REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL JURISDICTION

WRIT PETITION (C) NO. 421 OF 2019

Moser Baer Karamchari Union Thr.

President Mahesh Chand Sharma …Appellant(s)

Versus

Union of India and Ors. …Respondent(s)

WITH

WRIT PETITION (C) NO. 777 OF 2020

Manoj Kumar Nagar …Appellant(s)

Versus

Union of India …Respondent(s)

AND

WRIT PETITION (C) NO. 712 OF 2020

Raj Kumar Verma …Appellant(s)

Versus

Union of India …Respondent(s)

Writ Petition (C) No. 421 of 2019

Page 1 of 74

J U D G M E N T

M.R. SHAH, J.

Writ Petition (C) No. 421 of 2019

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) No. 421 of 2019

Page 2 of 74

Writ Petition (C) Nos. 777 and 712 of 2020

1.1By 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.

Writ Petition (C) No. 421 of 2019

Page 3 of 74

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

Writ Petition (C) No. 421 of 2019

Page 4 of 74

Companies Act and the Preferential Payments and also

the framing of the Insolvency and Bankruptcy Code.

3.1It 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.

3.2It 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.

3.3It 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 pari passu charge in favour

Writ Petition (C) No. 421 of 2019

Page 5 of 74

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 pari 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 pari

passu. These debts are payable in full, unless the assets

are insufficient to meet them, in which case they shall

abate in equal proportions.

3.4It 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).

3.5It 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

Writ Petition (C) No. 421 of 2019

Page 6 of 74

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.

3.6It 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

Writ Petition (C) No. 421 of 2019

Page 7 of 74

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.

3.7It 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

Writ Petition (C) No. 421 of 2019

Page 8 of 74

the Companies Act, 1956, introduced the proviso to

Section 326(1) and also modified Section 326(2).

3.8It 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 pari

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 pari passu with the debts owed to secured creditors

Writ Petition (C) No. 421 of 2019

Page 9 of 74

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.

3.9That 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

Writ Petition (C) No. 421 of 2019

Page 10 of 74

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.

Writ Petition (C) No. 421 of 2019

Page 11 of 74

3.10It 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 pari passu priority with secured

creditors and thereafter, the remaining dues will rank

along with unsecured creditors.

3.11It 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, pari passu. It is submitted that in

Writ Petition (C) No. 421 of 2019

Page 12 of 74

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 pari 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 16

th

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

Writ Petition (C) No. 421 of 2019

Page 13 of 74

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 pari 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

Writ Petition (C) No. 421 of 2019

Page 14 of 74

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.

3.12It 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

Writ Petition (C) No. 421 of 2019

Page 15 of 74

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.

3.13It 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.

3.14It 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

Writ Petition (C) No. 421 of 2019

Page 16 of 74

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 pari 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 pari 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

Writ Petition (C) No. 421 of 2019

Page 17 of 74

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.

3.15Shri 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

Writ Petition (C) No. 421 of 2019

Page 18 of 74

public interest and in view of it being an economic

measure.

3.16On 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

3.17It is further submitted that in the case of Committee

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

Writ Petition (C) No. 421 of 2019

Page 19 of 74

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.

3.18He 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.

Writ Petition (C) No. 421 of 2019

Page 20 of 74

3.19On 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.

3.20Making 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.

4.1Shri 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.

4.2It 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

Writ Petition (C) No. 421 of 2019

Page 21 of 74

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.

4.3It 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:-

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

Writ Petition (C) No. 421 of 2019

Page 22 of 74

welfare of the workmen maintained by the

Company.

4.4It is submitted that the waterfall mechanism is given

in Section 327, which is similar to Section 530 of the

Companies Act, 1956. It is submitted that thereafter the

IBC has been introduced in the year 2016 wherein the

workmen dues were duly protected and the Provident

Fund, Gratuity Fund and Pension Fund are excluded from

the liquidation estate. It is submitted that as per Section

53 of the IBC, the workmen dues are given the top priority

in the waterfall mechanism.

4.5It is submitted that the liquidation process is covered

under Chapter III of the IBC, which comprises from

Sections 33 to 54. Section 36 of the IBC provides for

liquidation estate and Section 36(4) of the IBC specifies

certain payouts not to be included in the liquidation estate

assets. Therefore, as per the said provision, all these

debts due are not to be included in the liquidation estate

assets. It is submitted that as per the said provision, all

payments due to any workmen or employee from

Provident Fund, Pension Fund and The Gratuity Fund

shall not be included in the list of assets under liquidation

estate.

Writ Petition (C) No. 421 of 2019

Page 23 of 74

4.6It is submitted that with respect to Section 53 of the

IBC, sale of liquidation assets shall be distributed in

certain order of priority. It is submitted that as per Section

53, the payment of insolvency resolution process costs

and liquidation costs is paramount and the same shall be

paid in full. The liquidation cost includes the salary and

wages paid to workmen during the period of liquidation

process to maintain the Company as going concern.

Thereafter, the payment of workmen dues for a period of

24 months are to be paid alongwith secured creditors

dues in the event of relinquishment of security. The

workmen dues and debts of secured creditors in the case

of relinquishment of security are ranked equally between

them. However, in the case of enforcement of security any

unpaid outstanding debt comes below in ladder to Section

53(1)(e)(iii) of the IBC.

4.7It is submitted that the challenge has been made on

the ground of Article 14 of the Constitution of India by

comparing Section 53 of the IBC with the provisions of

erstwhile Companies Act, 1956 and existing Companies

Act, 2013 to state that workmen are at a disadvantageous

position on the basis: (i) workmen’s portion in the security

Writ Petition (C) No. 421 of 2019

Page 24 of 74

held by secured creditor has been done away with; (ii)

preference/superiority given to 24 months over any other

debt has been done away with; (iii) workmen and secured

creditors have been placed in same pool.

4.8To the aforesaid, it is submitted by Shri Balbir Singh,

learned ASG that as such the IBC is a new insolvency

mechanism in line with the international practices and with

overarching objective of unlocking sick and insolvent

companies primarily to revive such companies in event of

failure, for transparent and equitable liquidation of assets.

It is submitted that the IBC was introduced as a water-

shed moment for insolvency law in India that consolidated

process under several disparate statutes such as Act,

2013, SICA, SARFAESI, Recovery of Debts Act etc., into

a single Code. It is submitted that the objective of the IBC

was to introduce comprehensive and time bound

insolvency framework and to maximize the value of assets

of all persons and balance the interest of all stakeholders.

4.9It is submitted that the UNICITRAL Legislative

Guide on Insolvency Law was instructive for the Indian

experience on drafting the IBC which provided critical

guidance on what an insolvency law represents. It is

Writ Petition (C) No. 421 of 2019

Page 25 of 74

submitted that a reading together of the UNICITRAL

Legislative Guide on Insolvency Law and Bankruptcy Law

Report clarifies in no uncertain terms, that the procedure

designed for the insolvency process under the IBC is

critical for allocating economic coordination between the

parties who partake in or are bound by the process. It is

submitted that this Hon’ble Court has looked at

overarching object and economic balance achieved by

IBC and as such has appreciated the working and

operation of IBC in unlocking value for all its stakeholders

including financial institutions in the case of Innoventive

Industries Limited Vs. ICICI Bank and Anr., (2018) 1

SCC 407, followed in Arcelormittal India Private

Limited Vs. Satish Kumar Gupta and Ors., (2019) 2

SCC 1; Arun Kumar Jagatramka Vs. Jindal Steel and

Power Limited and Anr., (2021) 7 SCC 474 and Sesh

Nath Singh and Anr. Vs. Baidyabati Sheoraphuli Co-

operative Bank Limited and Anr., (2021) 7 SCC 313.

4.10It is submitted that as per the objectives of the IBC,

it is clear that corporate death of a Corporate Debtor is

inevitable. However, every effort should be made to

resuscitate the Corporate debtor in the larger public

interest, which includes not only the workmen of the

corporate debtor, but also its creditors and the goods it

Writ Petition (C) No. 421 of 2019

Page 26 of 74

produces in the larger interest of the economy of the

country.

4.11It is submitted that in the Bankruptcy Law Reforms

Committee (Volume 1) (November, 2015), it was agreed

that the assets held in by the entity in trust (such as

employee pensions), assets held as collateral to certain

financial market institutions and assets held as part of

operational transactions where the entity has right over

the asset but is not the owner of the same shall be

excluded from the liquidation estate. It is further submitted

that it was also debated with respect to the waterfall

mechanism under the IBC and was agreed that the

workmen dues capped up to 3 months will be given the

second priority with the secured creditor after the costs of

the corporate insolvency and resolution process and

liquidation.

4.12It is submitted that subsequently, a report of the

Joint Committee on the Insolvency and Bankruptcy Code,

2015 was prepared and presented in Lok Sabha on

28.04.2016 wherein the issue of exclusion of Provident

Fund, Pension Fund and Gratuity Fund from the

liquidation estate assets and estate of bankrupt was

Writ Petition (C) No. 421 of 2019

Page 27 of 74

debated. It is submitted that the Committee, after an in-

depth examination, was of the view that Provident Fund,

Pension Fund and Gratuity Fund provide the social safety

net to the workmen and employees and hence, need to be

secured in the event of liquidation of a company or

bankruptcy of partnership firm. It is submitted that the

Committee further observed that the workers are the

nerve center of any company and in the event of any

company becoming insolvent or bankrupt, the workmen

get affected adversely and therefore, priority must be

given to their outstanding dues. Therefore, all sums due to

any workman or employee from the Provident Fund,

Gratuity Fund or Pension Fund should not be included in

the liquidation estate assets. It is submitted that thus, to

protect the interest of the workmen, the Committee

decided that the workmen dues for a period of 12 months

as provided under Section 53 of the IBC be increased to

24 months preceding liquidation commencement date.

4.13It is submitted that in light of the same, Section 36 of

the IBC 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. That therefore,

Writ Petition (C) No. 421 of 2019

Page 28 of 74

this share of workmen’s dues has consciously been taken

outside the liquidation process.

4.14It is submitted that liquidation costs cover the wages

and salary of the workmen during the liquidation process.

It is submitted that the liquidation cost is defined in

Section 5(16) of the IBC which includes the cost incurred

by the liquidator during the period of liquidation subject to

such regulations as specified by the Board. It is submitted

that with respect to the liquidation process, the Board has

notified the Insolvency and Bankruptcy Board of India

(Liquidation Process) Regulations, 2016. It is submitted

that Regulation 2(ea) talks about liquidation cost which

under Section 5(16) of the IBC includes the costs incurred

by the liquidator in carrying on the business of the

Corporate Debtor as a going concern. That, therefore, the

salary and wages of the workmen in case of going

concern liquidation are protected under the liquidation

costs. It is further submitted that under the Liquidation

Regulations 2016, a mechanism is created wherein

Regulation 19 provides for claim by workmen and

employee and Regulation 31A has been inserted to bring

in stakeholders Consultation Committee, where

participation to workmen/ employees is given.

Writ Petition (C) No. 421 of 2019

Page 29 of 74

4.15It is submitted that the issue with respect to the

workmen and secured creditor being kept at equal footing

under Section 53 of the IBC is only in the case wherein

the secured creditor has relinquished its security and the

same is the part of the liquidation pool. It is submitted that

Section 52 of the IBC specifically states about the secured

creditor in the liquidation proceedings and Regulation 21A

talks about the presumption of security interest in the case

of secured creditors. It is submitted that the said position

has been duly considered by the respondent – Union of

India in the Report of the Insolvency Law Committee

(March, 2018) as well as Report of Insolvency Law

Committee (February, 2020).

4.16It is further submitted that the Committee in the

Report of February, 2020 duly agreed that the priority for

recovery to secured creditors under Section 53(1)(b)(ii)

should be applicable only to the extent of the value of the

security interest that is relinquished by the secured

creditor. It is submitted that the Committee noted that the

Code aims to promote a collective liquidation process and

towards this end, it encourages secured creditors to

relinquish their security interest by providing them second

Writ Petition (C) No. 421 of 2019

Page 30 of 74

highest priority in the recovery of their dues under Section

53(1)(b) of the IBC and are not treated as ordinary

unsecured creditors under the IBC as they would have

been under the Companies Act, 1956. That the said

provision intends to promote the overall value

maximization.

4.17It is submitted that furthermore, the Committee in its

report of February, 2020 also decided whether the

secured creditors who realized their security interest

should contribute towards the payment of dues of

workmen. Regulation 21(A) of Liquidation Process

requires that secured creditors who realise their security

interest contribute towards the payment of dues of

workmen as they would have if they had relinquished their

security interest to the liquidation estate. It is submitted

that thus, the requirement to contribute to workmen dues

as provided under Regulation 21A, recognizes that

workmen are key stakeholders and form the backbone of

the efforts to preserve the business of the Corporate

Debtor not just prior to commencement of insolvency but

also during the insolvency proceedings.

Writ Petition (C) No. 421 of 2019

Page 31 of 74

4.18It is submitted that thus, visualizing the objects and

working of the IBC, it is clear that the rights and interest of

the workers have been protected from the date of

enactment of the IBC. It is submitted that in either case

that is of relinquishment or non-relinquishment of the

security by the secured creditor, the interest of the

workmen is protected. It is submitted that in fact, the

secured creditors are taking significant hair-cut and

workmen are being compensated on equitable basis in a

just and proper manner as per Section 53 of the IBC. It is

submitted that therefore, it is unfair to say that ranking

them with workmen is arbitrary, lest manifestly arbitrary to

declare Section 53 as unconstitutional.

4.19It is submitted that from examination of waterfall

mechanism as provided under Section 53 of the IBC, it is

clear that other stakeholders including the Central

Government have seriously compromises their position in

connection with the recovery of statutory dues so as to

enable value maximization and reviving unhealthy

companies on going concern basis. It is submitted that

therefore, to say that workmen are in any way adversely

affected to the tune of arbitrariness or inequity

contemplated under Article 14 is erroneous.

Writ Petition (C) No. 421 of 2019

Page 32 of 74

4.20It is further submitted by Shri Balbir Singh, learned

ASG appearing on behalf of the respondent – Union of

India that the IBC being a law relating to economic

activities as observed and held by this Court in the case of

R.K. Garg Vs. Union of India and Ors., (1981) 4 SCC

675, the laws relating to economy should be viewed with

greater latitude than the laws touching civil rights.

4.21Making above submissions and relying upon the

decisions of this Court in the case of R.K. Garg (supra)

(paras 8 and 16); Rustom Cavasjee Cooper Vs. Union

of India, (1970) 1 SCC 248 (paras 63 and 179); Delhi

Science Forum and Ors. Vs. Union of India and Anr.,

(1996) 2 SCC 405 (para7); BALCO Employees’ Union

(Regd.) Vs. Union of India and Ors., (2002) 2 SCC 333

(paras 46, 47, 92, 93, 94 and 98), it is prayed to observe

and hold that Section 53 of the IBC, 2016 is neither

arbitrary nor violative of Articles 14 and 21 of the

Constitution of India.

5.We have heard learned counsel appearing on behalf

of the respective parties at length.

Writ Petition (C) No. 421 of 2019

Page 33 of 74

6.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. Section

53 of the IBC reads as under: -

“53. Distribution of assets.—(1) 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 the

liquidation assets shall be distributed in the following

Writ Petition (C) No. 421 of 2019

Page 34 of 74

order of priority and within such period and in such

manner as may be specified, namely—

(a) the insolvency resolution process costs and the

liquidation costs paid in full;

(b) the following debts which shall rank equally

between and among the following—

(i) workmen's dues for the period of twenty-four

months preceding the liquidation commencement

date; and

(ii) debts owed to a secured creditor in the event such

secured creditor has relinquished security in the

manner set out in Section 52;

(c) wages and any unpaid dues owed to employees

other than workmen for the period of twelve months

preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and

among the following:—

(i) any amount due to the Central Government and

the State Government including the amount to be

received on account of the Consolidated Fund of India

and the Consolidated Fund of a State, if any, in

respect of the whole or any part of 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 sub-section shall be

disregarded by the liquidator.

Writ Petition (C) No. 421 of 2019

Page 35 of 74

(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 in Section 326 of the

Companies Act, 2013 (18 of 2013).”

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.

Writ Petition (C) No. 421 of 2019

Page 36 of 74

6.1At 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 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.

6.2Now so far as Section 53 of the IBC is concerned, it

provides for distribution of the assets in case of liquidation

of a company under IBC. As per Section 53(1)(b) the

workmen’s dues for the period of twenty-four months

preceding the liquidation commencement date shall rank

equally between the workmen and the secured creditor in

the event such secured creditor has relinquished security

in the manner set out in Section 52. Therefore, workmen’s

Writ Petition (C) No. 421 of 2019

Page 37 of 74

dues for the period of twenty-four months preceding the

liquidation commencement date shall have pari passu

with the dues of secured creditor. At this stage, it is

required to be noted that as per Section 36(4) of IBC, all

sums due to any workman or employee from the provident

fund, the pension fund and the gratuity fund shall not be

included in the liquidation estate assets and shall not be

used for the recovery in the liquidation. Therefore, a

conscious decision has been taken by the

Parliament/Legislature in its wisdom to keep out of all

sums due to any workman/employee from the provident

fund, the pension fund and the gratuity fund from the

liquidation estate assets [as per Section 36(4)] and that

the workmen’s dues for the period of twenty-four months

preceding the liquidation commencement date shall rank

equally between the workmen’s dues to the said extent

and the dues to the secured creditor. Therefore, the same

cannot be said to be arbitrary and violative of Article 21 of

the Constitution of India as contended on behalf of the

petitioner. As per the settled position of law, IBC is a

complete Code and the object and purpose of IBC is

altogether different than that of the Act, 1956/2013. The

IBC is a new insolvency mechanism, therefore, the

provisions under the IBC cannot be compared with that of

Writ Petition (C) No. 421 of 2019

Page 38 of 74

the earlier regime, namely, the Companies Act,

1956/2013.

6.3At this stage, it is required to be noted that the issue

with respect to the workman and the secured creditor

being kept at equal footing under Section 53 of the IBC is

only in a case wherein the secured creditor has

relinquished its security and the same is the part of the

stage of the liquidation pool.

7.Section 271

1

of the Companies Act 2013, as

originally enacted, had as many as seven grounds on

which a company could be wound up. Ground (a) on

1 271. Circumstances in which company may be wound up by Tribunal. – (1)

A company may, on a petition under section 272, be wound-up by the Tribunal, -

(a) If the company is unable to pay debts;

(b) if the company has, by special resolution, resolved that the company be

wound up by the Tribunal;

(c) if the company has acted against the interests of the sovereignty and integrity

of India, the security of the State, friendly relations with foreign States, public

order, decency or morality;

(d) if the Tribunal has ordered the winding up of the company under Chapter XIX;

(e) if on an application made by the Registrar or any other person authorised by

the Central Government by notification under this Act, the Tribunal is of the

opinion that the affairs of the company have been conducted in a fraudulent

manner or the company was formed for fraudulent and unlawful purpose or the

persons concerned in the formation or management of its affairs have been guilty

of fraud, misfeasance or misconduct in connection therewith and that is proper

that the company be wound up;

(f) if the company has made a default in filing with the Registrar its financial

statements or annual returns for immediately preceding five consecutive financial

years; or

(g) if the Tribunal is of the opinion that it is just and equitable that the company

should be wound up.

***

Writ Petition (C) No. 421 of 2019

Page 39 of 74

which the company could be wound up was when the

company is unable to pay its debts. The other grounds

were, when the company, by special resolution, has

decided to be wound up; when the company has acted

against the interests of sovereignty and integrity of India,

the security of the State, friendly relations with foreign

State, public order, decency or morality; if the Tribunal has

ordered winding up of the company under Chapter XIX of

the Companies Act, 2013, a chapter relating to revival and

rehabilitation of sick companies; if on an application made

by the Registrar or any other person authorised by the

Central Government by notification, the Tribunal is of the

opinion that the affairs of the company have been

conducted in a fraudulent manner or the company has

been formed for fraudulent and unlawful purpose, or

persons concerned in formation or management of its

affairs have been guilty of fraud, misfeasance, misconduct

in connection therewith, which makes it proper that the

company be wound up; or if the company has made

default in filing its financial statements or annual returns

with the Registrar for immediately preceding five

consecutive financial years; lastly, if the Tribunal is of the

opinion that it is just and equitable to wind up the

company.

Writ Petition (C) No. 421 of 2019

Page 40 of 74

7.1The provision as enacted was never enforced till it

was substituted by Act No. 31 of 2016 and the Eleventh

Schedule in paragraph 10 of the Insolvency and

Bankruptcy Code, 2016

2

, with effect from 15

th

November

2016. This coincided with the enactment and enforcement

of the Code, also applicable with effect from 15

th

November 2016. Consequent to the substitution, Section

271

3

of the Companies Act 2013 now envisages only five

grounds for winding up of the company under the

Companies Act 2013. The first ground is where the

company, by special resolution, has resolved to be wound

up by the Tribunal. The other grounds are when the

company has acted against the sovereignty and integrity

2 For short, “Code”.

3 271. Circumstances in which company may be wound up by Tribunal. – A

company may, on a petition under section 272, be wound-up by the Tribunal, -

(a) if the company has, by special resolution, resolved that the company be

wound up by the Tribunal;

(b) if the company has acted against the interests of the sovereignty and integrity

of India, the security of the State, friendly relations with foreign States, public

order, decency or morality;

(c) if on an application made by the Registrar or any other person authorised by

the Central Government by notification under this Act, the Tribunal is of the

opinion that the affairs of the company have been conducted in a fraudulent

manner or the company was formed for fraudulent and unlawful purpose or the

persons concerned in the formation or management of its affairs have been guilty

of fraud, misfeasance or misconduct in connection therewith and that is proper

that the company be wound up;

(d) if the company has made a default in filing with the Registrar its financial

statements or annual returns for immediately preceding five consecutive financial

years; or

(e) if the Tribunal is of the opinion that it is just and equitable that the company

should be wound up.

Writ Petition (C) No. 421 of 2019

Page 41 of 74

of India, security of the State, friendly relations with

foreign States, public order, decency or morality; if the

Tribunal on an application made by the Registrar or any

other person authorised by the Central Government by a

notification is satisfied that the affairs of the company

have been conducted in a fraudulent manner, or the

company was formed for a fraudulent or unlawful purpose,

or the persons concerned in the formation or management

of its affairs have been found to be guilty of fraud,

misfeasance or misconduct in connection therewith, which

makes it proper for the company to be wound up; if the

company has defaulted in filing financial statements and

annual returns with the Registrar for immediately

preceding five consecutive financial years; and lastly if the

Tribunal is of the opinion that it is just and equitable that

the company should be wound up.

7.2Clearly, the legislature has now removed clause (a)

to Section 271 of the Companies Act, 2013, when a

company is unable to pay the debts, and clause (d) to

Section 271 of the Companies Act, 2013, when a

company is directed to be wound up under the Chapter

XIX of the Companies Act, 2013. In fact, Chapter XIX of

the Companies Act 2013 was deleted/omitted in terms of

Act No. 31 of 2016 and the Eleventh Schedule in

Writ Petition (C) No. 421 of 2019

Page 42 of 74

paragraph 8 of the Code, with effect from 15

th

November

2016. The Code, as enacted, is a separate and

consolidated enactment specifically relating to and dealing

with companies which are insolvent and unable to pay

dues, and envisages a procedure with a mandate to first

explore possibility of rehabilitation and revival of the

company, and the dissolution/winding up as the last call.

7.3This is significant and must be highlighted when we

examine the question of the Constitutional challenge

made by the petitioners, so as to not frustrate the

objective and purpose of the Code, which completely

replaces the then existing framework for insolvency and

bankruptcy resolution that was inadequate, ineffective and

guilty of causing undue delays. The enactment of the

Code and the amendments thereafter are a consequence

of detailed consultation and deliberations by several

committees, commissions and experts

4

, in a matter which

deals with the economy of the country as a whole. Earlier

position was far from satisfactory in spite of enactment of

the Sick Industrial Companies (Special Provisions) Act,

4 See – The Report of High Level Committee on Law Relating to Insolvency and

Winding Up of Companies, 2000, The Report of the Expert Committee on

Company Law dated 31.05.2005, 57

th

Report of the Standing Committee of 15

th

Lok Sabha on Finance on The Companies Bill, 2011, The Report of the

Bankruptcy Law Reforms Committee dated 04.11.2015, The Report of Joint

Committee on Insolvency and Bankruptcy Code, 2015 of the 16

th

Lok Sabha and

The report of the Insolvency Law Committee dated 26.03.2018.

Writ Petition (C) No. 421 of 2019

Page 43 of 74

1985, the Recovery of Debts Due to Banks and Financial

Institutions Act, 1993, and the Securitisation and

Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002. The Code has been enacted

with the objective of reorganisation and insolvency

resolution of corporate persons, partnership firms and

individuals in a time-bound manner for maximisation of

the value of assets, promote entrepreneurship, enhance

availability of credit and balance the interests of all

stakeholders, including by alteration in the priority of

payment of government dues, to establish an Insolvency

and Bankruptcy Fund, and matters connected therewith or

incidental thereto. The objective is to improve the ease of

doing business and facilitate more investments, leading to

higher economic growth and development.

8.We have earlier referred to, in detail, the divergent

opinions expressed while enacting the Code on the status

of the workmen's dues and the hierarchy in which they

should be placed. The waterfall mechanism now

prescribed in the Code with reference to the workmen’s

dues is a well-considered and thought-out decision. The

waterfall mechanism and the hierarchy prescribed to the

workmen’s dues should be seen in the overall objective of

the Code, which is to explore whether the corporate

Writ Petition (C) No. 421 of 2019

Page 44 of 74

debtor can be revived so that jobs are not lost, the use of

economic assets is maximised, and there is an effective

legal framework which enhances the viability of credit in

the hands of banks and financial institutions. The Code

recognises the financial impact on secured creditors or

financial institutions dealing with public money, as their

economic health is equally important for the general public

as well as the national economy. Unless there is

economic growth and fresh investments in the industry,

employment opportunities will not be available, which

would in turn lead to economic woes, insolvencies and

bankruptcies. These are all complex economic matters

wherein various conflicting interests have to be balanced,

and a holistic rather than a one-sided, approach is to be

taken. Each opinion may have merit, but the court can

hardly substitute its own wisdom or view for that of the

legislature, especially when the enactment is the outcome

of a thought-out and ruminated review on complex fiscal

and commercial challenges facing the economy. It is in

this context, this Court, while upholding the Constitutional

validity of the Code on the challenge of discrimination

made by the operational creditors in Swiss Ribbons

Private Limited and Another. v. Union of India and

Others.

5

had observed as under:

5 (2019) 4 SCC 17.

Writ Petition (C) No. 421 of 2019

Page 45 of 74

“Judicial hands-off qua economic legislation

****

21. In this country, this Court in R.K. Garg v. Union of

India, (1981) 4 SCC 675, has held :

“8. Another rule of equal importance is that

laws relating to economic activities should be

viewed with greater latitude than laws touching

civil rights such as freedom of speech, religion,

etc. It has been said by no less a person than

Holmes, J., that the legislature should be

allowed some play in the joints, because it has

to deal with complex problems which do not

admit of solution through any doctrinaire or

straitjacket formula and this is particularly true

in case of legislation dealing with economic

matters, where, having regard to the nature of

the problems required to be dealt with, greater

play in the joints has to be allowed to the

legislature. The court should feel more inclined

to give judicial deference to legislative

judgment in the field of economic regulation

than in other areas where fundamental human

rights are involved. Nowhere has this

admonition been more felicitously expressed

than in Morey v. Doud where Frankfurter, J.,

said in his inimitable style:

‘In the utilities, tax and economic

regulation cases, there are good

reasons for judicial self-restraint if not

judicial deference to legislative

judgment. The legislature after all has

the affirmative responsibility. The courts

have only the power to destroy, not to

reconstruct. When these are added to

the complexity of economic regulation,

the uncertainty, the liability to error, the

bewildering conflict of the experts, and

the number of times the Judges have

been overruled by events — self-

Writ Petition (C) No. 421 of 2019

Page 46 of 74

limitation can be seen to be the path to

judicial wisdom and institutional prestige

and stability.’

The Court must always remember that

“legislation is directed to practical problems,

that the economic mechanism is highly

sensitive and complex, that many problems

are singular and contingent, that laws are not

abstract propositions and do not relate to

abstract units and are not to be measured by

abstract symmetry”; ‘that exact wisdom and

nice adaption of remedy are not always

possible’ and that ‘judgment is largely a

prophecy based on meagre and uninterpreted

experience’. Every legislation, particularly in

economic matters is essentially empiric and it

is based on experimentation or what one may

call trial and error method and therefore it

cannot provide for all possible situations or

anticipate all possible abuses. There may be

crudities and inequities in complicated

experimental economic legislation but on that

account alone it cannot be struck down as

invalid. The courts cannot, as pointed out by

the United States Supreme Court in Secy. of

Agriculture v. Central Roig Refining Co. be

converted into tribunals for relief from such

crudities and inequities. There may even be

possibilities of abuse, but that too cannot of

itself be a ground for invalidating the

legislation, because it is not possible for any

legislature to anticipate as if by some divine

prescience, distortions and abuses of its

legislation which may be made by those

subject to its provisions and to provide against

such distortions and abuses. Indeed,

howsoever great may be the care bestowed on

its framing, it is difficult to conceive of a

legislation which is not capable of being

abused by perverted human ingenuity. The

Court must therefore adjudge the

constitutionality of such legislation by the

Writ Petition (C) No. 421 of 2019

Page 47 of 74

generality of its provisions and not by its

crudities or inequities or by the possibilities of

abuse of any of its provisions. If any crudities,

inequities or possibilities of abuse come to

light, the legislature can always step in and

enact suitable amendatory legislation. That is

the essence of pragmatic approach which must

guide and inspire the legislature in dealing with

complex economic issues.

***

19. …. It would be outside the province of

the Court to consider if any particular immunity

or exemption is necessary or not for the

purpose of inducing disclosure of black money.

That would depend upon diverse fiscal and

economic considerations based on practical

necessity and `administrative expediency and

would also involve a certain amount of

experimentation on which the Court would be

least fitted to pronounce. The Court would not

have the necessary competence and expertise

to adjudicate upon such an economic issue.

The Court cannot possibly assess or evaluate

what would be the impact of a particular

immunity or exemption and whether it would

serve the purpose in view or not. There are so

many imponderables that would enter into the

determination that it would be wise for the

Court not to hazard an opinion where even

economists may differ. The Court must while

examining the constitutional validity of a

legislation of this kind, “be resilient, not rigid,

forward looking, not static, liberal, not verbal”

and the Court must always bear in mind the

constitutional proposition enunciated by the

Supreme Court of the United States

in Munn v. Illinois, namely, ‘that courts do not

substitute their social and economic beliefs for

the judgment of legislative bodies’. The Court

must defer to legislative judgment in matters

relating to social and economic policies and

Writ Petition (C) No. 421 of 2019

Page 48 of 74

must not interfere, unless the exercise of

legislative judgment appears to be palpably

arbitrary . The Court should constantly remind

itself of what the Supreme Court of the United

States said in Metropolis Theater Co. v. City of

Chicago:

“12. … The problems of government are

practical ones and may justify, if they do

not require, rough accommodations,

illogical it may be, and unscientific. But

even such criticism should not be hastily

expressed. What is best is not always

discernible, the wisdom of any choice

may be disputed or condemned. Mere

error of Government are not subject to

our judicial review.”

It is true that one or the other of the

immunities or exemptions granted under the

provisions of the Act may be taken advantage

of by resourceful persons by adopting

ingenious methods and devices with a view to

avoiding or saving tax. But that cannot be

helped because human ingenuity is so great

when it comes to tax avoidance that it would be

almost impossible to frame tax legislation

which cannot be abused. Moreover, as already

pointed out above, the trial and error method is

inherent in every legislative effort to deal with

an obstinate social or economic issue and if it

is found that any immunity or exemption

granted under the Act is being utilised for tax

evasion or avoidance not intended by the

legislature, the Act can always be amended

and the abuse terminated. We are accordingly

of the view that none of the provisions of the

Act is violative of Article 14 and its

constitutional validity must be upheld.”

(emphasis supplied)

Writ Petition (C) No. 421 of 2019

Page 49 of 74

22. Likewise, in Bhavesh D. Parish v. Union of

India (2000) 5 SCC 471, this Court held :

“26. The services rendered by certain

informal sectors of the Indian economy could

not be belittled. However, in the path of

economic progress, if the informal system was

sought to be replaced by a more organised

system, capable of better regulation and

discipline, then this was an economic

philosophy reflected by the legislation in

question. Such a philosophy might have its

merits and demerits. But these were matters of

economic policy. They are best left to the

wisdom of the legislature and in policy matters

the accepted principle is that the courts should

not interfere. Moreover in the context of the

changed economic scenario the expertise of

people dealing with the subject should not be

lightly interfered with. The consequences of

such interdiction can have large-scale

ramifications and can put the clock back for a

number of years. The process of rationalisation

of the infirmities in the economy can be put in

serious jeopardy and, therefore, it is necessary

that while dealing with economic legislations,

this Court, while not jettisoning its jurisdiction to

curb arbitrary action or unconstitutional

legislation, should interfere only in those few

cases where the view reflected in the

legislation is not possible to be taken at all.

***

30. Before we conclude there is another

matter which we must advert to. It has been

brought to our notice that Section 45-S of the

Act has been challenged in various High

Courts and a few of them have granted the

stay of provisions of Section 45-S. When

considering an application for staying the

operation of a piece of legislation, and that too

pertaining to economic reform or change, then

Writ Petition (C) No. 421 of 2019

Page 50 of 74

the courts must bear in mind that unless the

provision is manifestly unjust or glaringly

unconstitutional, the courts must show judicial

restraint in staying the applicability of the

same. Merely because a statute comes up for

examination and some arguable point is raised,

which persuades the courts to consider the

controversy, the legislative will should not

normally be put under suspension pending

such consideration. It is now well settled that

there is always a presumption in favour of the

constitutional validity of any legislation, unless

the same is set aside after final hearing and,

therefore, the tendency to grant stay of

legislation relating to economic reform, at the

interim stage, cannot be understood. The

system of checks and balances has to be

utilised in a balanced manner with the primary

objective of accelerating economic growth

rather than suspending its growth by doubting

its constitutional efficacy at the threshold itself.”

(emphasis supplied)

23. In Directorate General of Foreign

Trade v. Kanak Exports, (2016) 2 SCC 226, this Court

has held :

“109. Therefore, it cannot be denied that

the Government has a right to amend, modify

or even rescind a particular scheme. It is well

settled that in complex economic matters every

decision is necessarily empiric and it is based

on experimentation or what one may call trial

and error method and therefore, its validity

cannot be tested on any rigid prior

considerations or on the application of any

straitjacket formula. In BALCO Employees'

Union v. Union of India, (2002) 2 SCC 333] ,

the Supreme Court held that laws, including

executive action relating to economic activities

should be viewed with greater latitude than

laws touching civil rights such as freedom of

Writ Petition (C) No. 421 of 2019

Page 51 of 74

speech, religion, etc. that the legislature should

be allowed some play in the joints because it

has to deal with complex problems which do

not admit of solution through any doctrine or

straitjacket formula and this is particularly true

in case of legislation dealing with economic

matters, where having regard to the nature of

the problems greater latitude require to be

allowed to the legislature.”

****

The raison d'être for the Insolvency and

Bankruptcy Code

****

27. As is discernible, the Preamble gives an

insight into what is sought to be achieved by the

Code. The Code is first and foremost, a Code for

reorganisation and insolvency resolution of corporate

debtors. Unless such reorganisation is effected in a

time-bound manner, the value of the assets of such

persons will deplete. Therefore, maximisation of value

of the assets of such persons so that they are

efficiently run as going concerns is another very

important objective of the Code. This, in turn, will

promote entrepreneurship as the persons in

management of the corporate debtor are removed

and replaced by entrepreneurs. When, therefore, a

resolution plan takes off and the corporate debtor is

brought back into the economic mainstream, it is able

to repay its debts, which, in turn, enhances the

viability of credit in the hands of banks and financial

institutions. Above all, ultimately, the interests of all

stakeholders are looked after as the corporate debtor

itself becomes a beneficiary of the resolution scheme

—workers are paid, the creditors in the long run will

be repaid in full, and shareholders/investors are able

to maximise their investment. Timely resolution of a

corporate debtor who is in the red, by an effective

legal framework, would go a long way to support the

development of credit markets. Since more

Writ Petition (C) No. 421 of 2019

Page 52 of 74

investment can be made with funds that have come

back into the economy, business then eases up,

which leads, overall, to higher economic growth and

development of the Indian economy. What is

interesting to note is that the Preamble does not, in

any manner, refer to liquidation, which is only availed

of as a last resort if there is either no resolution plan

or the resolution plans submitted are not up to the

mark. Even in liquidation, the liquidator can sell the

business of the corporate debtor as a going concern.

(See ArcelorMittal (India) (P) Ltd. v. Satish Kumar

Gupta, (2019) 2 SCC 1 at para 83, fn 3).

****

Epilogue

120. The Insolvency Code is a legislation which

deals with economic matters and, in the larger sense,

deals with the economy of the country as a whole.

Earlier experiments, as we have seen, in terms of

legislations having failed, “trial” having led to repeated

“errors”, ultimately led to the enactment of the Code.

The experiment contained in the Code, judged by the

generality of its provisions and not by so-called

crudities and inequities that have been pointed out by

the petitioners, passes constitutional muster. To stay

experimentation in things economic is a grave

responsibility, and denial of the right to experiment is

fraught with serious consequences to the nation. We

have also seen that the working of the Code is being

monitored by the Central Government by Expert

Committees that have been set up in this behalf.

Amendments have been made in the short period in

which the Code has operated, both to the Code itself

as well as to subordinate legislation made under it.

This process is an ongoing process which involves all

stakeholders, including the petitioners.

****”

Writ Petition (C) No. 421 of 2019

Page 53 of 74

9.As elucidated above, 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. The two

enactments deal with two distinct situations and in our

opinion, they cannot be equated when we examine

whether there is discrimination or violation of Article 14 of

the Constitution of India. For the revival and rehabilitation

of the companies, certain sacrifices are required from all

quarters, including the workmen. In case of insolvent

companies, for the sake of survival and regeneration,

Writ Petition (C) No. 421 of 2019

Page 54 of 74

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. We would also reject the argument that to find

out whether there was a violation of Article 14 of the

Constitution of India or whether the right to life under

Article 21 Constitution of India was infringed, we must

word by word examine the waterfall mechanism

envisaged under the Companies Act, 2013, where the

company is wound up in terms of grounds (a) to (e) of

Section 271 of the Companies Act, 2013; and the rights of

the workmen when the insolvent company is sought to be

revived, rehabilitated or wound up under the Code. The

grounds and situations in the context of the objective and

purpose of the two enactments are entirely different.

10.We now turn to the difference in the waterfall

mechanism provided in the Companies Act, 2013 and the

Writ Petition (C) No. 421 of 2019

Page 55 of 74

Code. As per Section 324

6

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

6 324. Debts of all descriptions to be admitted to proof.— In every winding up

(subject, in the case of insolvent companies, to the application in accordance with

the provisions of this Act or of the law of insolvency), all debts payable on a

contingency, and all claims against the company, present or future, certain or

contingent, ascertained or sounding only in damages, shall be admissible to proof

against the company, a just estimate being made, so far as possible, of the value

of such debts or claims as may be subject to any contingency, or may sound only

in damages, or for some other reason may not bear a certain value.

7 326. Overriding preferential payments.—(1) In the winding up of a company

under this Act, the following debts shall be paid in priority to all other debts:

(a) workmen's dues; and;

(b) where a secured creditor has realised a secured asset, so much of the debts

due to such secured creditor as could not be realised by him or the amount of the

workmen's portion in his security (if payable under the law), whichever is less,

pari passu with the workmen's dues:

Provided that in case of the winding up of a company, the sums referred to in

sub-clauses (i) and (ii) of clause (b) of the Explanation, which are payable for a

period of two years preceding the winding up order or such other period as may

be prescribed, shall be paid in priority to all other debts (including debts due to

secured creditors), within a period of thirty days of sale of assets and shall be

subject to such charge over the security of secured creditors as may be

prescribed.

(2) The debts payable under the proviso to sub-section (1) shall be paid in full

before any payment is made to secured creditors and thereafter debts payable

under that sub-section shall be paid in full, unless the assets are insufficient to

meet them, in which case they shall abate in equal proportions.

Explanation.—For the purposes of this section, and Section 327—

(a) “workmen”, in relation to a company, means the employees of the company,

being workmen within the meaning of clause(s) of Section 2 of the Industrial

Writ Petition (C) No. 421 of 2019

Page 56 of 74

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. Thus, this balances and

Disputes Act, 1947;

(b) “workmen's dues”, in relation to a company, means the aggregate of the

following sums due from the company to its workmen, namely—

(i) all wages or salary including wages payable for time or piece work and salary

earned wholly or in part by way of commission of any workman in respect of

services rendered to the company and any compensation payable to any

workman under any of the provisions of the Industrial Disputes Act, 1947;

(ii) all accrued holiday remuneration becoming payable to any workman or, in the

case of his death, to any other person in his right on the termination of his

employment before or by the effect of the winding up order or resolution;

(iii) unless the company is being wound up voluntarily merely for the purposes of

reconstruction or amalgamation with another company or unless the company

has, at the commencement of the winding up, under such a contract with insurers

as is mentioned in Section 14 of the Workmen's Compensation Act, 1923, rights

capable of being transferred to and vested in the workmen, all amount due in

respect of any compensation or liability for compensation under the said Act in

respect of the death or disablement of any workman of the company;

(iv) all sums due to any workman from the provident fund, the pension fund, the

gratuity fund or any other fund for the welfare of the workmen, maintained by the

company;

(c) “workmen's portion”, in relation to the security of any secured creditor of a

company, means the amount which bears to the value of the security the same

proportion as the amount of the workmen's dues bears to the aggregate of the

amount of workmen's dues and the amount of the debts due to the secured

creditors.

Illustration

The value of the security of a secured creditor of a company is Rs. 1,00,000. The

total amount of the workmen's dues is Rs. 1,00,000. The amount of the debts due

from the company to its secured creditors is Rs. 3,00,000. The aggregate of the

amount of workmen's dues and the amount of debts due to secured creditors is

Rs. 4,00,000. The workmen's portion of the security is, therefore, one-fourth of

the value of the security, that is Rs. 25,000.

Writ Petition (C) No. 421 of 2019

Page 57 of 74

equates the rights of the secured creditor to realise the

secured asset, but in case the secured creditor is not able

to realise the full amount or has paid an amount to the

workmen if payable under the law, whichever is less,

these dues rank pari passu with the workmen’s dues.

Explanation to Section 326 of the Companies Act, 2013

defines ‘workmen’, which means employees within the

meaning of Section 2(s) of the Industrial Disputes Act,

1947; and the expressions “workmen’s dues”; and

“workmen’s portion”, which expressions are terms of the

Companies Act, 2013 specially used in clause (b) of sub-

section (1) to Section 326 of the Companies Act, 2013.

The workmen’s portion in relation to the security of any

secured creditor of a company means the amount which

bears to the value of security, the same proportion as the

amount of workmen’s dues bears to the aggregate of the

amount of workmen’s dues and the amount of debts due

to the secured creditors. The illustration clarifies the

formula by way of an hypothetical case, where the

secured creditors and workmen’s dues are both Rs.1 lakh.

The amount of the debts due from the company to the

secured creditors is hypothetically taken as Rs. 3 lakhs.

Accordingly, the aggregate amount due towards

workmen’s dues and the amount of debts due to the

Writ Petition (C) No. 421 of 2019

Page 58 of 74

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.

11.However, the proviso to sub-section (1) to Section

326 of the Companies Act, 2013 states that in case of

winding up of the company, the sums referred to in sub-

clauses (i) and (ii) to 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, shall

be paid in priority to all other debts, including debts due to

secured creditors. This payment is to be made within a

period of thirty days from the sale of assets and shall be

subject to such charge over the security of the secured

creditors. Sub-clause (i) to clause (b) of the Explanation to

Section 326 of the Companies Act, 2013 refers to all

wages or salary, including wages payable for time or

piece work and salary earned wholly or in part, etc. under

any provisions of the Industrial Disputes Act, 1947. Sub-

clause (ii) to clause (b) of the Explanation to Section 326

Writ Petition (C) No. 421 of 2019

Page 59 of 74

of the Companies Act, 2013 deals with all accrued holiday

remuneration payable to any workmen or, in the case of

his death, to any other person in his right on termination of

his employment, etc. Sub-clauses (iii) and (iv) of clause

(b) of the Explanation to Section 326 of the Companies

Act, 2013 are excluded from the proviso. These sub-

clauses deal with liability of compensation under the

Workmen’s Compensation Act, 1923 in respect of death or

disablement of the workmen or all sums due to any

workman from the provident fund, the pension fund, the

gratuity fund or any other fund of the welfare of the

workmen

8

. 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. We are not informed that a different

period has been prescribed and, therefore, the sums

referred to in sub-clauses (i) and (ii) to clause (b) of the

Explanation to Section 326 of the Companies Act, 2013

8 For the purpose of the present decision, we are not required to comment on the

provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act,

1952 and the payment of workmen’s dues under the Companies Act,1956 or

even Section 36 (4)(a)(iii) of the Code. However, see - Employees Provident

Fund Commissioner v. Official Liquidator of Esskay Pharmaceuticals Limited,

(2011) 10 SCC 727 and Bhupinder Singh v. Unitech Limited, (2022) 8 SCC 749.

Writ Petition (C) No. 421 of 2019

Page 60 of 74

are payable for two years preceding the winding up order.

Thus, 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 sub-

section (1) to Section 326 of the Companies Act, 2013.

12.When we turn our attention to the Code, it is to be

first noted that in terms of Section 36(4)(a)(iii) of the Code,

all sums due to any workman or employee from the

provident fund, the pension fund and the gratuity fund, do

not form part and are not to be included in the liquidation

proceedings.

9

Sub-section (1) to Section 52 of the Code

gives two options to a secured creditor. First, the secured

creditor in a liquidation proceeding may relinquish its

security interest and receive the proceeds from the sale of

assets by the liquidator in the manner specified in Section

9 For the purpose of the present decision, we are not interpreting sub-clause (iii)

to clause (a) of sub-section (4) to Section 36 of the Code as this is an issue of

some debate and pending consideration in other matters. The legal effect of

exclusion is that, the amount of sums due to any workmen or employee from the

provident fund, the pension fund or the gratuity fund cannot be made subject

matter of reduction or dilution even in a rehabilitation or revival plan. They are

excluded from the waterfall mechanism and would not be used in recovery on

liquidation, and they cannot be shared.

Writ Petition (C) No. 421 of 2019

Page 61 of 74

53 of the Code. The second option is to realise the

security interest, but in the manner specified in Section 52

of the Code. Sub-section (2) to Section 52 of the Code

states that where the secured creditor realises the

security interest, he shall inform the liquidator of such

security interest and identify the asset subject to such

security interest to be realised. The liquidator is to verify

the security interest and shall permit the secured creditor

to realise such security interest, which is proved either by

records of such security interest maintained by an

information utility, or by such other means as may be

specified by the Board. Sub-section (4) to Section 52 of

the Code states that the secured creditor may enforce,

realise, settle, compromise or deal with the secured asset

in accordance with such law as applicable to the security

interest being realised and to the secured creditor. The

secured creditor is to accordingly apply the proceeds to

recover the debts due to him. We need not refer to sub-

section (5) to Section 52 of the Code as it relates to the

action which the secured creditor may take if he faces

resistance from the corporate debtor or any other person

connected therewith in taking possession of, selling or

otherwise disposing off the security. Sub-section (6) to

Section 52 of the Code applies when an adjudicating

Writ Petition (C) No. 421 of 2019

Page 62 of 74

authority is in receipt of an application under sub-section

(5) to Section 52 of the Code. Sub-section (7) to Section

52 of the Code, however, is important as it states that

where on enforcement of the security interest, an amount

by way of proceeds is in excess of the debts due to the

secured creditor, the secured creditor shall account for

and pay the excess/surplus amount to the liquidator from

enforcement of such secured assets. The amount of

insolvency resolution process costs, due from secured

creditors who realise their security interests in the manner

provided in the section, are to be deducted from the

proceeds of any realisation by such secured creditors.

They are to be transferred and included in the liquidation

estate. Sub-section (9) to Section 52 of the Code states

that where proceeds for realisation of the secured assets

are not adequate to repay the debts owed to the secured

creditor, the unpaid debts of such secured creditor shall

be paid by the liquidator in the manner specified in clause

(e) to sub-section (1) to Section 53 of the Code.

13.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

10

of the

10 21A. Presumption of security interest.— (1) A secured creditor shall inform

the liquidator of its decision to relinquish its security interest to the liquidation

estate or realise its security interest, as the case may be, in Form C or Form D of

Writ Petition (C) No. 421 of 2019

Page 63 of 74

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.

Schedule II:

Provided that, where a secured creditor does not intimate its decision within thirty

days from the liquidation commencement date, the assets covered under the

security interest shall be presumed to be part of the liquidation estate.

(2) Where a secured creditor proceeds to realise its security interest, it shall pay -

(a) as much towards the amount payable under clause (a) and sub-clause (i) of

clause (b) of sub-section (1) of section 53, as it would have shared in case it had

relinquished the security interest, to the liquidator within ninety days from the

liquidation commencement date; and

(b) the excess of the realised value of the asset, which is subject to security

interest, over the amount of his claims admitted, to the liquidator within one

hundred and eighty days from the liquidation commencement date:

Provided that where the amount payable under this sub-regulation is not

certain by the date the amount is payable under this sub-regulation, the secured

creditor shall pay the amount, as estimated by the liquidator:

Provided further that any difference between the amount payable under

this sub-regulation and the amount paid under the first proviso shall be made

good by the secured creditor or the liquidator, as the case may be, as soon as the

amount payable under this sub-regulation is certain and so informed by the

liquidator.

(3) Where a secured creditor fails to comply with sub-regulation (2), the asset,

which is subject to security interest, shall become part of the liquidation estate.

Writ Petition (C) No. 421 of 2019

Page 64 of 74

14.Before we refer to Section 53 of the Code, we would

like to take note of Section 30 of the Code, which relates

to the submission of resolution plan, which is required to

be examined by the resolution professional in the manner

stipulated in sub-section (2) to Section 30

11

of the Code.

Substantial part of clause (b) of sub-section (2) to Section

11 30. Submission of resolution plan.—(1) A resolution applicant may submit a

resolution plan along with an affidavit stating that he is eligible under Section 29-A

to the resolution professional prepared on the basis of the information

memorandum.

(2) The resolution professional shall examine each resolution plan received by

him to confirm that each resolution plan—

(a) provides for the payment of insolvency resolution process costs in a manner

specified by the Board in priority to the payment of other debts of the corporate

debtor;

(b) provides for the payment of debts of operational creditors in such manner as

may be specified by the Board which shall not be less than—

(i) the amount to be paid to such creditors in the event of a liquidation of the

corporate debtor under Section 53; or

(ii) the amount that would have been paid to such creditors, if the amount to be

distributed under the resolution plan had been distributed in accordance with the

order of priority in sub-section (1) of Section 53,

whichever is higher, and provides for the payment of debts of financial creditors,

who do not vote in favour of the resolution plan, in such manner as may be

specified by the Board, which shall not be less than the amount to be paid to such

creditors in accordance with sub-section (1) of Section 53 in the event of a

liquidation of the corporate debtor.

Explanation 1.—For the removal of doubts, it is hereby clarified that a distribution

in accordance with the provisions of this clause shall be fair and equitable to such

creditors.

Explanation 2.—For the purposes of this clause, it is hereby declared that on and

from the date of commencement of the Insolvency and Bankruptcy Code

(Amendment) Act, 2019, the provisions of this clause shall also apply to the

corporate insolvency resolution process of a corporate debtor—

Writ Petition (C) No. 421 of 2019

Page 65 of 74

30 of the Code relates to the payment of debts of

operational creditors, which is not relevant for us.

However, the later portion of clause (b) of sub-section (2)

to Section 30 of the Code provides for the payment of

debts of financial creditors who do not vote in favour of

the resolution plan. The amount payable to them, it

stipulates, shall not be less than the amount to be paid to

such creditors in accordance with sub-section (1) to

Section 53 of the Code in the event of a liquidation of the

corporate debtor. Sub-section (4) to Section 30 of the

Code states when and how a Committee of Creditors is to

approve the resolution plan. Sub-section (6) states that

(i) where a resolution plan has not been approved or rejected by the Adjudicating

Authority;

(ii) where an appeal has been preferred under Section 61 or Section 62 or such

an appeal is not time barred under any provision of law for the time being in force;

or

(iii) where a legal proceeding has been initiated in any court against the decision

of the Adjudicating Authority in respect of a resolution plan;

(c) provides for the management of the affairs of the corporate debtor after

approval of the resolution plan;

(d) the implementation and supervision of the resolution plan;

(e) does not contravene any of the provisions of the law for the time being in

force;

(f) conforms to such other requirements as may be specified by the Board.

Explanation.—For the purposes of clause (e), if any approval of shareholders is

required under the Companies Act, 2013 (18 of 2013) or any other law for the

time being in force for the implementation of actions under the resolution plan,

such approval shall be deemed to have been given and it shall not be a

contravention of that Act or law.

****

Writ Petition (C) No. 421 of 2019

Page 66 of 74

the resolution professional shall submit the resolution plan

as approved by the Committee of Creditors to the

adjudicating authority. Section 31

12

of the Code relates to

approval of the resolution plan. The adjudicating authority

is to satisfy that the resolution plan as approved by the

Committee of Creditors under sub-section (4) of Section

30 of the Code, meets the requirements as referred to in

sub-section (2) to Section 30 of the Code. Further, the

resolution plan has provisions for its effective

implementation. Sub-section (2) to Section 31 of the Code

states that where the adjudicating authority is satisfied

that the resolution plan does not confirm to the

requirements referred to in sub-section (1) to Section 31

of the Code, it may by an order reject the resolution plan.

12 31. Approval of resolution plan.—(1) If the Adjudicating Authority is satisfied

that the resolution plan as approved by the committee of creditors under sub-

section (4) of Section 30 meets the requirements as referred to in sub-section (2)

of Section 30, it shall by order approve the resolution plan which shall be binding

on the corporate debtor and its employees, members, creditors, including the

Central Government, any State Government or any local authority to whom a

debt in respect of the payment of dues arising under any law for the time being in

force, such as authorities to whom statutory dues are owed, guarantors and other

stakeholders involved in the resolution plan:

Provided that the Adjudicating Authority shall, before passing an order for

approval of resolution plan under this sub-section, satisfy that the resolution plan

has provisions for its effective implementation.

(2) Where the Adjudicating Authority is satisfied that the resolution plan does not

confirm to the requirements referred to in sub-section (1), it may, by an order,

reject the resolution plan.

****

Writ Petition (C) No. 421 of 2019

Page 67 of 74

We need not refer to other sub-sections of Section 31 of

the Code.

15.We now turn our attention to 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.

15.1Clause (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.

Writ Petition (C) No. 421 of 2019

Page 68 of 74

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

Writ Petition (C) No. 421 of 2019

Page 69 of 74

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 sub-

section (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

Writ Petition (C) No. 421 of 2019

Page 70 of 74

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 sub-

section (1) with equal ranking, if disrupting the order of

priority under the said sub-section will be disregarded by

the liquidator.

16.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.

Writ Petition (C) No. 421 of 2019

Page 71 of 74

17.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

Writ Petition (C) No. 421 of 2019

Page 72 of 74

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 law-

maker 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.

18.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

Writ Petition (C) No. 421 of 2019

Page 73 of 74

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.

19.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.

However, in the facts and circumstances of the case,

there shall be no order as to costs.

Pending applications, if any, also stand disposed of.

………………………………….J.

[M.R. SHAH]

NEW DELHI; ………………………………….J.

MAY 02, 2023. [SANJIV KHANNA]

Writ Petition (C) No. 421 of 2019

Page 74 of 74