Summary
The Court rejected the constitutional challenge to the exclusion of Companies Act payment priorities from IBC liquidation and refused to remove workmen’s dues from the section 53 waterfall. The IBC constituted a distinct, considered economic framework balancing stakeholder interests. Workmen’s priority for twenty-four months and the separate protection of provident, pension and gratuity funds supported its validity.
Issues
- Whether section 327(7) and the IBC priority scheme unconstitutionally disadvantaged workmen.
- Whether the Companies Act priority regime could be imported into IBC liquidation or workmen’s dues removed from its waterfall.
Provisions considered
- Section 327(7), Companies Act, 2013Upheld the exclusion of sections 326 and 327 in liquidation governed by the IBC, preventing conflicting distribution regimes. (¶¶ 6-6.3, 18)
- Sections 36(4)(a)(iii), 52 and 53, Insolvency and Bankruptcy Code, 2016Upheld the distribution hierarchy subject to exclusion of the specified employee funds; explained protection of workmen when secured creditors relinquish or separately realise security. (¶¶ 6.2, 12-18)
- Regulation 21A, IBBI (Liquidation Process) Regulations, 2016Separate realisation of security still entails contribution toward the specified costs and workmen’s dues rather than escaping those protections. (¶ 13)
Held
- IBC liquidation and winding up on the remaining Companies Act grounds address distinct situations. Their distribution provisions cannot be compared item by item as if the contexts were identical. Section 327(7) validly ensures that IBC liquidation follows its own distribution rules rather than two competing statutory regimes. (¶¶ 6-9, 18)
- Under section 53(1)(b), workmen’s dues for the twenty-four months preceding liquidation commencement rank equally with debts of secured creditors who relinquish security. Importation of the meaning of workmen’s dues from section 326 does not import the Companies Act’s entire priority mechanism. Equal-ranking claims abate proportionately if assets are insufficient. (¶¶ 6.2, 15, 15.1)
- Sums due from provident, pension and gratuity funds are excluded from the liquidation estate under section 36(4)(a)(iii), so are not shared through the waterfall. The Court relied on that exclusion while expressly reserving detailed interpretation of that subclause, an issue pending elsewhere. The judgment did not adjudicate every disputed category of fund liability. (¶¶ 12 and footnote 9, 18)
- A secured creditor realising security under section 52 must comply with Regulation 21A’s contribution requirement for the specified costs and workmen’s dues. Workmen’s protection therefore does not disappear solely because security is realised outside the common pool. (¶¶ 12, 13)
- The hierarchy reflects extensive deliberation and balances credit, revival, economic value and stakeholder interests. Courts accord latitude to economic legislation and cannot rearrange an interdependent waterfall merely because a prior regime or another possible arrangement appears preferable. The challenged treatment was not shown to be manifestly arbitrary or unconstitutional under Articles 14 and 21. (¶¶ 7-9, 16-19)
Result
Writ petitions dismissed without costs; constitutional challenge and request to displace the section 53 hierarchy rejected. IBC distribution applies subject to section 36(4); pending applications disposed of.