SUPREME COURT HOLDS WINDING UP PROVISIONS UNDER COMPANIES ACT 2013 NOT APPLICABLE TO COMPANIES UNDERGOING LIQUIDATION UNDER INSOLVENCY AND BANKRUPTCY CODE 2016

Recently, a two-Judge Bench of the Hon’ble Supreme Court comprising of Justice M.R. Shah and Justice Sanjiv Khanna Passed a Judgement dated 02.05.2023 in the matter of Moser Baer Karamchari Union thr. President Mahesh Chand Sharma vs. Union of India (UOI) and Ors. [Writ Petition (C) Nos. 421 of 2019, 777 of 2020 and 712 of 2020], and held that Section 327(7) of the Companies Act, 2013 (“Act, 2013“) (Preferential Payments), that provides for preferential payments to stakeholders of a company undergoing winding up under the Companies Act 2013, would not be applicable to companies undergoing liquidation under the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code“), which also provides for the manner of distribution of assets amongst the stakeholders of the company undergoing liquidation, under Section 53 of IBC (Distribution of Assets).

FACTS

i) In the present case, the Petitioner, Moser Baer Karamchari Union filed a Writ Petition bearing WP (C) No. 421 of 2019 before the Supreme Court under Article 32 of the Constitution of India (Remedies for Enforcement of Rights), seeking issue of appropriate writ, direction or order to strike down Section 327(7) of the Act, 2013, as the same is arbitrary and violative of Article 21 of the Constitution of India (Protection of Life and Personal Liberty).

ii) Further, the Petitioner sought for issue of a writ 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 IBC. Further, the Petitioner sought for a purposive interpretation to Section 53 of IBC and also sought for necessary directions which would enable the Petitioners to get their dues of 24 months released without any further delay.

iii) The other Petitioners, Manoj Kumar Nagar and Raj Kumar Verma filed Writ Petitions bearing WP (C) Nos. 777 of 2020 and 712 of 2020, before the Apex Court under Article 32 of the Constitution of India, contending that the Clause 19(a) of the Eleventh Schedule of IBC pursuant to Section 255 of IBC (Amendments of Act 18 of 2013), be declared as unreasonable and violative of Article 14 of the Constitution of India as Clause 19(a) of the Eleventh Schedule of IBC inserts sub-section (7) in Section 327 of the Act, 2013, which puts statutory bar on the application of Sections 326 (Overriding Preferential Payments) and 327 of the Act, 2013, to the liquidation proceedings under the IBC.

iv) In short, the Petitioners claimed that the aforementioned provisions of IBC have put a bar on the application of provisions of the Companies Act in respect of liquidation proceedings under IBC, hence, the said provisions of IBC be declared unconstitutional.

v) Further, the Petitioners contended that there is unreasonable classification in respect of distribution of legitimate dues of workmen in the event of liquidation of a company under IBC and liquidation of a company under the Companies Act, 2013.

vi) Furthermore, the Petitioners contended that the 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 workman’s dues payable to workmen to 24 months only preceding the date of order of liquidation and then rank the said workman’s dues equally with the secured creditors in the event such secured creditors relinquish their security in the manner set out in Section 52 of IBC (Secured Creditor in Liquidation Proceedings).

vii) The Petitioners also contended that the settlement of workmen dues should be done in accordance with the reasonable principles laid down under Section 326 of Act, 2013 even in the case of liquidation under the IBC.

ISSUE

I) Whether Section 327(7) of Act, 2013, which states that Sections 326 and 327 of the Act, 2013 shall not be applicable in case of liquidation under IBC, is arbitrary and/or violative of Article 21 of Constitution of India ?

SUPREME COURT OBSERVATIONS

The Supreme Court, vide Order dated 02.05.2023, made the following observations:

1) That the Companies Act, 2013 does not deal (i) with insolvency and bankruptcy procedure, when companies are unable to pay their debts, (ii) aspects relating to the revival and rehabilitation of companies and (iii) their winding up, if revival and rehabilitation is not possible.

2) Further the cases of revival or winding up of a company on the ground of insolvency and inability to pay debts under IBC are different from cases where companies are wound up under Section 271 of the Companies Act 2013 (Circumstances in Which Company may be Wound Up By Tribunal). The two situations are not identical and under Section 271 of the Act, 2013, a running and financially sound company can also be wound up for various reasons such as if the company has acted against the interests of the sovereignty and integrity of India, if the company has made a default in filing with the Registrar its financial statements, etc. 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.

3) The Bench observed, while examining the issue whether there is any discrimination or violation of Article 14 of the Constitution of India, that the two enactments deal with two distinct situations and they cannot be equated. Further, 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, 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, the Court would not set aside a legislation, solely on the ground that marginal sacrifice is to be made by the workmen.

4) Further, the Supreme Court observed that to protect the interest of the workmen where the secured creditor did not relinquish its security interest to fall under Section 53 of the Code, Regulation 21A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 had been enacted, and it requires that the secured creditor, who opts to realise its security interest as per Section 52 of the Code, had to pay as much towards the amount payable under 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 workman’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.

CONCLUSION

Thus, the Supreme Court, based on aforementioned observations, held that Section 327(7) of the Act, 2013 that provides that Sections 326 and 327 of the Act, 2013 shall not be applicable in the event of liquidation under the IBC, has been necessitated in view of the enactment of specialised legislation, IBC. Hence, Section 327(7) of the Act, 2013 cannot be said to be arbitrary and/or violative of Article 21 of the Constitution of India. Further, in case of 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 (Liquidation Estate). Thus, the Apex Court held that the Writ Petitions challenging the constitutional validity of the provisions of Companies Act, 2013 lacked merit and hence, were dismissed.

 

Girija Rani Mullapudi

Associate

The Indian Lawyer & Allied Services