout prioritisation. In the waterfall, secured creditors shall share highest priority along with a defined period of workmen dues.
iv. Thereafter, the Committee, in order to bring the law in India in line with global practice, established the priority of payout in liquidation and drafting instructions were accordingly given. As proposed, the costs of IRP and Liquidation would rank first. After that, secured creditors and workmen dues capped up to 3 months from the start of IRP will be given pari passu priority. This was to be followed by dues to employees capped up-to 3 months. As the next tier, workmen dues for 9 month period beginning 12 months before liquidation commencement date and ending 3 months before liquidation commencement date were to rank along with dues to unsecured financial creditors.
v. The Committee also notes that there was some debate on whether priority given to workmen in Companies Act, 2013 should be retained in the new Code.
3.10 It is submitted that thus, the BLRC Report recommended a waterfall mechanism that was different from the Companies Act, 1956 and the Companies Act, 2013, with due cognizance of the position of law as it existed then. It is submitted that having reviewed the position of law and in view of the objects sought to be achieved through the IBC, the BLRC Report recommended that workmen’s dues will be capped at 3 months and will have pani passu priority with secured creditors and thereafter, the remaining dues will rank along with unsecured creditors.
3.11 It is submitted that the IBC was introduced as a Bill in 2015. It is submitted that Section 36, as introduced in the Bill, provided for formation of the liquidation estate. Section 36(4)(a)(iii), as introduced in the Bill, stated that the contributions in respect of employee pensions alone would be excluded from the liquidation estate assets and would not be used for recovery in liquidation. Section 53, as introduced in the Bill, provided for the waterfall mechanism for payout in case of liquidation. Section 53(1) (b)(i) and (ii) ranked debts owed to secured creditors in the event of them relinquishing security and workmen’s dues for a period of 12 months preceding liquidation commencement date, pani passu. It is submitted that in terms of the waterfall mechanism, this was therefore a step further than the path suggested by the BLRC Report since the workmen’s dues were to rank pani passu for a defined period of 12 months. It is submitted that however, thereafter, the IBC, when introduced as a Bill, was then referred to a Joint Committee. The Joint Committee on Insolvency and Bankruptcy Code, 2015 of the 16th Lok Sabha submitted its report in April, 2016. It is submitted that the Joint Committee Report made two important recommendations in regard to the provisions contained in the Bill. Firstly, after noting representations from the workmen and employees, it was recommended that the Provident Fund, Pension Fund and Gratuity Fund are to be excluded from the liquidation estate assets under Section 36, since they provide the social safety net to the workmen and employees. Secondly, after consideration of the representations that workmen dues are to be paid as per the scheme contained in the Companies Act, 2013, the Joint Committee recommended that since the dues owed to Governments are being paid in respect of two years preceding liquidation commencement date, the workmen’s dues must also be paid for a period of two years, instead of the existing period of 12 months, preceding liquidation commencement date. It is submitted that this was recommended keeping in mind that the workers are the “nerve centre of any company” and that their interests were to be protected. It is submitted that keeping in view the Joint Committee Recommendations, the IBC was brought into force. It is submitted that 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. It is further submitted that Section 53(1)(b)(i) and (ii) of the IBC now ranks workmen’s dues for a period of 2 years preceding the liquidation commencement date and the debts owed to secured creditors in event of them relinquishing their security pani passu. It is submitted that dues owed to the employees are placed in Section 53(1)(c), confined to a period of 12 months, and the dues to Central Government and State Government are placed in Section 53(1)(e)(i), confined to a period of 2 years and below that of the unsecured creditors. It is submitted that the result, therefore, is that the position and waterfall mechanism as provided for in the Companies Act, 1956 and the Companies Act, 2013 has now been altered after application of mind and resultantly, the workmen’s dues have been capped at 24 months preceding the liquidation commencement date. The changes introduced from the erstwhile regime have been so done on the basis of an organic evolution of law and consultative process, after due consideration of the requirements of a new Code governing liquidation.
3.12 It is submitted that Section 53 Explanation (ii) of IBC states that the term “workmen’s dues” shall have the same meaning as assigned to it in Section 326 of the Companies Act, 2013. It is submitted that thereafter, the Eleventh Schedule to the IBC proposes Amendments to be made to Companies Act, 2013. It is submitted that importantly, Clause 18 of the Schedule omits erstwhile Section 325 of the Companies Act, 2013. It is submitted that Clause 19 of the Schedule amends Section 326 of Companies Act, 2013. Thereafter, Clause 20 of the Schedule inserts Section 327(7) to the Companies Act, 2013 which states that Section 326 and Section 327 shall not be applicable in the event of liquidation under the IBC. A conjoint reading of Section 53 Explanation (ii) of IBC and Section 327(7) of Companies Act, 2013 would indicate that only the meaning of “workmen’s dues” is incorporated by reference into the IBC. However, the waterfall mechanism, as has been fully altered by the IBC will apply to these “workmen’s dues” and not the waterfall mechanism contained in Section 326 of Companies Act, 2013. It is submitted that the reason for introduction of Section 327(7) of Companies Act, 2013 is only to exclude the application of waterfall mechanism and the modalities contained in the Companies Act, 2013 which has now been changed through the IBC. It is submitted that therefore, the argument that the waterfall mechanism from the Companies Act, 2013 must apply even under the IBC, would be wholly untenable and unworkable.
3.13 It is submitted that subsequently, the Insolvency Law Committee submitted its report in 2018 under the chairmanship of Mr. Injeti Srinivas. The Report contained summary responses of the Committee to the comments and issues raised with respect to the IBC. It is submitted that importantly, all questions that raised the issue of workmen’s dues either being unfairly ranked with secured creditors or that workmen’s dues were not protected under the IBC, the Committee noted that the interests of workmen were protected in line with the Objects sought to be achieved by the IBC.
3.14 It is further submitted that therefore, the legislature through the IBC has attempted to overhaul the existing system of law and provide for a different modality through which liquidation would function. It is submitted that under the Companies Act, 2013, the waterfall mechanism and preferential payments were being made, keeping in mind the scheme of winding up of a Company. It is submitted that admittedly, workmen’s dues were given pani passu priority with secured creditors of a defined kind and the wages and salaries owed for two years preceding the Order of winding up was to get absolute priority. It is further submitted that on the contrary, the scheme of the IBC is different from that of the Companies Act, 2013. It is submitted that the focus, in the IBC, is to revive the Company and it is only as a matter of last resort that liquidation envisaged. In liquidation, from the time of the BLRC Report, the focus has been on defined payout prioritisation and organically, the workmen’s dues have increased from 3 months to 12 months and now to 24 months to rank pani passu with secured creditors who relinquish their security. It is submitted that this evolution of the IBC has been as a result of a consultative process, the position of workmen’s dues has been reviewed at multiple occasions and the legislature, in its wisdom, has opted to cap it to a period of 24 months prior to liquidation commencement date. It is further submitted that the Pension Fund, Gratuity Fund and Provident Fund are left out of the liquidation estate, in a bid to protect the social safety net of the workmen. Therefore, the changes made through the IBC, to the existing scheme under the Companies Act, 2013 would not be unconstitutional.
3.15 Shri K.V. Viswanathan, learned Senior Advocate and Amicus Curiae has further submitted that this Hon’ble Court in a catena of judgments has considered the principle of “judicial hands-off” when it comes to economic legislations. It is submitted that in economic matters, a wider latitude is given to the law-maker and the Court allows for experimentation in such legislations based on practical experiences and other problems seen by the law-makers. It is submitted that in a challenge to such a legislation, the Court does not adopt a doctrinaire approach. Reliance is placed on the decisions of Manish Kumar Vs. Union of India and Anr., (2021) 5 SCC 1 (Paras 169, 249-251);Swiss Ribbons Private Limited and Anr. Vs. Union of India and Ors., (2019) 4 SCC 17 [(Paras 17-24, 25-28) [for objects of IBC] r/w Para 120]; Small Scale Industrial Manufacturers Association (Registered) Vs. Union of India and Ors., (2021) 8 SCC 511 (Paras 60-72). It is further submitted that as observed in a catena of decisions, a vested right under a statute can be taken away by another statute, in view of public interest and in view of it being an economic measure.
3.16 On IBC and reasonable classification, Shri K.V. Viswanathan, learned Senior Advocate and Amicus Curiae has submitted that in the case of Swiss Ribbons Private Limited and Anr. (supra), this Court was concerned with a challenge to Constitutional Validity of several provisions of the IBC including the waterfall mechanism under Section 53 of the IBC, even though it was at the instance of the Operational Creditors. It is submitted that after noting the objects and reasons for enactment of the IBC, this Hon’ble Court held that there existed an intelligible differentia for classification of financial creditors and operational creditors under the IBC. It is further submitted that Section 53 of the IBC was also upheld from the perspective of this reasonable classification by placing reliance on the object sought to be achieved by the IBC
3.17 It is further submitted that in the case ofCommittee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta and Ors., (2020) 8 SCC 531, this Court was concerned with whether a resolution plan was to treat operational creditors on par with financial creditors and further with amendments made to the IBC that provided operational creditors with a minimum of liquidation value under the CIRP Process. It is submitted that this Court in the said decision held that the principle of “equality for all” cannot be stretched to treat financial and operational creditors on par as this would defeat the entire objective of the IBC. This Court also held that amendments made to the IBC that guaranteed a minimum of liquidation value to operational creditors was not ultra vires Article 14.
3.18 He has also further submitted that in the case of Ghanashyam Mishra and Sons Private Limited Vs. Edelweiss Asset Reconstruction Company Limited, (2021) 9 SCC 657, this Court was concerned with whether the approved resolution plan was binding on the Government, whether before or after the Amendment made to Section 31 of IBC by Amendment Act, 2019. It is submitted that this Court categorically held that the amendment was clarificatory in nature and that the approved resolution plan would be binding on the Government. While holding so, this Court noted the legislative intent in making the plan binding on all stake holders, to create a clean slate and to ensure that no surprise claims come up after the resolution process has begun.
3.19 On interpretation of “workmen’s portion” under Section 529 and 529-A of the Companies Act, reliance is placed on the decision of this Court in the case of Allahabad Bank Vs. Canara Bank and Anr., (2000) 4 SCC 406 as well as Andhra Bank Vs. Official Liquidator and Anr., (2005) 5 SCC 75.
3.20 Making above submissions, it is prayed to allow the present writ petitions and grant the reliefs as prayed.
4. We have heard Shri Balbir Singh, learned ASG appearing on behalf of the respondent – Union of India.
4.1 Shri Balbir Singh, learned ASG has taken us to the relevant provisions under the Companies Act, 1956, more particularly, Sections 59A, 529A, 530 and the relevant provisions of the Companies Act, 2013.
4.2 It is submitted that initially the insolvency process in case of winding up of insolvent companies were provided under Section 325 of Act, 2013. However, Section 325 of the Act, 2013 has been omitted w.e.f. 15.11.2016 on advent of the IBC. It is submitted that therefore, as on today, the winding up proceeding in case of insolvency are not governed by Companies Act, 2013 and the provisions of the IBC is the only applicable law to deal with such a situation as it is a complete Code in itself. It is submitted that furthermore, an amendment w.e.f. 15.11.2016 was brought in under Section 327(7) of the Act, 2013 wherein it has been clarified that the provisions of Section 326 and Section 327 of the Act, 2013 will not be applicable in the event of liquidation under the IBC.
4.3 It is submitted that only in case of any winding up under Companies Act, 2013, Sections 326 and 327 of the Companies Act, 2013 are relevant. He has submitted that following are the relevant features in case of winding up proceedings under Sections 326 and 327 of the Act, 2013:-
