Sunil Kumar Jain and others vs Sundaresh Bhatt and others

Sunil Kumar Jain and others vs Sundaresh Bhatt and others

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले


REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5910 OF 2019
Sunil Kumar Jain and others …Appellants
Versus
Sundaresh Bhatt and others …Respondents
J U D G M E N T
M.R. SHAH, J.
1. Feeling aggrieved and dissatisfied with the impugned order dated
31.05.2019 passed by the National Company Law Appellate Tribunal,
New Delhi (hereinafter referred to as the ‘Appellate Tribunal’) in
Company Appeal (AT) (Insolvency) No. 605 of 2019, by which the
Appellate Tribunal has dismissed the said appeal preferred by the
appellants herein – workmen/employees of M/s ABG Shipyard Limited
(hereinafter referred to as the ‘Corporate Debtor’), working at Dahej and
Mumbai, which was filed against the order passed by the National
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Company Law Tribunal, Ahmedabad Bench, Ahmedabad (hereinafter
referred to as the ‘Adjudicating Authority’) dated 25.04.2019 not granting
any relief to them with regard to their claim relating to salary, which they
claimed for the period involving ‘Corporate Insolvency Resolution
Process’ (hereinafter referred to as the ‘CIRP’) and the prior period,
original applicants – workers/employees have preferred the present
appeal.
2. That the Corporate Debtor was a private sector Ship Building Yard
with its manufacturing activities at Dahej Yard and Surat Yard in Gujarat
and having its corporate office at Mumbai. That prior to the initiation of
CIRP, the Corporate Debtor had 562 workmen and 93 employees at
Dahej; 291 workmen and 99 employees at Surat and 101 employees at
its Mumbai Head Office. The appellants herein are the 272 employees
and workmen employed at Mumbai Head Office and Dahej Yard of the
Corporate Debtor. None of the 201 employees and workmen at Surat
Yard are the appellants herein.
3. Vide its order dated 1.8.2017, the Adjudicating Authority admitted
an application under Section 7 of the Insolvency and Bankruptcy Code,
2016 (hereinafter referred to as the ‘IBC Code’) and the CIRP was
initiated. The Adjudicating Authority also appointed the Interim
Resolution Professional of the Corporate Debtor who was thereafter
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confirmed as the Resolution Professional (for short, ‘RP’) by the
Committee of Creditors (for short, ‘COC’) of the Corporate Debtor on
7.9.2017. First meeting of the COC was held on 4.9.2017.
3.1 On 23.10.2017, Company Application No. 348 of 2017 was filed
before the Adjudicating Authority, praying inter alia to direct the
Resolution Professional to make payment to the employees and the
workmen. On 9.3.2018, the appellants herein filed Company Application
No. 78 of 2018 in Company Application No. 348/2017 before the
Adjudicating Authority, praying inter alia to direct the RP to utilize the
amount of Rs.9,75,33,236/- to be received from the Indian Coast Guard
solely for employees/workmen.
3.2 Vide order dated 25.04.2018 passed in Company Application No.
78/2018, the Adjudicating Authority directed the RP to deposit
Rs.2,75,00,000/- in the Registry of the Adjudicating Authority, subject to
the outcome of Company Application No. 348/2017. In the meantime, in
the 4th meeting of the COC held on 08.12.2017, the issue with respect to
the payment of salaries/wages of the employees/workers respectively
was discussed in view of the directions passed by the Adjudicating
Authority vide its order dated 01.12.2017. However, the issue was not
resolved and thereafter the appellants herein filed the aforesaid IA No.
78/2018 in which the Adjudicating Authority directed to deposit Rs. 2.75
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crores out of the total amount of Rs.9,75,33,236/- with the Registry of the
NCLT towards disbursement of the outstanding salaries/wages to the
appellants, subject to the final outcome of IA No. 348/2017 and the
Adjudicating Authority accordingly disposed of Company Application No.
78/2018.
3.3 It appears that thereafter since no agreed resolution plan could be
adopted of the Corporate Debtor, the RP filed IA No. 113/2019 before
the Adjudicating Authority praying for an order of liquidation of Corporate
Debtor. The Adjudicating Authority by order dated 25.04.2019, after
deciding various other applications including the application of the
appellants being Company Application No. 348/2017 passed an order of
liquidation of the Corporate Debtor and appointed respondent no.1
herein as Liquidator of the Corporate Debtor. While passing the order of
liquidation, the Adjudicating Authority also disposed of Company
Application No. 348/2017 in view of the order passed in Company
Application No. 78/2018 by which the Adjudicating Authority earlier
directed to deposit Rs.2.75 crores towards the dues of the appellants
which as such was subject to the final outcome of Company Application
No. 348/2017. Therefore, as such, the Adjudicating Authority while
disposing of Company Application No. 348/2017 did not grant the relief
claimed by the appellants – 272 workers/employees working at Dahej
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Yard and Mumbai Head Office for their claim relating to salary for the
period involving CIRP and the prior period.
4. Feeling aggrieved and dissatisfied with the order passed by the
Adjudicating Authority, not granting the relief to the appellants herein with
regard to their claim relating to salary/wages, which they claimed for the
period involving CIRP and prior period, the appellantsworkmen/employees working at Dahej Yard and Mumbai Head Office
preferred Company Appeal No. 605/2019 before the Appellate Tribunal.
By the impugned order, the Appellate Tribunal has disposed of the said
appeal declining to interfere with the order passed by the Adjudicating
Authority, however, allowed the appellants – 272 workmen/employees to
file their individual claims before the Liquidator, who after going through
the record and taking into consideration the pleadings made by the
workmen/employees will determine the claim. The Appellate Tribunal
has also further observed that if claim of one or other
workmen/employee is rejected, it will be open to them to move before
the Adjudicating Authority, which may decide the same in accordance
with law. The Appellate Tribunal has also observed that so far as the
Gratuity and Provident Funds are concerned, the same cannot be
treated to be the asset of the Corporate Debtor and they are to be
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disbursed amongst the employees/workmen who are entitled for the
same.
5. Feeling aggrieved and dissatisfied with the impugned order passed
by the Appellate Tribunal, the appellants-workmen/employees of the
Corporate Debtor working at Dahej Yard and Mumbai Head Office have
preferred the present appeal.
6. Ms. Shobha Ramamoorthy, learned Advocate appearing on behalf
of the appellants has vehemently submitted that in the present case the
respective appellants are all the workmen and employees – 272 in
number and were employed at Dahej Yard and Mumbai Head Office of
the Corporate Debtor. It is submitted that in the present case, the CIRP
period commenced from 01.08.2017 and ended on 25.04.2019 –
commencement of liquidation. It is submitted that for this entire period of
20 months and 25 days, the respective employees and workmen were
on the payrolls of the Corporate Debtor. It is submitted that the RP did
not terminate the employment contracts or retrench or layoff the
workmen. It is submitted that on the other hand, RP issued instructions
dated 4.9.2017 to all the employees and workmen to report to him and
follow his instructions. It is submitted that on 15.11.2017, RP issued an
email to HR Department of Corporate Debtor instructing strictly not to
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relieve or permit resignation of any employee/workmen, without written
approval.
6.1 It is further submitted that in the present case, the Corporate
Debtor was managed as a going concern in accordance with Section 21
of the IB Code. It is submitted that even the proposal to suspend
operations at Dahej Yard and provide workmen with paid leave was
rejected by the COC for lack of majority. It is submitted that therefore
when the Corporate Debtor was managed as a going concern, which as
such is mandatory under Section 19 of the IB Code and when the
operations at Dahej Yard were not suspended, the workmen/employees
at Dahej Yard are entitled to at least the wages/salaries during the CIRP
period. It is submitted that irrespective of whether the wages/salaries for
the period during CIRP are to be qualified as CIRP cost or not, provident
fund, gratuity and pension fund are to be paid to the workmen and
employees at Dahej Yard under Section 36(4) of the IB Code in priority
over other dues, which are also not paid till date.
6.2 It is further submitted that in the present case, throughout the CIRP
period, the employees and workmen of Dahej Yard were asked to
assemble at ABG Enclave and sign the attendance register since
transportation to the yard was discontinued by the RP. It is submitted
that throughout the CIRP period, the employees of Mumbai office had
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regularly attended the office; recorded their attendance with the
Attendance Reader installed at the Mumbai office. Learned counsel
appearing on behalf of the appellants has relied upon some documents
from the paper book as well as rejoinder affidavit in respect of proof of
work done by the respective employees/workmen during the CIRP
period.
6.3 It is submitted that all claims filed by the employees/workmen in
Form-E with the Liquidator have been verified. It is submitted that the
verified and admitted claims of the employees and workmen of the
Corporate Debtor for CIRP period on the basis of the records available
including the attendance register have been uploaded by the
RP/Liquidator on 24.12.2020 on the official website of the Corporate
Debtor as per regulations. It is submitted that therefore further
verification in respect of the claims of the appellants based on their
actual attendance is vexatious.
6.4 Learned counsel appearing on behalf of the appellants has taken
us to the relevant provisions of the IB Code in support of her submission
that the workmen/employees of the Dahej Yard and Mumbai Head Office
are at least entitled to the wages/salaries during the period of CIRP and
are also entitled to the amount due and payable towards provident fund,
gratuity and pension. Learned counsel appearing on behalf of the
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appellants has taken us to Section 3(36); Section 5(13); Section 5(14);
Section 5(23); Section 17, Section 18; Section 19; Section 20; Section
25; Section 33(7); Section 36(4) and Section 53 of the IB Code.
6.5 It is further submitted that the objective of the IB Code is for
maximising of value of assets of the Corporate Debtor so that they are
efficiently run as a going concern. Reliance is placed on the decision of
this Court in the case of Swiss Ribbons Pvt. Ltd. v. Union of India,
reported in (2019) 4 SCC 17 (para 37); and in the case of Gujarat Urja
Vikas Nigam Limited v. Amit Gupta, Civil Appeal No. 9241 of 2019
decided on 8.3.2021 (para 57).
6.6 It is submitted that even under Section 20(1) of the IB Code, the
RP is mandated to manage the operations of the Corporate Debtor as a
going concern. It is submitted that for this purpose he is vested with the
authority to issue instructions to the personnel of the Corporate Debtor
as may be necessary for keeping the Corporate Debtor as a going
concern. It is submitted that the RP is under the mandate to take all
such actions as are necessary to keep the Corporate Debtor as a going
concern.
6.7 It is submitted that Section 5(13) of the IB Code defines
“Insolvency Resolution Process Cost”. It is submitted that as per Section
5(13) of the Code, “Insolvency Resolution Process Cost” means any
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costs incurred by the RP in running the business of the Corporate Debtor
as a going concern and any other costs as may be specified by the IBBI
– Liquidator. It is submitted that in the present case, vide Circular dated
12.06.2018, the Liquidator had clearly provided the costs on account of
employees and workmen under the head “other services in a running
business” in Forms I, II and III submitted by the RP with respect to CIRP
costs incurred by him. It is submitted that therefore the salaries/wages
and the dues payable to the employees/workmen during the CIRP period
will be qualified as CIRP costs under Section 5(13) of the IB Code and
are liable to be disbursed even prior to the amount distributed under
Section 53 of the IB Code.
6.8 It is further submitted that even otherwise the provident fund,
gratuity and pension fund amounts remain outside the liquidation under
Section 36(4) of the IB Code. It is submitted that the obligation to pay
the provident fund, gratuity fund amount would arise as soon as the
employees and workmen are deemed to have been discharged under
Section 33(7) of the IB Code. It is submitted that even the
workmen/employees are required to be paid the wages/salaries for the
pre-CIRP period as per the priorities mentioned in Section 53 of the IB
Code.
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6.9 It is further submitted by the learned counsel appearing on behalf
of the appellants that the salaries and wages payable to the
workmen/employees for the CIRP period are a component of the
resolution professional costs and therefore the CIRP period salaries and
wages payable to the respective workmen/employees are to be first paid
and are not to be paid “pari passu” in terms of Section 53(1)(b) and (c) of
the IB Code. It is submitted that even the ‘Workmen’s Dues’ is explained
in Explanation (ii) to Section 53 of the Code as the term having the same
meaning as assigned to it in Section 326 of the Companies Act, 2013. It
is submitted that Section 327 of the Companies Act provides for
preferential payments upon winding up of a company, enlists the
component of the wages or salary and dues payable to an employee
under clauses b, c, e & f under sub-clause 1.
6.10. It is submitted that thus on a combined reading of the provisions of
Sections 326 & 327 of the Companies Act, it is clear that the workmen’s
dues and the employee’s dues are comprised of several components
including wages or salary, holiday remuneration, sums due from the
provident fund, pension fund and the gratuity fund amongst other items.
It is submitted that as observed by this Court in the case of Swiss
Ribbons Pvt. Ltd. (supra), the costs and expenses of the RP/Liquidator
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are to be given preferential treatment by excepting them from the pari
passu principle.
6.11 It is submitted that Rs. 2.75 crores are earmarked and kept apart
towards the dues of the workmen/employees. It is submitted that
therefore the said sum of Rs.2.75 crores which is deposited for the
benefit of the workmen/employees is liable to be disbursed in terms of
Section 53(1)(a) r/w Section 5(13)(c) of the IB Code. It is submitted that
the amount in the sum of Rs.16.8 crores (approximately) payable
towards the provident fund, gratuity and pension in terms of Section
36(4) to all the employees and workmen of the Corporate Debtor
including the appellants and therefore is required to be paid in priority
over the disbursement to be made under Section 53(1)(b) & (c).
6.12 Making the above submissions and relying upon the aforesaid
decisions, it is prayed to allow the present appeal.
7. The present appeal is vehemently opposed by Shri Nakul Dewan,
learned Senior Advocate appearing on behalf of respondent no.1 –
Liquidator of Corporate Debtor.
7.1 Shri Nakul Dewan, learned senior counsel appearing on behalf of
the Liquidator of Corporate Debtor has vehemently submitted that the
wages and salaries claimed by the appellants who have done no work
during the CIRP period and have not assisted the RP/Liquidator during
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the CIRP, would not fall within the parameters of CIRP costs within the
definition of Section 5(13)(c) of the IB Code.
7.2 It is submitted that only 8 employees at the Mumbai location for
eight months during the CIRP and workmen/employees from Surat (from
August 2017 to October 2017) assisted the RP in providing services
required under the CIRP process. It is submitted that the remaining
employees and workmen including the appellants herein were not
required to and did not perform any services to run the Corporate Debtor
during the CIRP period. It is submitted that therefore the COC of the
Corporate Debtor rightly did not approve any payments to the appellants
as part of the CIRP costs. It is submitted that the wages and salaries of
the appellants – workmen/employees of the Corporate Debtor would fall
under Sections 53(1)(b) and 53(1)(c) of the IB Code.
7.3 It is submitted that as per Section 5(13)(c) of the IB Code r/w
Regulations 31 and 33 of the CIRP Regulations, cost incurred by the RP
in running the business of the Corporate Debtor is required to be ratified
by the COC for it to be classified as CIRP costs. It is submitted that only
the costs for those employees who have assisted the RP during the
CIRP period, have been approved by the COC in the first COC meeting,
held on 4.9.2017. It is submitted that therefore no other costs can be
classified as CIRP costs, except unless it is ratified by the COC. It is
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submitted that the remaining dues of the workmen will form part of the
dues falling under Section 53(1)(b) of the IB Code.
7.4 It is submitted that in the meetings of the COC held periodically
right from first meeting to fourth meeting, it was specifically recorded that
the Dahej Shipyard is not operational and that the Corporate Debtor is
not in a position to pay the salaries of the workmen and employees due
to paucity of funds since the Corporate Debtor was not a going concern
and did not have a running business.
7.5 It is further submitted that the main business of the Corporate
Debtor was shipbuilding and ship repairing which was carried out at its
Yards at Surat and Dahej. It is submitted that the Yard at Dahej was not
in operation since 2015 and the Yard at Surat was closed in October
2017 and therefore it cannot be said that the Corporate Debtor was a
going concern during the CIRP and therefore all its employees would be
required to be treated as those who assisted the RP to run the Corporate
Debtor as a going concern.
7.6 It is further submitted that as such there is no evidence to suggest
that the respective workmen/employees deployed at Dahej Yard and
Mumbai Head Office have actually worked during the CIRP period. It is
therefore submitted that the Appellate Tribunal has rightly observed that
the respective workmen/employees can at least have to prove their
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claims before the RP/Liquidator by submitting their respective claims and
the same are required to be adjudicated upon and/or verified by the
Liquidator. It is submitted that therefore the Appellate Tribunal has
rightly not interfered with the order passed by the Adjudicating Authority
in not passing any order in favour of the workmen/employees.
7.7 It is further submitted that Section 53 of the IB Code sets out the
waterfall mechanism in terms of which the dues of the creditors are paid.
It is submitted that even the operational creditors fall sixth in line after
payment of CIRP dues, dues of Secured Creditors etc. It is submitted
that even after the Corporate Debtor goes into liquidation in terms of
Section 33 of the IB Code, the dues of the employees and workmen
being operational creditors would be paid in last in terms of the waterfall
mechanism of Section 53(1)(f) of the IB Code. It is therefore submitted
that the respective appellants – workmen/employees are not entitled to
any wages/salaries for the period during CIRP as CIRP costs, as
claimed by them.
7.8 Shri Nakul Dewan, learned Senior Advocate appearing on behalf
of respondent no.1 – RP/Liquidator has further submitted that the costs
incurred during the CIRP period by the Corporate Debtor/RP will qualify
as CIRP costs only with respect to costs incurred by the RP running the
company as a going concern under Section 5(13) (c) of the IB Code and
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in a case where the same has been approved by the COC under
Regulations 31 and 33 of the CIRP Regulations.
It is submitted that in the present case the Corporate Debtor is
neither a going concern nor the RP has incurred any costs. It is
submitted that therefore the wages/salaries of the workmen/employees
at the Dahej Yard cannot be included in the CIRP costs.
7.9 It is further submitted that after the commencement of the CIRP,
workmen and employee’s dues which are outstanding as on the date of
CIRP, are treated as operational creditors in terms of Section 5(20) and
5(21) of the IB Code. It is submitted that in terms of Section 30(2)(b) of
the IB Code, the amount payable to operational creditors by a
prospective resolution applicant shall not be less than the amount to be
paid to such creditors in the event of a liquidation of the corporate debtor
under Section 53; OR 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.
7.10 It is submitted that Section 53 of the IB Code sets out the waterfall
mechanism in terms of which the dues of the creditors are paid. It is
submitted that operational creditors fall sixth in line after payment of
CIRP dues, dues of secured creditors etc.
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7.11 It is submitted that in the present case, it is only few of the Surat
workmen/employees and 8 Mumbai employees who have rendered
services during the CIRP period to assist the RP to complete the CIRP
process whose dues would be treated as CIRP costs. Otherwise, all
dues of employees and workmen which have accrued prior to CIRP
would be paid in terms of Section 53(1)(f) of the IB Code, both during
CIRP and during liquidation. It is submitted that in the present case, the
Liquidator has accepted the claim filed by the workmen and employees.
However, the said claims filed by the workmen/employees cannot be
considered as CIRP costs and cannot be paid in priority to all other
claims. The treatment of the said claims of the workmen and employees
have to be treated in accordance with the provisions of Section 53(1)(b)
(i) and 53(1)(c) of the IB Code respectively, as applicable and not as
CIRP costs.
7.12 It is submitted that in the present case the appellants who are the
workmen at Dahej Yard and employees at Mumbai Head Office, did not
help to maintain the Corporate Debtor as a going concern, since (i) the
Corporate Debtor was never a going concern and (ii) the Dahej Yard was
not in operation since June, 2015 and (iii) Operations at the Surat
Shipyard were completely shut from October, 2017. It is submitted that
therefore the appellants who are the workmen of the Dahej Yard and
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employees of the Mumbai Head Office, cannot claim any amounts
towards wages/salaries for the CIRP period, since no work/services
were rendered by them, except for the critical Mumbai employees whose
salaries were ratified by the COC during the first COC meeting.
7.13 Making the above submissions, it is submitted that the wages and
salaries of the workmen/employees at Dahej Yard and the employees at
Mumbai Head Office, except those who worked during the CIRP period,
cannot be included and/or considered as CIRP costs and therefore they
have to be paid as per the waterfall mechanism mentioned in Section
53(1)(b) & (c) of the IB Code.
7.14 It is submitted that therefore the respective workmen employed at
Dahej Yard and some of the employees employed at Mumbai Head
Office were required to submit their individual claims and they have to
establish before the RP/Liquidator that in fact they actually worked
during the CIRP period, the Appellate Tribunal has rightly observed that
the respective workmen/employees have to submit their claims before
the RP/Liquidator, who is required to verify whether the Corporate
Debtor was a going concern during the CIRP period and whether in fact
the concerned workmen/employees actually worked during the CIRP
period or not. It is submitted that therefore no interference of this Court
is called for.
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8. We have heard the learned counsel for the respective parties at
length.
The issue before this Court is with respect to wages/salaries of the
workmen/employees during the CIRP period and the amount due and
payable to the respective workmen/employees towards Pension Fund,
Gratuity Fund and Provident Fund.
8.1 While considering the aforesaid claims, the legislative history and
the relevant provisions of the IB Code are required to be referred to.
Relevant Provisions of the IB Code:
“Section 3(36)
Section 3(36) "workman" shall have the same meaning as assigned to it in
clause (s) of section 2 of the Industrial Disputes Act, 1947 (14 of 1947);
Section 5(13)
(13) "insolvency resolution process costs" means—
(a) the amount of any interim finance and the costs incurred in raising
such finance;
(b) the fees payable to any person acting as a resolution professional;
(c) any costs incurred by the resolution professional in running the
business of the corporate debtor as a going concern;
(d) any costs incurred at the expense of the Government to facilitate the
insolvency resolution process; and
(e) any other costs as may be specified by the Board;
Section 5(14)
5(14) "insolvency resolution process period" means the period of one
hundred and eighty days beginning from the insolvency commencement
date and ending on one hundred and eightieth day;
Section 17
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17. Management of affairs of corporate debtor by interim resolution
professional. (1) From the date of appointment of the interim resolution
professional, —
(a) the management of the affairs of the corporate debtor shall vest in the
interim resolution professional;
(b) the powers of the board of directors or the partners of the corporate
debtor, as the case may be, shall stand suspended and be exercised by
the interim resolution professional;
(c) the officers and managers of the corporate debtor shall report to the
interim resolution professional and provide access to such documents and
records of the corporate debtor as may be required by the interim
resolution professional;
(d) the financial institutions maintaining accounts of the corporate debtor
shall act on the instructions of the interim resolution professional in relation
to such accounts and furnish all information relating to the corporate
debtor available with them to the interim resolution professional.
(2) The interim resolution professional vested with the management of the
corporate debtor shall—
(a) act and execute in the name and on behalf of the corporate debtor all
deeds, receipts, and other documents, if any;
(b) take such actions, in the manner and subject to such restrictions, as
may be specified by the Board;
(c) have the authority to access the electronic records of corporate debtor
from information utility having financial information of the corporate debtor;
(d) have the authority to access the books of account, records and other
relevant documents of corporate debtor available with government
authorities, statutory auditors, accountants and such other persons as
[may be specified; and]
[(e) be responsible for complying with the requirements under any law for
the time being in force on behalf of the corporate debtor.]
Section 20
20. Management of operations of corporate debtor as going concern.
- (1) The interim resolution professional shall make every endeavour to
protect and preserve the value of the property of the corporate debtor and
manage the operations of the corporate debtor as a going concern.
(2) For the purposes of sub-section (1), the interim resolution professional
shall have the authority—
(a) to appoint accountants, legal or other professionals as may be
necessary;
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(b) to enter into contracts on behalf of the corporate debtor or to amend or
modify the contracts or transactions which were entered into before the
commencement of corporate insolvency resolution process;
(c) to raise interim finance provided that no security interest shall be
created over any encumbered property of the corporate debtor without the
prior consent of the creditors whose debt is secured over such
encumbered property:
Provided that no prior consent of the creditor shall be required where the
value of such property is not less than the amount equivalent to twice the
amount of the debt.
(d) to issue instructions to personnel of the corporate debtor as may be
necessary for keeping the corporate debtor as a going concern; and
(e) to take all such actions as are necessary to keep the corporate debtor
as a going concern.
Section 25
25. Duties of resolution professional - (1) It shall be the duty of the
resolution professional to preserve and protect the assets of the corporate
debtor, including the continued business operations of the corporate
debtor.
(2) For the purposes of sub-section (1), the resolution professional shall
undertake the following actions, namely: —
(a) take immediate custody and control of all the assets of the corporate
debtor, including the business records of the corporate debtor;
(b) represent and act on behalf of the corporate debtor with third parties,
exercise rights for the benefit of the corporate debtor in judicial, quasijudicial or arbitration proceedings;
(c) raise interim finances subject to the approval of the committee of
creditors under section 28;
(d) appoint accountants, legal or other professionals in the manner as
specified by Board;
(e) maintain an updated list of claims;
(f) convene and attend all meetings of the committee of creditors;
(g) prepare the information memorandum in accordance with section 29;
(h) invite prospective resolution applicants, who fulfil such criteria as may
be laid down by him with the approval of committee of the creditors,
having regard to the complexity and scale of operations of the business of
the corporate debtor and such other conditions as may be specified by the
Board, to submit a resolution plan or plans.
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(i) present all resolution plans at the meetings of the committee of
creditors;
(j) file application for avoidance of transactions in accordance with Chapter
III, if any; and
(k) such other actions as may be specified by the Board.
Section 33(7)
33(7). The order for liquidation under this section shall be deemed to be a
notice of discharge to the officers, employees and workmen of the
corporate debtor, except when the business of the corporate debtor is
continued during the liquidation process by the liquidator.
Section 36(4)
Section 36 (4) Liquidation Estate –
(4) The following shall not be included in the liquidation estate assets and
shall not be used for recovery in the liquidation: —
(a) assets owned by a third party which are in possession of the corporate
debtor, including—
(i) assets held in trust for any third party;
(ii) bailment contracts;
(iii) all sums due to any workman or employee from the provident fund, the
pension fund and the gratuity fund;
(iv) other contractual arrangements which do not stipulate transfer of title
but only use of the assets; and
(v) such other assets as may be notified by the Central Government in
consultation with any financial sector regulator;
(b) assets in security collateral held by financial services providers and are
subject to netting and set-off in multi-lateral trading or clearing
transactions;
(c) personal assets of any shareholder or partner of a corporate debtor as
the case may be provided such assets are not held on account of
avoidance transactions that may be avoided under this Chapter;
(d) assets of any Indian or foreign subsidiary of the corporate debtor; or
(e) any other assets as may be specified by the Board, including assets
which could be subject to set-off on account of mutual dealings between
the corporate debtor and any creditor.
Section 53
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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 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 subsection shall be disregarded by the liquidator.
(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—
23
(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).”
Legislative History with respect to workmen/employee’s dues
towards the wages/salaries including the amount due and payable
towards provident fund, gratuity and pension fund:
8.2 Under the Companies Act, 1956 (hereinafter referred to as “1956
Act”), Section 59A provided that workmen’s dues and debts due to
secured creditors in terms of Section 529A(1)(c) of the 1956 Act shall be
paid in priority to other debts. Further, it provided that in case of insolvent
company, winding up should be undertaken in terms of laws of
insolvency with respect to the status of persons adjudged insolvent.
 8.2.1 The proviso to Section 59(1) of 1956 Act provided that
workmen shall deem to have pari passu charge in his favour to the
extent of workmen’s portion. It further stated that where the secured
creditor (instead of relinquishing) is enforcing his security, the debt due
to the extent of workmen’s share/ portion in the security shall rank pari
24
passu with workmen’s dues for the purposes of Section 529A. The said
section was brought in by way of Companies (Amendment) Bill, 1985
with the objective to introduce necessary legislation for the legitimate
dues of workers rank pari pasu with the secured creditors in the event of
the closure of the Company. The laudable objective was that in the
unfortunate event of liquidation, workers whose labour and effort
constitute an invisible but easily perceivable part of the capital of the
company, are not deprived of their legitimate right to participate in the
product of their labour and effort.
8.2.2 Section 530 of 1956 Act provided the waterfall mechanism as
per which priority is to be given to different kinds of debts. Subsequently,
the Companies Bill, 2009 and 2011 were introduced wherein
wages/salaries payable to workmen for a period of 2 years were
protected in case of winding up of the Company. Thereafter, under the
Companies Act, 2013 (hereinafter referred to as “2013 Act”), Section 326
and Section 327 i.e. “Overriding Preferential Payment” and “Preferential
Payments” were introduced wherein a proviso to Section 326 of the 2013
Act was inserted. Initially the insolvency process in case of winding up of
insolvent companies were provided under Section 325 of 2013 Act.
However, Section 325 of the 2013 Act was omitted w.e.f. 15.11.2016 on
the coming into force the IB Code. On enactment of the IB Code, the
25
winding up proceedings in case of insolvency are to be governed by the
provisions of the IB Code and the provisions of the IB code only shall be
applicable to deal with the winding up proceedings as the IB Code is a
complete Code in itself. That thereafter, an amendment w.e.f.
15.11.2016 has been brought in under Section 327 (7) of 2013 Act
wherein it has been clarified that the provisions of Section 326 and
Section 327 of the 2013 Act will not be applicable in the event of
liquidation under the IB Code.
8.2.3 In case of any insolvency, in a winding up of a company
under Section 326 and 327 of the Companies Act, the workmen dues
are to be paid as under: -
• 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 welfare of the workmen maintained by the
Company.
8.2.4 Under the IB Code, the workmen dues have been duly
protected and the provident fund, gratuity and pension fund have been
excluded from the liquidation estate assets (Section 36(4) of the IB
26
Code). Furthermore, as per Section 53 of the IB Code, the workmen
dues are given the top priority in the waterfall mechanism.
8.2.5 The issue of giving priority to the workmen dues have been
considered time and again in the various Committee’s Reports:
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. Furthermore, it was also debated with
respect to the waterfall mechanism under the Code 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.
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 debated. The Committee, after in dept 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.
The Committee 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. Thus, to
protect the interest of the workmen, the Committee decided that that the
workmen dues for a period of 12 months as provided under Section 53 of
the Code be increased to 24 months preceding liquidation commencement
date. 6
 In light of the same, the Section 36 of the Code 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. Therefore, this share of workmen’s dues has
consciously been taken outside the liquidation process.
27
8.2.6 In light of the above statutory provisions under the IB Code
and the legislative history, the claims of the workmen/employees towards
wages/salaries prior to CIRP and during the CIRP are required to be
considered.
9. It cannot be disputed that as per Section 5(13) of the IB Code,
“insolvency resolution process costs” shall include any costs incurred by
the resolution professional in running the business of the corporate
debtor as a going concern. It is also true that Section 20 of the IB Code
mandates that the interim resolution professional/resolution professional
is to manage the operations of the corporate debtor as a going concern
and in case during the CIRP the corporate debtor was a going concern,
the wages/salaries of such workmen/employees who actually worked,
shall be included in the CIRP costs and in case of liquidation of the
corporate debtor, dues towards the wages and salaries of such
workmen/employees who actually worked when the corporate debtor
was a going concern during the CIRP, being a part of the CIRP costs
are entitled to have the first priority and they have to be paid in full first
as per Section 53(1)(a) of the IB Code. Therefore, while considering the
claims of the concerned workmen/employees towards the
wages/salaries payable during CIRP, first of all it has to be established
and proved that during CIRP, the corporate debtor was a going concern
28
and that the concerned workmen/employees actually worked while the
corporate debtor was a going concern during the CIRP. The wages and
salaries of all other workmen/employees of the Corporate Debtor during
the CIRP who actually have not worked and/or performed their duties
when the Corporate Debtor was a going concern, shall not be included
automatically in the CIRP costs. Only with respect to those
workmen/employees who actually worked during CIRP when the
Corporate Debtor was a going concern, their wages/salaries are to be
included in the CIRP costs and they shall have the first priority over all
other dues as per Section 53(1)(a) of the IB Code. Any other dues
towards wages and salaries of the employees/workmen of the corporate
debtor shall have to be governed by Section 53(1)(b) and Section 53(1)
(c) of the IB Code. Any other interpretation would lead to absurd
consequences and violate the scheme of Section 53 r/w Section 5(13) of
the IB Code. If any other interpretation, more particularly, the
interpretation canvassed on behalf of the appellants is accepted, in that
case, the wages/salaries of those workmen/employees who had not
worked at all during CIRP shall have to be treated and/or included in the
CIRP costs, which cannot be the intention of the legislature.
10. On a fair reading of Section 5(13) of the IB code which defines
“insolvency resolution process costs”, it is observed and held that the
29
dues towards the wages/salaries of only those workmen/employees who
actually worked during the CIRP are to be included in the CIRP costs.
The rests of the claims towards the wages/salaries of the
workmen/employees, as observed hereinabove, shall be governed by
Sections 53(1)(b) & (c) of the IB Code.
11. In the present case, the RP/Liquidator has seriously disputed that
during the CIRP, the Corporate Debtor was a going concern. It is
seriously disputed that the respective appellants – workmen/employees
employed at Dahej Yard and Mumbai Head Office actually worked during
the CIRP. It is true that while submitting the claims towards CIRP costs,
the RP has not submitted the claims towards the wages/salaries of the
appellants, however, still the claims submitted/to be submitted by the
appellants will have to be adjudicated upon and considered by the
Liquidator and the Liquidator has to adjudicate and consider, (i) whether
the Corporate Debtor was a going concern during the CIRP; (ii) how
many workmen/employees actually worked during the CIRP while the
Corporate Debtor was a going concern.
If on adjudication of the claims made by the respective
workmen/employees, if it is established and proved that during CIRP, the
Corporate Debtor was a going concern and the concerned
workmen/employees actually worked during the CIRP when the
30
Corporate Debtor was a going concern, the wages and salaries of such
workmen/employees to be included in the CIRP costs as defined under
Section 5(13) of the IB Code and they will have to be paid such
wages/salaries as per Section 53(1)(a) of the IB Code as part of the
CIRP costs in full before making any payment as per priorities
mentioned in Section 53(1) of the IB code.
12. Now so far as the submission on behalf of the appellants that as
per Section 20 of the IB Code and even as per the decisions of this
Court in the cases of Swiss Ribbons Pvt. Ltd. (supra) and Gujarat Urja
Vikas Nigam Ltd. v. Amit Gupta (supra), the RP is under mandate to
manage the operations of the Corporate Debtor as a going concern and
therefore it is to be believed that during CIRP, the Corporate Debtor was
a going concern, managed and/or operated as a going concern cannot
be accepted. It is true that under Section 20 of the IB Code, it is the duty
of the RP to manage and run the operations of the Corporate Debtor as
a going concern. However, the words used in Section 20 are “the interim
resolution professional shall make every endeavour to …. manage the
operations of the corporate debtor as a going concern”. Therefore, even
if it is found that the Corporate Debtor was not a going concern during
the CIRP despite best efforts by the resolution professional, it cannot be
presumed that still the Corporate Debtor was a going concern during the
31
CIRP period. It depends on the facts of each case. In a given case, the
Corporate Debtor may be a going concern and in a given case, the
corporate debtor might not be a going concern. Therefore, submission
on behalf of the appellants that as the RP is under mandate to manage
the operations of the corporate debtor as a going concern under Section
20 of the IB code and therefore it is to be presumed that the RP
managed the operations of the Corporate Debtor as a going concern
and therefore the workmen/employees are entitled to their wages and
salaries during the CIRP, as their wages/salaries to be included in the
CIRP costs cannot be accepted. However, the wages and salaries of
the workmen/employees of pre-CIRP period will have to be governed as
per the priorities mentioned in Section 53(1) of the IB Code.
Dues of the workmen/employees towards Provident Fund, Gratuity
Fund and Pension Fund”
13. Now so far as the dues of the workmen/employees on account of
provident fund, gratuity and pension are concerned, they shall be
governed by Section 36(4) of the IB Code. Section 36(4)(iii) of the IB
Code specifically excludes “all sums due to any workman or employee
from the provident fund, the pension fund and the gratuity fund”, from the
ambit of “liquidation estate assets”. Therefore, Section 53(1) of the IB
Code shall not be applicable to such dues, which are to be treated
32
outside the liquidation process and liquidation estate assets under the IB
Code. Thus, Section 36(4) of the IB Code has clearly given outright
protection to workmen’s dues under provident fund, gratuity fund and
pension fund which are not to be treated as liquidation estate assets and
the Liquidator shall have no claim over such dues. Therefore, the
concerned workmen/employees shall be entitled to provident fund,
gratuity fund and pension fund from such funds which are specifically
kept out of liquidation estate assets and as per Section 36(4) of the IB
Code, they are not to be used for recovery in the liquidation.
14. In view of the above and for the reasons stated above, it is held as
under:
i) that the wages/salaries of the workmen/employees of the
Corporate Debtor for the period during CIRP can be included in the
CIRP costs provided it is established and proved that the Interim
Resolution Professional/Resolution Professional managed the
operations of the corporate debtor as a going concern during the CIRP
and that the concerned workmen/employees of the corporate debtor
actually worked during the CIRP and in such an eventuality, the
wages/salaries of those workmen/employees who actually worked during
the CIRP period when the resolution professional managed the
operations of the corporate debtor as a going concern, shall be paid
33
treating it and/or considering it as part of CIRP costs and the same shall
be payable in full first as per Section 53(1)(a) of the IB Code;
ii) considering Section 36(4) of the IB code and when the provident
fund, gratuity fund and pension fund are kept out of the liquidation estate
assets, the share of the workmen dues shall be kept outside the
liquidation process and the concerned workmen/employees shall have to
be paid the same out of such provident fund, gratuity fund and pension
fund, if any, available and the Liquidator shall not have any claim over
such funds.
15. As observed hereinabove, there are disputed questions, whether
in fact the IRP/RP managed the operations of the corporate debtor as a
going concern during the CIRP and there is a serious dispute whether
Dahej Yard was operational during the CIRP or not and there is a serious
dispute that the concerned workmen/employees of the Dahej Yard and
the concerned employees of the Mumbai Head Office actually worked
during the CIRP or not and therefore it is directed that let the appellants
submit their claims before the Liquidator and establish and prove that
during CIRP, IRP/RP managed the operations of the corporate debtor as
a going concern and that they actually worked during the CIRP and the
Liquidator is directed to adjudicate such claims in accordance with law
and on its own merits and on the basis of the evidence which may be
34
laid/produced, irrespective of the fact whether the RP who himself is now
the Liquidator included the claims of the appellants being wages/salaries
during CIRP as CIRP costs or not. The Liquidator is directed to
adjudicate such claims independently. If it is found that in fact the
IRP/RP managed the operations of the corporate debtor as a going
concern during the CIRP and the concerned workmen/employees
actually worked during CIRP, their wages and salaries be considered
and included in CIRP costs and they will have to be paid as per Section
53(1)(a) of the IB Code in full before distributing the amount in the
priorities as mentioned in Section 53 of the IB Code. The aforesaid
exercise shall be completed within a period of twelve weeks from today
and such amount shall be paid out of the amount which is directed to be
kept aside earlier by the Adjudicating Authority/Appellate Tribunal and
thereafter by this Court. Till such claims are adjudicated upon, the
Liquidator is directed to keep aside the said amount exclusively to be
used for the workmen/employee’s dues which is to be paid on
adjudication as above.
16. The present appeal is partly allowed to the aforesaid extent and
disposed of accordingly. No costs.
……………………………….J.
[M.R. SHAH]
NEW DELHI; ………………………………...J.
APRIL 19, 2022. [ANIRUDDHA BOSE]
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