MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH CHAND SHARMA versus UNION OF INDIA AND ORS. on 2 May 2023

MOSER BAER KARAMCHARI UNION THR. PRESIDENTMAHESH CHAND SHARMA

v.

UNION OF INDIA AND ORS.

(Writ Petition (C) No. 421 of 2019)

MAY 02, 2023

[M. R. SHAH AND SANJIV KHANNA, JJ.]

Companies Act, 2013: s. 327(7) – Constitutional validity –Held: s. 327(7) provides that ss. 326 and 327 shall not be applicablein the event of liquidation under the IBC, in view of the enactmentof IBC and it applies with respect to the liquidation of a companyunder the IBC, thus, s. 327(7) cannot be said to be arbitrary and/orviolative of Art. 21 – In case of liquidation of a company underIBC, the provisions of s. 53 IBC and other provisions of the IBCshall be applicable as the company is ordered to be liquidated orwound up under the provisions of IBC – Distribution of the assetsshall have to be made as per s. 53 IBC subject to s. 36(4) IBC – Asper s. 53(1)(b) the workmen’s dues for the period of twenty-fourmonths preceding the liquidation commencement date shall rankequally between the workmen and the secured creditor in the eventsuch secured creditor has relinquished security – Thus, the samecannot be said to be arbitrary and violative of Art. 21 – Insolvencyand Bankruptcy Code, 2016 – ss. 53 and 36(4).

Insolvency and Bankruptcy Code, 2016: s. 53 – Waterfallmechanism under – Held: Waterfall mechanism is based on astructured mathematical formula, and the hierarchy is created interms of payment of debts in order of priority with severalqualifications – Striking down any one of the provisions orrearranging the hierarchy in the waterfall mechanism may lead toseveral trips and disrupt the working of the equilibrium as a wholeand stasis, resulting in instability – Every change in the waterfallmechanism is bound to lead to cascading effects on the balance ofrights and interests of the secured creditors, operational creditorsand even the Central and State Governments – In the waterfallmechanism, after the costs of the insolvency resolution process andliquidation, secured creditors share the highest priority along with

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Aa defined period of dues of the workmen – Unpaid dues of theworkmen are adequately and significantly protected in line with theobjectives sought to be achieved by the Code and in terms of thewaterfall mechanism prescribed by s.53.

Dismissing the writ petitions, the CourtB

HELD: 1.1 In view of the enactment of Insolvency andBankruptcy Code, 2016 and Section 53 of the IBC, itnecessitated to amend the Act, 2013. As per Sub-Section (7) ofSection 327, Sections 326 and 327 shall not be applicable in theevent of liquidation under the IBC. The object and purpose ofCamending the Act, 2013 and to exclude Sections 326 and 327 inthe event of liquidation under the IBC seems to be that theremay not be two different provisions with respect to winding up/liquidation of a company. Therefore, in view of the enactment ofIBC, it necessitated to exclude the applicability of Sections 326and 327 of the Act, 2013 which cannot be said to be arbitrary.D[Para 6][111-E-F]

1.2. Sub-Section (7) of Section 327 shall be applicable incase of liquidation of a company under the IBC. In case ofliquidation of a company under IBC, the provisions of Section 53of the IBC and other provisions of the IBC shall be applicable asEthe company is ordered to be liquidated or wound up under theprovisions of IBC. Therefore, merely because under the earlierregime and in case of winding up of a company under theCompanies Act, 1956/2013, the dues of the workmen may havepari passu with that of the secured creditor, the petitioner cannotFclaim the same benefit in case of winding up/liquidation of thecompany under IBC. The parties shall be governed by theprovisions of the IBC in case of liquidation of a company underthe provisions of the IBC. [Para 6.1][111-G-H; 112-A-B]

1.3. Section 53 of the IBC provides for distribution of theGassets in case of liquidation of a company under IBC. As perSection 53(1)(b) the workmen’s dues for the period of twenty-four months preceding the liquidation commencement date shallrank equally between the workmen and the secured creditor inthe event such secured creditor has relinquished security in the H

manner set out in Section 52. Therefore, workmen’s dues for theperiod of twenty-four months preceding the liquidationcommencement date shall have pari passu with the dues of securedcreditor. At this stage, it is required to be noted that as per Section36(4) of IBC, all sums due to any workman or employee from theprovident fund, the pension fund and the gratuity fund shall notbe included in the liquidation estate assets and shall not be usedfor the recovery in the liquidation. Therefore, a conscious decisionhas been taken by the Parliament/Legislature in its wisdom tokeep out of all sums due to any workman/employee from theprovident fund, the pension fund and the gratuity fund from theliquidation estate assets [as per Section 36(4)] and that theworkmen’s dues for the period of twenty-four months precedingthe liquidation commencement date shall rank equally betweenthe workmen’s dues to the said extent and the dues to the securedcreditor. Therefore, the same cannot be said to be arbitrary andviolative of Article 21 of the Constitution of India. [Para 6.2][112-B-F]

1.4 As per the settled position of law, IBC is a completeCode and the object and purpose of IBC is altogether differentthan that of the Act, 1956/2013. The IBC is a new insolvencymechanism, therefore, the provisions under the IBC cannot becompared with that of the earlier regime, namely, the CompaniesAct, 1956/2013. [Para 6.2][112-F]

1.5 The legislature has now removed clause (a) to Section271 of the Companies Act, 2013, when a company is unable topay the debts, and clause (d) to Section 271 of the CompaniesAct, 2013, when a company is directed to be wound up under theChapter XIX of the Companies Act, 2013. In fact, Chapter XIX ofthe Companies Act 2013 was deleted/omitted in terms of Act No.31 of 2016 and the Eleventh Schedule in the Code, with effectfrom 15th November 2016. The Code, as enacted, is a separateand consolidated enactment specifically relating to and dealingwith companies which are insolvent and unable to pay dues, andenvisages a procedure with a mandate to first explore possibilityof rehabilitation and revival of the company, and the dissolution/winding up as the last call. This is significant and completelyreplaces the then existing framework for insolvency and ABC

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Abankruptcy resolution that was inadequate, ineffective and guiltyof causing undue delays. The enactment of the Code and theamendments thereafter are a consequence of detailedconsultation and deliberations by several committees,commissions and experts , in a matter which deals with theeconomy of the country as a whole. [Para 7.2, 7.3][115-A-E]B

1.6 The waterfall mechanism now prescribed in the Codewith reference to the workmen’s dues is a well-considered andthought-out decision. The waterfall mechanism and the hierarchyprescribed to the workmen’s dues should be seen in the overallobjective of the Code, which is to explore whether the corporateCdebtor can be revived so that jobs are not lost, the use of economicassets is maximised, and there is an effective legal frameworkwhich enhances the viability of credit in the hands of banks andfinancial institutions. The Code recognises the financial impacton secured creditors or financial institutions dealing with publicDmoney, as their economic health is equally important for thegeneral public as well as the national economy. Unless there iseconomic growth and fresh investments in the industry,employment opportunities will not be available, which would inturn lead to economic woes, insolvencies and bankruptcies. Theseare all complex economic matters wherein various conflictingEinterests have to be balanced, and a holistic rather than a one-sided, approach is to be taken. Each opinion may have merit, butthe court can hardly substitute its own wisdom or view for that ofthe legislature, especially when the enactment is the outcome ofa thought-out and ruminated review on complex fiscal andFcommercial challenges facing the economy. [Para 8][116-B-F]

1.7 The Companies Act, 2013 does not deal with insolvencyand bankruptcy when the companies are unable to pay their debtsor the aspects relating to the revival and rehabilitation of thecompanies and their winding up if revival and rehabilitation isGnot possible. In principle, it cannot be doubted that the cases ofrevival or winding up of the company on the ground of insolvencyand inability to pay debts are different from cases where companiesare wound up under Section 271 of the Companies Act 2013. The two situations are not identical. Under Section 271 of theCompanies Act, 2013, even a running and financially soundcompany can also be wound up for the reasons in clauses (a) to(e). The reasons and grounds for winding up under Section 271of the Companies Act, 2013 are vastly different from the reasonsand grounds for the revival and rehabilitation scheme as envisagedunder the Code. The two enactments deal with two distinctsituations and they cannot be equated when it is examinedwhether there is discrimination or violation of Article 14 of theConstitution of India. The workmen also have a stake and benefitfrom the revival of the company, and therefore unless it is foundthat the sacrifices envisaged for the workmen, which certainlyform a separate class, are onerous and burdensome so as to bemanifestly unjust and arbitrary, the legislation will not be set aside,solely on the ground that some or marginal sacrifice is to be madeby the workers. The submission is rejected that to find outwhether there was a violation of Article 14 of the Constitution ofIndia or whether the right to life under Article 21 Constitution ofIndia was infringed, this Court must word by word examine thewaterfall mechanism envisaged under the Companies Act, 2013,where the company is wound up in terms of grounds (a) to (e) ofSection 271 of the Companies Act, 2013; and the rights of theworkmen when the insolvent company is sought to be revived,rehabilitated or wound up under the Code. The grounds andsituations in the context of the objective and purpose of the two enactments are entirely different. [Para 9][123-A-G]

enactments are entirely different. [Para 9][123-A-G]

1.8 Section 53 of the Code which begins with a non-obstanteclause and states that notwithstanding anything to the contrarycontained in any law enacted by the Parliament or any StateLegislature for the time being in force, the proceeds from thesale of liquidation assets shall be distributed in the order ofpriority, which is stipulated, and within such period and suchmanner as may be specified. The consequence of sub-section (1)to Section 53 of the Code is that it will override the rights ofparties, including the secured creditor, when the said provisionapplies. Section 53 of the Code is the complete andcomprehensive code which ensures collection of assets and thenprovides the manner in which the creditors are to be paid. Even ABC

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Athe rights of the secured creditor falling under Section 53 of theCode to enforce, realise, settle, compromise or deal with thesecured assets as applicable to the security interest are dilutedand compromised. [Para 15][131-C-E]

1.9 Clause (a) to sub-section (1) to Section 53 deals withBinsolvency resolution process costs and the liquidation costswhich are to be paid in full. No grievance or issue can be raisedin respect of the said clause. Clause (b) to sub-section (1) toSection 53 states that the debts due in the form of workmen’sdues for a period of twenty four months preceding the liquidationcommencement date and the debts owed to the secured creditorCin the event such secured creditor has relinquished security inthe manner set out in Section 52 of the Code shall rank equallybetween and amongst the workmen and the secured creditors.The Explanation to Section 53 of the Code states that ‘workmen’sdues’ shall have the same meaning as assigned to it in SectionD326 of the Companies Act, 2013. In other words, Explanation toSection 326 of the Companies Act, 2013 has been incorporatedand applies to the waterfall mechanism as prescribed in clause(b) to sub-section (1) to Section 53 of the Code. What is significanthere is that under clause (b) to sub-section (1) to Section 53 ofthe Code, the workmen’s dues are for the period of twenty fourEmonths preceding the liquidation commencement date. [Para15.1][131-E-H; 132-A]

1.10 The waterfall mechanism is based on a structuredmathematical formula, and the hierarchy is created in terms ofpayment of debts in order of priority with several qualifications,Fstriking down any one of the provisions or rearranging thehierarchy in the waterfall mechanism may lead to several tripsand disrupt the working of the equilibrium as a whole and stasis,resulting in instability. Every change in the waterfall mechanismis bound to lead to cascading effects on the balance of rights andGinterests of the secured creditors, operational creditors and eventhe Central and State Governments. Depending upon the facts,in some cases, the waterfall mechanism in the Code may be morebeneficial than the hierarchy provided under Section 326 of theCompanies Act, 2013 and vice-versa. [Para 16][132-G-H; 133-A]H

1.11. In the waterfall mechanism, after the costs of theinsolvency resolution process and liquidation, secured creditorsshare the highest priority along with a defined period of dues ofthe workmen. The unpaid dues of the workmen are adequatelyand significantly protected in line with the objectives sought tobe achieved by the Code and in terms of the waterfall mechanismprescribed by Section 53 of the Code. In either case ofrelinquishment or non-relinquishment of the security by thesecured creditor, the interests of workmen are protected underthe Code. In fact, the secured creditors are taking significanthair-cut and workmen are being compensated on an equitablebasis in a just and proper manner as per Section 53 of the Code.In economic matters, a wider latitude is given to the lawmakerand the Court allows for experimentation in such legislations basedon practical experiences and other problems seen by the law-makers. In a challenge to such legislation, the Court does notadopt a doctrinaire approach. Some sacrifices have to be alwaysmade for the greater good, and unless such sacrifices are primafacie apparent and ex facie harsh and unequitable as to classify asmanifestly arbitrary, these would be interfered with by the court.[Para 17][133-C-G]

1.12 As Sub-section (7) of Section 327 of the Act, 2013provides that Sections 326 and 327 of the Act, 2013 shall not beapplicable in the event of liquidation under the IBC, which hasbeen necessitated in view of the enactment of IBC and it applieswith respect to the liquidation of a company under the IBC,Section 327(7) of the Act, 2013 cannot be said to be arbitraryand/or violative of Article 21 of the Constitution of India. In caseof the liquidation of a company under the IBC, the distribution ofthe assets shall have to be made as per Section 53 of the IBCsubject to Section 36(4) of the IBC, in case of liquidation ofcompany under IBC. [Para 18][133-H; 134-A-B]

Manish Kumar v. Union of India and Anr. (2021) 5 SCC1; Swiss Ribbons Private Limited and Anr. v. Union ofIndia and Ors. (2019) 4 SCC 17 : [2019] 3 SCR 535;Small Scale Industrial Manufacturers Association(Registered) v. Union of India and Ors. (2021) 8 SCC

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A511; Committee of Creditors of Essar Steel India Limitedv. Satish Kumar Gupta and Ors. (2020) 8 SCC 531 :[2019] 16 SCR 275; Ghanashyam Mishra and SonsPrivate Limited v. Edelweiss Asset ReconstructionCompany Limited (2021) 9 SCC 657; Allahabad Bankv. Canara Bank and Anr. (2000) 4 SCC 406 : [2000] 2BSCR 1102; Andhra Bank v. Official Liquidator and Anr.(2005) 5 SCC 75 : [2005] 2 SCR 776; InnoventiveIndustries Limited v. ICICI Bank and Anr. (2018) 1 SCC407 : [2017] 8 SCR 33; Arcelormittal India PrivateLimited v. Satish Kumar Gupta and Ors. (2019) 2 SCCC1 : [2018] 12 SCR 362; Arun Kumar Jagatramka v.Jindal Steel and Power Limited and Anr. (2021) 7 SCC474; Sesh Nath Singh and Anr. v. BaidyabatiSheoraphuli Co-operative Bank Limited and Anr. (2021)7 SCC 313; R.K. Garg v. Union of India and Ors. (1981)4 SCC 675 : [1982] 1 SCR 947; Rustom CavasjeeDCooper v. Union of India (1970) 1 SCC 248 : [1970] 3SCR 530; Delhi Science Forum and Ors. v. Union ofIndia and Anr. (1996) 2 SCC 405 : [1996] 2 SCR 767;BALCO Employees’ Union (Regd.) v. Union of India andOrs. (2002) 2 SCC 333 : [2001] 5 Suppl. SCR 511;EEmployees Provident Fund Commissioner v. OfficialLiquidator of Esskay Pharmaceuticals Limited (2011)10 SCC 727 : [2011] 15 SCR 336; Bhupinder Singh v.Unitech Limited (2022) 8 SCC 749; Swiss RibbonsPrivate Limited and Another. v. Union of India andOthers (2019) 4 SCC 17 : [2019] 3 SCR 535 – referredFto.

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Case Law Reference

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MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESHCHAND SHARMA v. UNION OF INDIA

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CIVIL ORIGINAL JURISDICTION: Writ Petition (C) No. 421of 2019.

Under Article 32 of The Constitution of India.

With

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

K.V. Viswanathan, Sr. Adv., Aravind Raj, P. Venkataraman,Amarthya Sharan, Rahul Sangwan, Chanakya Dwivedi, Advs. (AmiciCuriae)

Gopal Sankaranarayanan, Sr. Adv., Ujjal Banerjee, Swapnil Gupta,Dinkar Singh, Gagan Garg, Rohit Singh, Ms. Aditi Gupta, Deepak Goel,Advs. for the Petitioner.

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Balbir Singh, ASG, Naman Tandon, Ms. Surbhi Singh, SamarvirSingh, Ms. Sagarika Kaul, Ms. Monica Benjamin, K. Gurumurthy,Ms. Aakanksha Kaul, Navanjay Mahapatra, Kanu Agrawal, T.S. Sabarish,Arvind Kumar Sharma, Sanchar Anand, Arvind Kumar, Prahlad NarayanSingh, Mrs. Lara Siddiqui, Devendra Singh, Ankur Mittal, Ms. MeeraMurali, Ms. Aishwarya Pandey, Ms. Pallavi Pratap, Ms. Prachi Pratap,Prashant Pratap, Ms. Neema, Advs. for the Respondents.

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AThe Judgment of the Court was delivered by

M. R. SHAH, J.

Writ Petition (C) No. 421 of 2019

1. By way of this writ petition under Article 32 of the ConstitutionBof India, filed by the writ petitioner – Moser Baer Karamchari Unionhave prayed for an appropriate writ, direction or order striking downSection 327(7) of the Companies Act, 2013 (hereinafter referred to as“Act, 2013”) as arbitrary and violative of Article 21 of the Constitutionof India.

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It is also prayed to issue an appropriate writ, direction or order inthe nature of Mandamus so as to leave the statutory claims of the“workmen’s dues” out of the purview of waterfall mechanism underSection 53 of the Insolvency and Bankruptcy Code, 2016 (hereinafterreferred to either as “IBC” or “Code”).

It is further prayed to issue an appropriate writ in the nature ofMandamus by giving a purposive interpretation to Section 53 of the IBCand pass necessary directions which will enable the petitioners to gettheir dues of 24 months released without any further delay.

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

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1.1 By way of these writ petitions under Article 32 of theConstitution of India, the respective writ petitioners have prayed thatClause 19(a) of the Eleventh Schedule of the IBC pursuant Section 255of the IBC, be declared as unreasonable and violative of Article 14 ofthe Constitution of India as Clause 19(a) of the Eleventh Schedule of theFIBC inserts sub-section (7) in Section 327 of the Companies Act, 2013,which puts statutory bar on the application of Sections 326 and 327 ofthe Companies Act, 2013, to the liquidation proceedings under the IBC.

It is further prayed that sub-section (7) of Section 327 of theCompanies Act, 2013, be declared as unreasonable and violative of ArticleG14 of the Constitution of India as sub-section (7) of Section 327 of theCompanies Act, 2013, which was inserted in Section 327 of theCompanies Act, 2013 pursuant to Section 255 and the Eleventh Scheduleof the Insolvency and Bankruptcy Code, 2016, Act 31 of 2016, createsunreasonable classification for the distribution of legitimate dues ofworkmen in the event of liquidation of the Company under the IBC andHliquidation of Company under the provisions of the Companies Act, 2013.

It is also prayed that distribution of the workmen’s due asenvisaged under Section 53(1)(b)(i) of the IBC, be declared asunreasonable and violative of Article 14 of the Constitution of India, asSection 53(1)(b)(i) of the IBC limits the workmen’s dues payable toworkmen to twenty-four months only preceding the date of order ofLiquidation and then rank the said workmen’s dues equally with thesecured creditors in the events such secured creditors has relinquishedsecurity in the manner set out in Section 52 of the IBC.

It is further prayed that settlement of Workmen Dues should bedone in accordance with the reasonable principles laid down under Section326 even in the event of liquidation under the IBC.

2. Shri K.V. Viswanathan, learned Senior Advocate has appearedas Amicus Curiae. Shri Gopal Sankaranarayanan, learned SeniorAdvocate, 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 ofall taken us to the legislative history of the Companies Act and thePreferential Payments and also the framing of the Insolvency andBankruptcy Code.

3.1 It is submitted that the Companies Act, 1956, as it existedprior to the Companies (Amendment) Act, 1985, did not provide for any“overriding preferential payments” to any party. It is submitted that in1985, the Companies (Amendment) Bill, 1985 sought to introduce theproviso to sub-section (1) of Section 529, definition of “workmen”,“workmen’s dues” and “workmen’s portion” through insertion of Section529(3) and the “overriding preferential payments” through Section 529-A.

3.2 It is submitted that the Statement of Objects and Reasons forbringing these changes into effect was to ensure that the resources ofthe company are distributed even to workers whose labour and effortform 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 inthe Companies Act, 1956.

3.3 It is submitted that a cumulative reading of Section 529 andSection 529-A of the Companies Act, 1956 indicates that firstly, thesecurity of every secured creditor is deemed to be subject to a pari A

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Apassu charge in favour of the appellant - workmen, to the extent of theworkmen’s portion. Secondly, when the secured creditor opts to realisehis security, so much of the debt due to such secured creditor as couldnot be realised by him by virtue of the proviso or the amount of workmen’sportion in his security, whichever is less, will rank pari passu with theworkmen’s dues. Thirdly, the workmen’s dues and debts of securedBcreditor as described in Section 529(1) Proviso (c) get overridingpreferential payment and rank pari passu. These debts are payable infull, unless the assets are insufficient to meet them, in which case theyshall abate in equal proportions.

3.4 It is submitted that Section 530, when it provides forC“Preferential Payments”, restricts Government dues to a period of 12months and wages or salary of an employee to a period not exceeding 4months within 12 months next before the relevant date, subject to limit insub-section (2) of Section 530(1)(b).

3.5 It is submitted that prior to enactment of the Companies Act,D2013, there were several Committees that were set-up in order to considerthe proposals for reformation of the Companies Act, 1956. It is submittedthat two of these Committees and their proposals are indicative of theissues that were sought to be addressed through a new, refurbishedlegislation. In the year 2000, the Report of the High-Level CommitteeEon Law relating to Insolvency and Winding Up of Companies wassubmitted under the chairmanship of Justice V. Balakrishna Eradi(popularly known as “Eradi Committee”). On consideration of varioussuggestions received by it, the Eradi Committee inter alia recommendedthat appropriate legislative action must be taken to ensure that the claimsof all “employees of a company” and its secured creditors are rankedFpari passu. Thereafter, in 2005, the Report of Expert Committee onCompany Law, 2005 was submitted under the chairmanship of Dr.Jamshed J. Irani. The Irani Committee, on consideration of proposalsbefore it, recommended that the status of secured creditors should bepari passu with “employees” in respect of their claims after paymentGof claims related to costs and expenses of administration of liquidation.

3.6 It is submitted that the focus of these two Committees wason bringing the claims of “employees of a company” pari passu withthe secured creditors, when the existing provision as on that day onlyspecified that “workmen’s dues” would rank pari passu with securedHcreditors. It is submitted that these two Reports were followed by the introduction of the Companies Bill, 2009 which retained the same structureas that of Section 529, 529-A and 530 of the Companies Act, 1956. It issubmitted that it was clear that the recommendations qua ranking ofdues of “employees of a company” were not accepted as the existingstructure had been retained. It is submitted that however, this CompaniesBill, 2009 lapsed and, therefore, the same was not given effect to.

3.7 It is submitted that thereafter, again, the Companies Bill, 2011was introduced, which was then referred to a Standing Committee. TheReport of the Standing Committee of 15th Lok Sabha on CompaniesBill, 2011 notes the legislative changes made to the Companies Act,1956 and the Companies Bill, 2009. It is submitted that this indicates thatSection 326, which was being introduced in lieu of Section 529-A ofCompanies Act, 1956, will now include a proviso to Section 326(1) andamendment to Section 326(2) to ensure that wages/salaries payable toworkmen 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 ofworkmen in case of winding up. It is submitted that resultantly, theCompanies Act, 2013, as enacted, while mostly retaining the structureof Section 529 and 529-A of the Companies Act, 1956, introduced theproviso to Section 326(1) and also modified Section 326(2).

3.8 It is submitted that the consequence of this change was thatwhile workmen’s dues and dues owed to secured creditors as per Section325(1) Proviso (c) ranked pari passu, the wages and salaries due toworkmen for a period of 2 years preceding winding up order, shall bepaid in priority to all other debts, within a period of 30 days of sale ofassets and shall be subject to such charge over the security of securedcreditors as may be prescribed. Importantly, the Government Dues andwages or salary owned to employees remained restricted to periods asthey were in the Companies Act, 1956. It is submitted that anotherimportant aspect to be noted is that the definition of “workmen’s dues”includes the Pension Fund, Gratuity Fund and the Provident Fund amountsand there was no exclusion of the said amounts in the case of liquidation.It is submitted that therefore, the position of law regarding “overridingpreferential payments” and “preferential payments”, as per theCompanies Act, 1956 and the Companies Act, 2013, is that workmenhave a charge over the property of the security of every secured creditorto the extent of workmen’s portion, the workmen’s dues rank pari passuwith the debts owed to secured creditors and specifically wages or salary AB

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Adue to workmen for a period of 2 years preceding the winding up ordershall be paid in priority to all other debts.

3.9 That thereafter, Shri K.V. Viswanathan, learned SeniorAdvocate and Amicus Curiae has taken us to the framing of the IBC. Itis submitted that the Bankruptcy Law Reforms Committee submitted itsBReport on 04.11.2015. The said Report discussed the changes that areto be made to the existing regime of insolvency and bankruptcyproceedings and inter alia provided for reasons as to why changeswere being made to the existing position of law. It is submitted thatimportant parts of the Bankruptcy Law Reforms Committee (BLRC)Report may be summarized as follows:C

i.The Committee noted that operational creditors will includeworkmen and employees whose past payments are due.

ii.Further, the Committee notes that the Central and StateGovernment dues will be kept at a priority below theunsecured financial creditors in addition to all kinds ofsecured creditors.

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iii.The Committee also categorically notes that liquidation underthe new regime will have an irreversible, time-bound processwith defined payout prioritisation. In the waterfall, securedEcreditors shall share highest priority along with a definedperiod of workmen dues.

iv.Thereafter, the Committee, in order to bring the law in Indiain line with global practice, established the priority of payoutin liquidation and drafting instructions were accordinglyFgiven. As proposed, the costs of IRP and Liquidation wouldrank first. After that, secured creditors and workmen duescapped up to 3 months from the start of IRP will be givenpari passu priority. This was to be followed by dues toemployees capped up-to 3 months. As the next tier,workmen dues for 9 month period beginning 12 monthsGbefore liquidation commencement date and ending 3 monthsbefore liquidation commencement date were to rank alongwith dues to unsecured financial creditors.

v.The Committee also notes that there was some debate onwhether priority given to workmen in Companies Act, 2013Hshould be retained in the new Code.

3.10 It is submitted that thus, the BLRC Report recommended awaterfall mechanism that was different from the Companies Act, 1956and the Companies Act, 2013, with due cognizance of the position oflaw as it existed then. It is submitted that having reviewed the position oflaw and in view of the objects sought to be achieved through the IBC,the BLRC Report recommended that workmen’s dues will be capped at3 months and will have pari passu priority with secured creditors andthereafter, the remaining dues will rank along with unsecured creditors.

3.11 It is submitted that the IBC was introduced as a Bill in 2015.It is submitted that Section 36, as introduced in the Bill, provided forformation of the liquidation estate. Section 36(4)(a)(iii), as introduced inthe Bill, stated that the contributions in respect of employee pensionsalone would be excluded from the liquidation estate assets and wouldnot be used for recovery in liquidation. Section 53, as introduced in theBill, provided for the waterfall mechanism for payout in case of liquidation.Section 53(1)(b)(i) and (ii) ranked debts owed to secured creditors inthe event of them relinquishing security and workmen’s dues for a periodof 12 months preceding liquidation commencement date, pari passu. Itis submitted that in terms of the waterfall mechanism, this was thereforea step further than the path suggested by the BLRC Report since theworkmen’s dues were to rank pari passu for a defined period of 12months. It is submitted that however, thereafter, the IBC, when introducedas a Bill, was then referred to a Joint Committee. The Joint Committeeon Insolvency and Bankruptcy Code, 2015 of the 16[th] Lok Sabhasubmitted its report in April, 2016. It is submitted that the Joint CommitteeReport made two important recommendations in regard to the provisionscontained in the Bill. Firstly, after noting representations from theworkmen and employees, it was recommended that the Provident Fund,Pension Fund and Gratuity Fund are to be excluded from the liquidationestate assets under Section 36, since they provide the social safety netto the workmen and employees. Secondly, after consideration of therepresentations that workmen dues are to be paid as per the schemecontained in the Companies Act, 2013, the Joint Committeerecommended that since the dues owed to Governments are being paidin respect of two years preceding liquidation commencement date, theworkmen’s dues must also be paid for a period of two years, instead ofthe existing period of 12 months, preceding liquidation commencementdate. It is submitted that this was recommended keeping in mind that theworkers are the “nerve centre of any company” and that their interests ABC

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Awere to be protected. It is submitted that keeping in view the JointCommittee Recommendations, the IBC was brought into force. It issubmitted that Section 36(4)(a)(iii) of the IBC now excludes all sumsdue to any workman or employee from the Provident Fund, PensionFund and Gratuity Fund from being included in the liquidation estateassets. It is further submitted that Section 53(1)(b)(i) and (ii) of the IBCBnow ranks workmen’s dues for a period of 2 years preceding theliquidation commencement date and the debts owed to secured creditorsin event of them relinquishing their security pari passu. It is submittedthat dues owed to the employees are placed in Section 53(1)(c), confinedto a period of 12 months, and the dues to Central Government and StateCGovernment are placed in Section 53(1)(e)(i), confined to a period of 2years and below that of the unsecured creditors. It is submitted that theresult, therefore, is that the position and waterfall mechanism as providedfor in the Companies Act, 1956 and the Companies Act, 2013 has nowbeen altered after application of mind and resultantly, the workmen’sdues have been capped at 24 months preceding the liquidationDcommencement date. The changes introduced from the erstwhile regimehave been so done on the basis of an organic evolution of law andconsultative process, after due consideration of the requirements of anew Code governing liquidation.

3.12 It is submitted that Section 53 Explanation (ii) of IBC statesEthat the term “workmen’s dues” shall have the same meaning as assignedto it in Section 326 of the Companies Act, 2013. It is submitted thatthereafter, the Eleventh Schedule to the IBC proposes Amendments tobe made to Companies Act, 2013. It is submitted that importantly, Clause18 of the Schedule omits erstwhile Section 325 of the Companies Act,F2013. It is submitted that Clause 19 of the Schedule amends Section 326of Companies Act, 2013. Thereafter, Clause 20 of the Schedule insertsSection 327(7) to the Companies Act, 2013 which states that Section326 and Section 327 shall not be applicable in the event of liquidationunder the IBC. A conjoint reading of Section 53 Explanation (ii) of IBC

and Section 327(7) of Companies Act, 2013 would indicate that only theGmeaning of “workmen’s dues” is incorporated by reference into the IBC.However, the waterfall mechanism, as has been fully altered by the IBCwill apply to these “workmen’s dues” and not the waterfall mechanismcontained in Section 326 of Companies Act, 2013. It is submitted thatthe reason for introduction of Section 327(7) of Companies Act, 2013 isHonly to exclude the application of waterfall mechanism and the modalities contained in the Companies Act, 2013 which has now been changedthrough the IBC. It is submitted that therefore, the argument that thewaterfall mechanism from the Companies Act, 2013 must apply evenunder the IBC, would be wholly untenable and unworkable.

3.13 It is submitted that subsequently, the Insolvency LawCommittee submitted its report in 2018 under the chairmanship of Mr.Injeti Srinivas. The Report contained summary responses of theCommittee to the comments and issues raised with respect to the IBC.It is submitted that importantly, all questions that raised the issue ofworkmen’s dues either being unfairly ranked with secured creditors orthat workmen’s dues were not protected under the IBC, the Committeenoted that the interests of workmen were protected in line with the Objectssought to be achieved by the IBC.

3.14 It is further submitted that therefore, the legislature throughthe IBC has attempted to overhaul the existing system of law and providefor a different modality through which liquidation would function. It issubmitted that under the Companies Act, 2013, the waterfall mechanismand preferential payments were being made, keeping in mind the schemeof winding up of a Company. It is submitted that admittedly, workmen’sdues were given pari passu priority with secured creditors of a definedkind and the wages and salaries owed for two years preceding the Orderof winding up was to get absolute priority. It is further submitted that onthe contrary, the scheme of the IBC is different from that of the CompaniesAct, 2013. It is submitted that the focus, in the IBC, is to revive theCompany and it is only as a matter of last resort that liquidationenvisaged. In liquidation, from the time of the BLRC Report, the focushas been on defined payout prioritisation and organically, the workmen’sdues have increased from 3 months to 12 months and now to 24 monthsto 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 aconsultative process, the position of workmen’s dues has been reviewedat multiple occasions and the legislature, in its wisdom, has opted to capit to a period of 24 months prior to liquidation commencement date. It isfurther submitted that the Pension Fund, Gratuity Fund and ProvidentFund are left out of the liquidation estate, in a bid to protect the socialsafety net of the workmen. Therefore, the changes made through theIBC, to the existing scheme under the Companies Act, 2013 would notbe unconstitutional.

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A3.15 Shri K.V. Viswanathan, learned Senior Advocate and AmicusCuriae has further submitted that this Hon’ble Court in a catena ofjudgments has considered the principle of “judicial hands-off” when itcomes to economic legislations. It is submitted that in economic matters,a wider latitude is given to the law-maker and the Court allows forexperimentation in such legislations based on practical experiences andBother problems seen by the law-makers. It is submitted that in a challengeto such a legislation, the Court does not adopt a doctrinaire approach.Reliance is placed on the decisions of Manish Kumar Vs. Union ofIndia and Anr., (2021) 5 SCC 1 (Paras 169, 249-251); Swiss RibbonsPrivate Limited and Anr. Vs. Union of India and Ors., (2019) 4CSCC 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 isfurther submitted that as observed in a catena of decisions, a vestedright under a statute can be taken away by another statute, in view ofpublic interest and in view of it being an economic measure.D

3.16 On IBC and reasonable classification, Shri K.V. Viswanathan,learned Senior Advocate and Amicus Curiae has submitted that in thecase of Swiss Ribbons Private Limited and Anr. (supra), this Courtwas concerned with a challenge to Constitutional Validity of severalprovisions of the IBC including the waterfall mechanism under SectionE53 of the IBC, even though it was at the instance of the OperationalCreditors. It is submitted that after noting the objects and reasons forenactment of the IBC, this Hon’ble Court held that there existed anintelligible differentia for classification of financial creditors andoperational creditors under the IBC. It is further submitted that SectionF53 of the IBC was also upheld from the perspective of this reasonableclassification by placing reliance on the object sought to be achieved bythe IBC

3.17 It is further submitted that in the case of Committee ofCreditors of Essar Steel India Limited Vs. Satish Kumar GuptaGand Ors., (2020) 8 SCC 531, this Court was concerned with whethera resolution plan was to treat operational creditors on par with financialcreditors and further with amendments made to the IBC that providedoperational creditors with a minimum of liquidation value under the CIRPProcess. It is submitted that this Court in the said decision held that theprinciple of “equality for all” cannot be stretched to treat financial andH

operational creditors on par as this would defeat the entire objective ofthe IBC. This Court also held that amendments made to the IBC thatguaranteed a minimum of liquidation value to operational creditors wasnot ultra vires Article 14.

3.18 He has also further submitted that in the case ofGhanashyam Mishra and Sons Private Limited Vs. EdelweissAsset Reconstruction Company Limited, (2021) 9 SCC 657, thisCourt was concerned with whether the approved resolution plan wasbinding on the Government, whether before or after the Amendmentmade to Section 31 of IBC by Amendment Act, 2019. It is submittedthat this Court categorically held that the amendment was clarificatoryin nature and that the approved resolution plan would be binding on theGovernment. While holding so, this Court noted the legislative intent inmaking the plan binding on all stake holders, to create a clean slate andto ensure that no surprise claims come up after the resolution processhas begun.

3.19 On interpretation of “workmen’s portion” under Section 529and 529-A of the Companies Act, reliance is placed on the decision ofthis Court in the case of Allahabad Bank Vs. Canara Bank and Anr.,(2000) 4 SCC 406 as well as Andhra Bank Vs. Official Liquidatorand Anr., (2005) 5 SCC 75.

3.20 Making above submissions, it is prayed to allow the presentwrit petitions and grant the reliefs as prayed.

4. We have heard Shri Balbir Singh, learned ASG appearing onbehalf of the respondent – Union of India.

4.1 Shri Balbir Singh, learned ASG has taken us to the relevantprovisions under the Companies Act, 1956, more particularly, Sections59A, 529A, 530 and the relevant provisions of the Companies Act, 2013.

4.2 It is submitted that initially the insolvency process in case ofwinding up of insolvent companies were provided under Section 325 ofAct, 2013. However, Section 325 of the Act, 2013 has been omittedw.e.f. 15.11.2016 on advent of the IBC. It is submitted that therefore, ason today, the winding up proceeding in case of insolvency are not governedby Companies Act, 2013 and the provisions of the IBC is the onlyapplicable law to deal with such a situation as it is a complete Code initself. It is submitted that furthermore, an amendment w.e.f. 15.11.2016was brought in under Section 327(7) of the Act, 2013 wherein it has A

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Abeen clarified that the provisions of Section 326 and Section 327 of theAct, 2013 will not be applicable in the event of liquidation under the IBC.

4.3 It is submitted that only in case of any winding up underCompanies Act, 2013, Sections 326 and 327 of the Companies Act, 2013are relevant. He has submitted that following are the relevant featuresBin case of winding up proceedings under Sections 326 and 327 of theAct, 2013:-

• workmen’s portion in the security shall be paid in priority to allother debts;

• however, workmen’s dues (given in (b)(i) and (ii) payable forCthe period of 24 months, shall be paid in priority to all otherdebts (including debts due to secured creditors). This meansthat wages/salary for the period of 24 months is over and aboveevery other claim/debts (including debts due to securedcreditors).

D• workmen’s dues include Provident Fund, Pension Fund andGratuity Fund or any other Fund for the welfare of the workmenmaintained by the Company.

4.4 It is submitted that the waterfall mechanism is given in Section327, which is similar to Section 530 of the Companies Act, 1956. It isEsubmitted that thereafter the IBC has been introduced in the year 2016wherein 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 aregiven the top priority in the waterfall mechanism.

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F4.5 It is submitted that the liquidation process is covered underChapter III of the IBC, which comprises from Sections 33 to 54. Section36 of the IBC provides for liquidation estate and Section 36(4) of theIBC specifies certain payouts not to be included in the liquidation estateassets. Therefore, as per the said provision, all these debts due are notto be included in the liquidation estate assets. It is submitted that as perGthe said provision, all payments due to any workmen or employee fromProvident Fund, Pension Fund and The Gratuity Fund shall not be includedin the list of assets under liquidation estate.

4.6 It is submitted that with respect to Section 53 of the IBC, saleof liquidation assets shall be distributed in certain order of priority. It is H

submitted that as per Section 53, the payment of insolvency resolutionprocess costs and liquidation costs is paramount and the same shall bepaid in full. The liquidation cost includes the salary and wages paid toworkmen during the period of liquidation process to maintain the Companyas going concern. Thereafter, the payment of workmen dues for a periodof 24 months are to be paid alongwith secured creditors dues in theevent of relinquishment of security. The workmen dues and debts ofsecured creditors in the case of relinquishment of security are rankedequally between them. However, in the case of enforcement of securityany unpaid outstanding debt comes below in ladder to Section 53(1)(e)(iii)of the IBC.

4.7 It is submitted that the challenge has been made on the groundof Article 14 of the Constitution of India by comparing Section 53 of theIBC with the provisions of erstwhile Companies Act, 1956 and existingCompanies Act, 2013 to state that workmen are at a disadvantageousposition on the basis: (i) workmen’s portion in the security held by securedcreditor has been done away with; (ii) preference/superiority given to24 months over any other debt has been done away with; (iii) workmenand secured creditors have been placed in same pool.

4.8 To the aforesaid, it is submitted by Shri Balbir Singh, learnedASG that as such the IBC is a new insolvency mechanism in line withthe international practices and with overarching objective of unlockingsick and insolvent companies primarily to revive such companies in eventof failure, for transparent and equitable liquidation of assets. It is submittedthat the IBC was introduced as a water-shed moment for insolvencylaw in India that consolidated process under several disparate statutessuch as Act, 2013, SICA, SARFAESI, Recovery of Debts Act etc., intoa single Code. It is submitted that the objective of the IBC was tointroduce comprehensive and time bound insolvency framework and tomaximize the value of assets of all persons and balance the interest ofall stakeholders.

4.9 It is submitted that the UNICITRAL Legislative Guide onInsolvency Law was instructive for the Indian experience on draftingthe IBC which provided critical guidance on what an insolvency lawrepresents. It is submitted that a reading together of the UNICITRALLegislative Guide on Insolvency Law and Bankruptcy Law Reportclarifies in no uncertain terms, that the procedure designed for theinsolvency process under the IBC is critical for allocating economic AB

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Acoordination between the parties who partake in or are bound by theprocess. It is submitted that this Hon’ble Court has looked at overarchingobject and economic balance achieved by IBC and as such hasappreciated the working and operation of IBC in unlocking value for allits stakeholders including financial institutions in the case of InnoventiveIndustries Limited Vs. ICICI Bank and Anr., (2018) 1 SCC 407,Bfollowed in Arcelormittal India Private Limited Vs. Satish KumarGupta and Ors., (2019) 2 SCC 1; Arun Kumar Jagatramka Vs.Jindal Steel and Power Limited and Anr., (2021) 7 SCC 474 andSesh Nath Singh and Anr. Vs. Baidyabati Sheoraphuli Co-operative Bank Limited and Anr., (2021) 7 SCC 313.

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4.10 It is submitted that as per the objectives of the IBC, it isclear that corporate death of a Corporate Debtor is inevitable. However,every effort should be made to resuscitate the Corporate debtor in thelarger public interest, which includes not only the workmen of thecorporate debtor, but also its creditors and the goods it produces in theDlarger interest of the economy of the country.

4.11 It is submitted that in the Bankruptcy Law ReformsCommittee (Volume 1) (November, 2015), it was agreed that the assetsheld in by the entity in trust (such as employee pensions), assets held ascollateral to certain financial market institutions and assets held as partEof operational transactions where the entity has right over the asset butis 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 waterfallmechanism under the IBC and was agreed that the workmen dues cappedup to 3 months will be given the second priority with the secured creditorafter the costs of the corporate insolvency and resolution process andFliquidation.

4.12 It is submitted that subsequently, a report of the JointCommittee on the Insolvency and Bankruptcy Code, 2015 was preparedand presented in Lok Sabha on 28.04.2016 wherein the issue of exclusionof Provident Fund, Pension Fund and Gratuity Fund from the liquidationGestate assets and estate of bankrupt was debated. It is submitted thatthe Committee, after an in-depth examination, was of the view thatProvident Fund, Pension Fund and Gratuity Fund provide the social safetynet to the workmen and employees and hence, need to be secured in theevent of liquidation of a company or bankruptcy of partnership firm. It issubmitted that the Committee further observed that the workers are theH

nerve center of any company and in the event of any company becominginsolvent or bankrupt, the workmen get affected adversely and therefore,priority must be given to their outstanding dues. Therefore, all sums dueto any workman or employee from the Provident Fund, Gratuity Fund orPension Fund should not be included in the liquidation estate assets. It issubmitted that thus, to protect the interest of the workmen, the Committeedecided that the workmen dues for a period of 12 months as providedunder Section 53 of the IBC be increased to 24 months precedingliquidation commencement date.

4.13 It is submitted that in light of the same, Section 36 of theIBC has clearly given outright protection to workmen’s dues underProvident Fund, Pension Fund and Gratuity Fund which is not treated asliquidation assets and liquidator has no claim over such funds. Thattherefore, this share of workmen’s dues has consciously been takenoutside the liquidation process.

4.14 It is submitted that liquidation costs cover the wages andsalary of the workmen during the liquidation process. It is submitted thatthe liquidation cost is defined in Section 5(16) of the IBC which includesthe cost incurred by the liquidator during the period of liquidation subjectto such regulations as specified by the Board. It is submitted that withrespect to the liquidation process, the Board has notified the Insolvencyand Bankruptcy Board of India (Liquidation Process) Regulations, 2016.It is submitted that Regulation 2(ea) talks about liquidation cost whichunder Section 5(16) of the IBC includes the costs incurred by the liquidatorin carrying on the business of the Corporate Debtor as a going concern.That, therefore, the salary and wages of the workmen in case of goingconcern liquidation are protected under the liquidation costs. It is furthersubmitted that under the Liquidation Regulations 2016, a mechanism iscreated wherein Regulation 19 provides for claim by workmen andemployee and Regulation 31A has been inserted to bring in stakeholdersConsultation Committee, where participation to workmen/ employees isgiven.

4.15 It is submitted that the issue with respect to the workmenand secured creditor being kept at equal footing under Section 53 of theIBC is only in the case wherein the secured creditor has relinquished itssecurity and the same is the part of the liquidation pool. It is submittedthat Section 52 of the IBC specifically states about the secured creditorin the liquidation proceedings and Regulation 21A talks about the AB

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Apresumption of security interest in the case of secured creditors. It issubmitted 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).

4.16 It is further submitted that the Committee in the Report ofBFebruary, 2020 duly agreed that the priority for recovery to securedcreditors under Section 53(1)(b)(ii) should be applicable only to the extentof the value of the security interest that is relinquished by the securedcreditor. It is submitted that the Committee noted that the Code aims topromote a collective liquidation process and towards this end, itencourages secured creditors to relinquish their security interest byCproviding them second highest priority in the recovery of their dues underSection 53(1)(b) of the IBC and are not treated as ordinary unsecuredcreditors under the IBC as they would have been under the CompaniesAct, 1956. That the said provision intends to promote the overall valuemaximization.D

4.17 It is submitted that furthermore, the Committee in its reportof February, 2020 also decided whether the secured creditors whorealized their security interest should contribute towards the payment ofdues of workmen. Regulation 21(A) of Liquidation Process requiresthat secured creditors who realise their security interest contributeEtowards the payment of dues of workmen as they would have if theyhad relinquished their security interest to the liquidation estate. It issubmitted that thus, the requirement to contribute to workmen dues asprovided under Regulation 21A, recognizes that workmen are keystakeholders and form the backbone of the efforts to preserve thebusiness of the Corporate Debtor not just prior to commencement ofFinsolvency but also during the insolvency proceedings.

4.18 It is submitted that thus, visualizing the objects and workingof the IBC, it is clear that the rights and interest of the workers havebeen protected from the date of enactment of the IBC. It is submittedthat in either case that is of relinquishment or non-relinquishment of theGsecurity by the secured creditor, the interest of the workmen is protected.It is submitted that in fact, the secured creditors are taking significanthair-cut and workmen are being compensated on equitable basis in ajust and proper manner as per Section 53 of the IBC. It is submitted thattherefore, it is unfair to say that ranking them with workmen is arbitrary,Hlest manifestly arbitrary to declare Section 53 as unconstitutional.

4.19 It is submitted that from examination of waterfall mechanismas provided under Section 53 of the IBC, it is clear that other stakeholdersincluding the Central Government have seriously compromises theirposition in connection with the recovery of statutory dues so as to enablevalue maximization and reviving unhealthy companies on going concernbasis. It is submitted that therefore, to say that workmen are in any wayadversely affected to the tune of arbitrariness or inequity contemplatedunder Article 14 is erroneous.

4.20 It is further submitted by Shri Balbir Singh, learned ASGappearing on behalf of the respondent – Union of India that the IBCbeing a law relating to economic activities as observed and held by thisCourt 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 greaterlatitude than the laws touching civil rights.

4.21 Making above submissions and relying upon the decisions ofthis Court in the case of R.K. Garg (supra) (paras 8 and 16); RustomCavasjee Cooper Vs. Union of India, (1970) 1 SCC 248 (paras 63and 179); Delhi Science Forum and Ors. Vs. Union of India andAnr., (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 ofthe IBC, 2016 is neither arbitrary nor violative of Articles 14 and 21 ofthe Constitution of India.

5. We have heard learned counsel appearing on behalf of therespective parties at length.

6. By way of this writ petition under Article 32 of the Constitutionof India, the petitioner - union has sought for an appropriate writ, directionor order striking down Section 327(7) of the Companies Act, 2013 asarbitrary and violative of Article 21 of the Constitution of India. Thepetitioner has also sought for an appropriate direction so as to leave thestatutory claims of the “workmen’s dues” out of the purview of waterfallmechanism under Section 53 of the Insolvency and Bankruptcy Code,2016. As per Section 327(7), Sections 326 and 327 of the Act, 2013 shallnot be applicable in the event of liquidation under the IBC. Sections 326and 327 of the Act, 2013 provide for preferential payments in a windingup under the provisions of the Act, 2013. However, in view of theintroduction of new regime under the IBC, in case of liquidation underIBC, distribution is to be made as per Section 53 of IBC. At this stage, it AB

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Ais required to be noted that IBC has been enacted w.e.f. 28.05.2016 andas per Section 53 of the IBC, the distribution of assets in case of liquidationunder the IBC is required to be made. Section 53 of the IBC reads asunder: - “53. Distribution of assets.—(1) Notwithstanding anything toBthe contrary contained in any law enacted by the Parliament orany State Legislature for the time being in force, the proceedsfrom the sale of the liquidation assets shall be distributed in thefollowing order of priority and within such period and in suchmanner as may be specified, namely—

C(a) the insolvency resolution process costs and the liquidation costspaid in full; (b) the following debts which shall rank equally between and amongthe following—

(i) workmen’s dues for the period of twenty-four months precedingDthe liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such securedcreditor has relinquished security in the manner set out in Section52;

(c) wages and any unpaid dues owed to employees other thanEworkmen for the period of twelve months preceding the liquidationcommencement date; (d) financial debts owed to unsecured creditors; (e) the following dues shall rank equally between and among theFfollowing:—(i) any amount due to the Central Government and the StateGovernment including the amount to be received on account ofthe Consolidated Fund of India and the Consolidated Fund of aState, if any, in respect of the whole or any part of the period ofGtwo years preceding the liquidation commencement date;(ii) debts owed to a secured creditor for any amount unpaidfollowing the enforcement of security interest; (f) any remaining debts and dues; (g) preference shareholders, if any; and H

(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 priorityunder that sub-section shall be disregarded by the liquidator.

(3) The fees payable to the liquidator shall be deductedproportionately from the proceeds payable to each class ofrecipients under sub-section (1), and the proceeds to the relevantrecipient 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 ofproceeds in respect of a class of recipients that rank equally, eachof the debts will either be paid in full, or will be paid in equalproportion within the same class of recipients, if the proceeds areinsufficient to meet the debts in full; and

(ii) the term “workmen’s dues” shall have the same meaning asassigned to it in Section 326 of the Companies Act, 2013 (18 of2013).”

In view of the enactment of IBC and Section 53 of the IBC, itnecessitated to amend the Act, 2013. As per Sub-Section (7) of Section327, Sections 326 and 327 shall not be applicable in the event of liquidationunder the IBC. The object and purpose of amending the Act, 2013 andto exclude Sections 326 and 327 in the event of liquidation under theIBC seems to be that there may not be two different provisions withrespect to winding up/liquidation of a company. Therefore, in view ofthe enactment of IBC, it necessitated to exclude the applicability ofSections 326 and 327 of the Act, 2013 which cannot be said to be arbitraryas contended on behalf of the petitioner.

6.1 At this stage, it is required to be noted that Sub-Section (7) ofSection 327 of which the vires are under challenge, shall be applicable incase of liquidation of a company under the IBC. Meaning thereby, incase of liquidation of a company under IBC, the provisions of Section 53of the IBC and other provisions of the IBC shall be applicable as thecompany is ordered to be liquidated or wound up under the provisions ofIBC. Therefore, merely because under the earlier regime and in case ofwinding up of a company under the Act, 1956/2013, the dues of theworkmen may have pari passu with that of the secured creditor, the A

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Apetitioner cannot claim the same benefit in case of winding up/liquidationof the company under IBC. The parties shall be governed by theprovisions of the IBC in case of liquidation of a company under theprovisions of the IBC.

6.2 Now so far as Section 53 of the IBC is concerned, it providesBfor distribution of the assets in case of liquidation of a company underIBC. As per Section 53(1)(b) the workmen’s dues for the period oftwenty-four months preceding the liquidation commencement date shallrank equally between the workmen and the secured creditor in the eventsuch secured creditor has relinquished security in the manner set out inCSection 52. Therefore, workmen’s dues for the period of twenty-fourmonths preceding the liquidation commencement date shall have paripassu with the dues of secured creditor. At this stage, it is required to benoted that as per Section 36(4) of IBC, all sums due to any workman oremployee from the provident fund, the pension fund and the gratuityfund shall not be included in the liquidation estate assets and shall not beDused for the recovery in the liquidation. Therefore, a conscious decisionhas been taken by the Parliament/Legislature in its wisdom to keep outof all sums due to any workman/employee from the provident fund, thepension fund and the gratuity fund from the liquidation estate assets [asper Section 36(4)] and that the workmen’s dues for the period of twenty-Efour months preceding the liquidation commencement date shall rankequally between the workmen’s dues to the said extent and the dues tothe secured creditor. Therefore, the same cannot be said to be arbitraryand violative of Article 21 of the Constitution of India as contended onbehalf of the petitioner. As per the settled position of law, IBC is a completeCode and the object and purpose of IBC is altogether different than thatFof the Act, 1956/2013. The IBC is a new insolvency mechanism,therefore, the provisions under the IBC cannot be compared with that ofthe earlier regime, namely, the Companies Act, 1956/2013.

6.3 At this stage, it is required to be noted that the issue withGrespect to the workman and the secured creditor being kept at equalfooting under Section 53 of the IBC is only in a case wherein the securedcreditor has relinquished its security and the same is the part of thestage 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 which the company could be wound up was when thecompany is unable to pay its debts. The other grounds were, when thecompany, by special resolution, has decided to be wound up; when thecompany has acted against the interests of sovereignty and integrity ofIndia, the security of the State, friendly relations with foreign State, publicorder, decency or morality; if the Tribunal has ordered winding up of thecompany under Chapter XIX of the Companies Act, 2013, a chapterrelating to revival and rehabilitation of sick companies; if on an applicationmade by the Registrar or any other person authorised by the CentralGovernment by notification, the Tribunal is of the opinion that the affairsof the company have been conducted in a fraudulent manner or thecompany has been formed for fraudulent and unlawful purpose, or personsconcerned in formation or management of its affairs have been guilty offraud, misfeasance, misconduct in connection therewith, which makes itproper that the company be wound up; or if the company has madedefault in filing its financial statements or annual returns with theRegistrar for immediately preceding five consecutive financial years;lastly, if the Tribunal is of the opinion that it is just and equitable to windup the company.

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

(c) if the company has acted against the interests of the sovereignty and integrity ofIndia, 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 theCentral Government by notification under this Act, the Tribunal is of the opinion thatthe affairs of the company have been conducted in a fraudulent manner or the companywas formed for fraudulent and unlawful purpose or the persons concerned in theformation or management of its affairs have been guilty of fraud, misfeasance ormisconduct 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 statementsor 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 shouldbe wound up.

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A7.1 The provision as enacted was never enforced till it wassubstituted by Act No. 31 of 2016 and the Eleventh Schedule in paragraph10 of the Insolvency and Bankruptcy Code, 2016[2], with effect from15[th] November 2016. This coincided with the enactment and enforcementof the Code, also applicable with effect from 15[th] November 2016.Consequent to the substitution, Section 271[3 ]of the Companies Act 2013Bnow envisages only five grounds for winding up of the company underthe Companies Act 2013. The first ground is where the company, byspecial resolution, has resolved to be wound up by the Tribunal. Theother grounds are when the company has acted against the sovereigntyand integrity of India, security of the State, friendly relations with foreignCStates, public order, decency or morality; if the Tribunal on an applicationmade by the Registrar or any other person authorised by the CentralGovernment by a notification is satisfied that the affairs of the companyhave been conducted in a fraudulent manner, or the company was formedfor a fraudulent or unlawful purpose, or the persons concerned in theformation or management of its affairs have been found to be guilty ofDfraud, misfeasance or misconduct in connection therewith, which makesit proper for the company to be wound up; if the company has defaultedin filing financial statements and annual returns with the Registrar forimmediately preceding five consecutive financial years; and lastly if theTribunal is of the opinion that it is just and equitable that the companyEshould be wound up.

2 For short, “Code”.

3 271. Circumstances in which company may be wound up by Tribunal. – Acompany 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 upFby the Tribunal; (b) if the company has acted against the interests of the sovereignty and integrity ofIndia, 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 theCentral Government by notification under this Act, the Tribunal is of the opinion thatthe affairs of the company have been conducted in a fraudulent manner or the companyGwas formed for fraudulent and unlawful purpose or the persons concerned in theformation or management of its affairs have been guilty of fraud, misfeasance ormisconduct 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 statementsor 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 shouldHbe wound up.

7.2 Clearly, the legislature has now removed clause (a) to Section271 of the Companies Act, 2013, when a company is unable to pay thedebts, and clause (d) to Section 271 of the Companies Act, 2013, whena company is directed to be wound up under the Chapter XIX of theCompanies Act, 2013. In fact, Chapter XIX of the Companies Act 2013was deleted/omitted in terms of Act No. 31 of 2016 and the EleventhSchedule in paragraph 8 of the Code, with effect from 15[th] November2016. The Code, as enacted, is a separate and consolidated enactmentspecifically relating to and dealing with companies which are insolventand unable to pay dues, and envisages a procedure with a mandate tofirst explore possibility of rehabilitation and revival of the company, andthe dissolution/winding up as the last call.

7.3 This is significant and must be highlighted when we examinethe question of the Constitutional challenge made by the petitioners, soas to not frustrate the objective and purpose of the Code, which completelyreplaces the then existing framework for insolvency and bankruptcyresolution that was inadequate, ineffective and guilty of causing unduedelays. The enactment of the Code and the amendments thereafter area consequence of detailed consultation and deliberations by severalcommittees, commissions and experts[4], in a matter which deals with theeconomy of the country as a whole. Earlier position was far fromsatisfactory in spite of enactment of the Sick Industrial Companies(Special Provisions) Act, 1985, the Recovery of Debts Due to Banksand Financial Institutions Act, 1993, and the Securitisation andReconstruction of Financial Assets and Enforcement of Security InterestAct, 2002. The Code has been enacted with the objective of reorganisationand insolvency resolution of corporate persons, partnership firms andindividuals in a time-bound manner for maximisation of the value of assets,promote entrepreneurship, enhance availability of credit and balance theinterests of all stakeholders, including by alteration in the priority ofpayment of government dues, to establish an Insolvency and BankruptcyFund, and matters connected therewith or incidental thereto. The 4 See – The Report of High Level Committee on Law Relating to Insolvency andWinding Up of Companies, 2000, The Report of the Expert Committee on CompanyLaw dated 31.05.2005, 57[th] Report of the Standing Committee of 15[th] Lok Sabha onFinance on The Companies Bill, 2011, The Report of the Bankruptcy Law ReformsCommittee dated 04.11.2015, The Report of Joint Committee on Insolvency andBankruptcy Code, 2015 of the 16[th] Lok Sabha and The report of the Insolvency LawCommittee dated 26.03.2018.0

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Aobjective is to improve the ease of doing business and facilitate moreinvestments, leading to higher economic growth and development.

8. We have earlier referred to, in detail, the divergent opinionsexpressed while enacting the Code on the status of the workmen’s duesand the hierarchy in which they should be placed. The waterfallBmechanism now prescribed in the Code with reference to the workmen’sdues is a well-considered and thought-out decision. The waterfallmechanism and the hierarchy prescribed to the workmen’s dues shouldbe seen in the overall objective of the Code, which is to explore whetherthe corporate debtor can be revived so that jobs are not lost, the use ofeconomic assets is maximised, and there is an effective legal frameworkCwhich enhances the viability of credit in the hands of banks and financialinstitutions. The Code recognises the financial impact on securedcreditors or financial institutions dealing with public money, as theireconomic health is equally important for the general public as well as thenational economy. Unless there is economic growth and fresh investmentsDin the industry, employment opportunities will not be available, whichwould in turn lead to economic woes, insolvencies and bankruptcies.These are all complex economic matters wherein various conflictinginterests 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 canhardly substitute its own wisdom or view for that of the legislature,Eespecially when the enactment is the outcome of a thought-out andruminated review on complex fiscal and commercial challenges facingthe economy. It is in this context, this Court, while upholding theConstitutional validity of the Code on the challenge of discriminationmade by the operational creditors in Swiss Ribbons Private Limited Fand Another. v. Union of India and Others.[5] had observed as under:

“Judicial hands-off qua economic legislation ****

21. In this country, this Court in R.K. Garg v. Union of India,G(1981) 4 SCC 675, has held :

“8. Another rule of equal importance is that laws relating toeconomic activities should be viewed with greater latitude thanlaws touching civil rights such as freedom of speech, religion, etc.It has been said by no less a person than Holmes, J., that the H5 (2019) 4 SCC 17.

legislature should be allowed some play in the joints, because ithas to deal with complex problems which do not admit of solutionthrough any doctrinaire or straitjacket formula and this isparticularly true in case of legislation dealing with economicmatters, where, having regard to the nature of the problemsrequired to be dealt with, greater play in the joints has to be allowedto the legislature. The court should feel more inclined to give judicialdeference to legislative judgment in the field of economic regulationthan in other areas where fundamental human rights are involved.Nowhere has this admonition been more felicitously expressedthan in Morey v. Doud where Frankfurter, J., said in his inimitablestyle:

‘In the utilities, tax and economic regulation cases, thereare good reasons for judicial self-restraint if not judicialdeference to legislative judgment. The legislature after allhas the affirmative responsibility. The courts have only thepower to destroy, not to reconstruct. When these are addedto 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 overruledby events — self-limitation can be seen to be the path tojudicial wisdom and institutional prestige and stability.’

The Court must always remember that “legislation isdirected to practical problems, that the economic mechanismis highly sensitive and complex, that many problems aresingular and contingent, that laws are not abstractpropositions and do not relate to abstract units and are not tobe measured by abstract symmetry”; ‘that exact wisdom andnice adaption of remedy are not always possible’ and that ‘judgmentis largely a prophecy based on meagre and uninterpretedexperience’. Every legislation, particularly in economic mattersis essentially empiric and it is based on experimentation orwhat one may call trial and error method and therefore itcannot provide for all possible situations or anticipate allpossible abuses. There may be crudities and inequities incomplicated experimental economic legislation but on thataccount alone it cannot be struck down as invalid. The courtscannot, as pointed out by the United States Supreme Court in Secy.

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of Agriculture v. Central Roig Refining Co. be converted intotribunals for relief from such crudities and inequities. There mayeven be possibilities of abuse, but that too cannot of itself be aground for invalidating the legislation, because it is not possiblefor any legislature to anticipate as if by some divine prescience,distortions and abuses of its legislation which may be made bythose subject to its provisions and to provide against such distortionsand abuses. Indeed, howsoever great may be the care bestowedon its framing, it is difficult to conceive of a legislation which isnot capable of being abused by perverted human ingenuity. TheCourt must therefore adjudge the constitutionality of suchlegislation by the generality of its provisions and not by itscrudities or inequities or by the possibilities of abuse of anyof its provisions. If any crudities, inequities or possibilities ofabuse come to light, the legislature can always step in and enactsuitable amendatory legislation. That is the essence of pragmaticapproach which must guide and inspire the legislature in dealingwith complex economic issues.

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19. …. It would be outside the province of the Court toconsider if any particular immunity or exemption is necessary ornot for the purpose of inducing disclosure of black money. Thatwould depend upon diverse fiscal and economic considerationsbased on practical necessity and ‘administrative expediency andwould also involve a certain amount of experimentation on whichthe Court would be least fitted to pronounce. The Court wouldnot have the necessary competence and expertise to adjudicateupon such an economic issue. The Court cannot possibly assessor evaluate what would be the impact of a particular immunity orexemption and whether it would serve the purpose in view or not.There are so many imponderables that would enter into thedetermination that it would be wise for the Court not to hazard anopinion where even economists may differ. The Court must whileexamining 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 constitutionalproposition enunciated by the Supreme Court of the United Statesin Munn v. Illinois, namely, ‘that courts do not substitute their social and economic beliefs for the judgment of legislativebodies’. The Court must defer to legislative judgment in mattersrelating to social and economic policies and must not interfere,unless the exercise of legislative judgment appears to bepalpably arbitrary.The Court should constantly remind itself ofwhat the Supreme Court of the United States said in MetropolisTheater Co. v. City of Chicago:

“12. … The problems of government are practical onesand may justify, if they do not require, roughaccommodations, illogical it may be, and unscientific. Buteven such criticism should not be hastily expressed. Whatis best is not always discernible, the wisdom of any choicemay be disputed or condemned. Mere error of Governmentare not subject to our judicial review.”

It is true that one or the other of the immunities orexemptions granted under the provisions of the Act may be takenadvantage of by resourceful persons by adopting ingeniousmethods and devices with a view to avoiding or saving tax. Butthat cannot be helped because human ingenuity is so great whenit comes to tax avoidance that it would be almost impossible toframe tax legislation which cannot be abused. Moreover, as alreadypointed out above, the trial and error method is inherent in everylegislative effort to deal with an obstinate social or economic issueand if it is found that any immunity or exemption granted underthe Act is being utilised for tax evasion or avoidance not intendedby the legislature, the Act can always be amended and the abuseterminated. We are accordingly of the view that none of theprovisions of the Act is violative of Article 14 and its constitutionalvalidity must be upheld.”

22. Likewise, in Bhavesh D. Parish v. Union of India(2000) 5 SCC 471, this Court held :

“26. The services rendered by certain informal sectorsof the Indian economy could not be belittled. However, in thepath of economic progress, if the informal system was soughtto be replaced by a more organised system, capable of betterregulation and discipline, then this was an economic philosophy AB

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reflected by the legislation in question. Such a philosophy mighthave its merits and demerits. But these were matters ofeconomic policy. They are best left to the wisdom of thelegislature and in policy matters the accepted principle is thatthe courts should not interfere. Moreover in the context of thechanged economic scenario the expertise of people dealingwith the subject should not be lightly interfered with. Theconsequences of such interdiction can have large-scaleramifications and can put the clock back for a number of years.The process of rationalisation of the infirmities in the economycan be put in serious jeopardy and, therefore, it is necessarythat while dealing with economic legislations, this Court, whilenot jettisoning its jurisdiction to curb arbitrary action orunconstitutional legislation, should interfere only in those fewcases where the view reflected in the legislation is not possibleto be taken at all.

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30. Before we conclude there is another matter which wemust advert to. It has been brought to our notice that Section 45-S of the Act has been challenged in various High Courts and afew of them have granted the stay of provisions of Section 45-S.When considering an application for staying the operation of apiece of legislation, and that too pertaining to economic reform orchange, then the courts must bear in mind that unless the provisionis manifestly unjust or glaringly unconstitutional, the courts mustshow judicial restraint in staying the applicability of the same.Merely because a statute comes up for examination and somearguable point is raised, which persuades the courts to considerthe controversy, the legislative will should not normally be putunder suspension pending such consideration. It is now well settledthat there is always a presumption in favour of the constitutionalvalidity of any legislation, unless the same is set aside after finalhearing and, therefore, the tendency to grant stay of legislationrelating to economic reform, at the interim stage, cannot beunderstood. The system of checks and balances has to beutilised in a balanced manner with the primary objective ofaccelerating economic growth rather than suspending itsgrowth by doubting its constitutional efficacy at the thresholditself.”

23. In Directorate General of Foreign Trade v. KanakExports, (2016) 2 SCC 226, this Court has held :

“109. Therefore, it cannot be denied that the Governmenthas a right to amend, modify or even rescind a particular scheme.It is well settled that in complex economic matters every decisionis necessarily empiric and it is based on experimentation or whatone may call trial and error method and therefore, its validity cannotbe tested on any rigid prior considerations or on the application ofany straitjacket formula. In BALCO Employees’ Union v. Unionof India, (2002) 2 SCC 333] , the Supreme Court held that laws,including executive action relating to economic activities shouldbe viewed with greater latitude than laws touching civil rightssuch as freedom of speech, religion, etc. that the legislature shouldbe allowed some play in the joints because it has to deal withcomplex problems which do not admit of solution through anydoctrine or straitjacket formula and this is particularly true in caseof legislation dealing with economic matters, where having regardto the nature of the problems greater latitude require to be allowedto the legislature.”

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The raison d’être for the Insolvency and Bankruptcy Code ****

27. As is discernible, the Preamble gives an insight intowhat is sought to be achieved by the Code. The Code is first andforemost, a Code for reorganisation and insolvency resolution ofcorporate debtors. Unless such reorganisation is effected in atime-bound manner, the value of the assets of such persons willdeplete. Therefore, maximisation of value of the assets of suchpersons so that they are efficiently run as going concerns is anothervery important objective of the Code. This, in turn, will promoteentrepreneurship as the persons in management of the corporatedebtor are removed and replaced by entrepreneurs. When,therefore, a resolution plan takes off and the corporate debtor isbrought back into the economic mainstream, it is able to repay itsdebts, which, in turn, enhances the viability of credit in the handsof banks and financial institutions. Above all, ultimately, theinterests of all stakeholders are looked after as the corporate debtor AB

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itself becomes a beneficiary of the resolution scheme—workersare paid, the creditors in the long run will be repaid in full, andshareholders/investors are able to maximise their investment.Timely resolution of a corporate debtor who is in the red, by aneffective legal framework, would go a long way to support thedevelopment of credit markets. Since more investment can bemade with funds that have come back into the economy, businessthen eases up, which leads, overall, to higher economic growthand development of the Indian economy. What is interesting tonote is that the Preamble does not, in any manner, refer toliquidation, which is only availed of as a last resort if there iseither no resolution plan or the resolution plans submitted are notup to the mark. Even in liquidation, the liquidator can sell thebusiness 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).

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Epilogue

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Epilogue

120. The Insolvency Code is a legislation which deals witheconomic matters and, in the larger sense, deals with the economyof 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. Theexperiment contained in the Code, judged by the generality of itsprovisions and not by so-called crudities and inequities that havebeen 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 seriousconsequences to the nation. We have also seen that the workingof the Code is being monitored by the Central Government byExpert Committees that have been set up in this behalf.Amendments have been made in the short period in which theCode has operated, both to the Code itself as well as to subordinatelegislation made under it. This process is an ongoing process whichinvolves all stakeholders, including the petitioners.

****”

9. As elucidated above, the Companies Act, 2013 does not dealwith insolvency and bankruptcy when the companies are unable to paytheir debts or the aspects relating to the revival and rehabilitation of thecompanies and their winding up if revival and rehabilitation is not possible.In principle, it cannot be doubted that the cases of revival or winding upof the company on the ground of insolvency and inability to pay debtsare different from cases where companies are wound up under Section271 of the Companies Act 2013. The two situations are not identical.Under Section 271 of the Companies Act, 2013, even a running andfinancially sound company can also be wound up for the reasons inclauses (a) to (e). The reasons and grounds for winding up under Section271 of the Companies Act, 2013 are vastly different from the reasonsand grounds for the revival and rehabilitation scheme as envisaged underthe Code. The two enactments deal with two distinct situations and inour opinion, they cannot be equated when we examine whether there isdiscrimination or violation of Article 14 of the Constitution of India. Forthe revival and rehabilitation of the companies, certain sacrifices arerequired from all quarters, including the workmen. In case of insolventcompanies, for the sake of survival and regeneration, everyone, includingthe secured creditors and the Central and State Government, are requiredto make sacrifices. The workmen also have a stake and benefit fromthe revival of the company, and therefore unless it is found that thesacrifices envisaged for the workmen, which certainly form a separateclass, are onerous and burdensome so as to be manifestly unjust andarbitrary, we will not set aside the legislation, solely on the ground thatsome or marginal sacrifice is to be made by the workers. We would alsoreject the argument that to find out whether there was a violation ofArticle 14 of the Constitution of India or whether the right to life underArticle 21 Constitution of India was infringed, we must word by wordexamine the waterfall mechanism envisaged under the Companies Act,2013, where the company is wound up in terms of grounds (a) to (e) ofSection 271 of the Companies Act, 2013; and the rights of the workmenwhen the insolvent company is sought to be revived, rehabilitated orwound up under the Code. The grounds and situations in the context ofthe objective and purpose of the two enactments are entirely different.

10. We now turn to the difference in the waterfall mechanismprovided in the Companies Act, 2013 and the Code. As per Section 324[6]

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 ABC

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Aof the Companies Act, 2013, all debts payable on a contingency, or allclaims against the company, present or future, certain or contingent,ascertained or sounding only in damages, are admissible to proof againstthe company. A just estimate can be made so far as possible in respectof 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 theB

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, ascertainedor sounding only in damages, shall be admissible to proof against the company, a justestimate being made, so far as possible, of the value of such debts or claims as may besubject to any contingency, or may sound only in damages, or for some other reasonCmay not bear a certain value.7 326. Overriding preferential payments.—(1) In the winding up of a companyunder 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 tosuch secured creditor as could not be realised by him or the amount of the workmen’sportion in his security (if payable under the law), whichever is less, pari passu with theDworkmen’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 oftwo 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 overthe security of secured creditors as may be prescribed.E(2) The debts payable under the proviso to sub-section (1) shall be paid in full beforeany 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 whichcase 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, beingworkmen within the meaning of clause(s) of Section 2 of the Industrial Disputes Act,F1947;(b) “workmen’s dues”, in relation to a company, means the aggregate of the followingsums due from the company to its workmen, namely—

(i) all wages or salary including wages payable for time or piece work and salary earnedwholly or in part by way of commission of any workman in respect of servicesrendered to the company and any compensation payable to any workman under any ofGthe provisions of the Industrial Disputes Act, 1947;(ii) all accrued holiday remuneration becoming payable to any workman or, in the caseof his death, to any other person in his right on the termination of his employmentbefore or by the effect of the winding up order or resolution;

(iii) unless the company is being wound up voluntarily merely for the purposes ofreconstruction or amalgamation with another company or unless the company has, atthe commencement of the winding up, under such a contract with insurers as is mentionedHin Section 14 of the Workmen’s Compensation Act, 1923, rights capable of being

Companies Act, 2013 deals with overriding preferential payments whichhave to be paid in priority to all other debts. These include the workmendebts, and dues of the secured creditor where the secured creditor hasrealised the secured asset but could not realise the entire amount, or theamount of workmen’s portion in his security payable under the law,whichever is less, pari passu with the workmen’s dues. Thus, thisbalances and equates the rights of the secured creditor to realise thesecured asset, but in case the secured creditor is not able to realise thefull amount or has paid an amount to the workmen if payable under thelaw, whichever is less, these dues rank pari passu with the workmen’sdues. 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’sdues”; and “workmen’s portion”, which expressions are terms of theCompanies Act, 2013 specially used in clause (b) of sub-section (1) toSection 326 of the Companies Act, 2013. The workmen’s portion inrelation to the security of any secured creditor of a company means theamount which bears to the value of security, the same proportion as theamount of workmen’s dues bears to the aggregate of the amount ofworkmen’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 creditorsis hypothetically taken as Rs. 3 lakhs. Accordingly, the aggregate amount transferred to and vested in the workmen, all amount due in respect of any compensationor liability for compensation under the said Act in respect of the death or disablementof any workman of the company;

(iv) all sums due to any workman from the provident fund, the pension fund, thegratuity fund or any other fund for the welfare of the workmen, maintained by thecompany;

(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 theamount of the workmen’s dues bears to the aggregate of the amount of workmen’s duesand 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 totalamount of the workmen’s dues is Rs. 1,00,000. The amount of the debts due from thecompany to its secured creditors is Rs. 3,00,000. The aggregate of the amount ofworkmen’s dues and the amount of debts due to secured creditors is Rs. 4,00,000. Theworkmen’s portion of the security is, therefore, one-fourth of the value of the security,that is Rs. 25,000.

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Adue towards workmen’s dues and the amount of debts due to the securedcreditors is Rs. 4 lakhs. In this background, when the value of the securityof the secured creditors is Rs. 1 lakh, one-fourth of the value of thesecurity, 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 anydifference in the said hierarchy and the waterfall mechanism under theBCode.

11. However, the proviso to sub-section (1) to Section 326 of theCompanies 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 theExplanation to Section 326 of the Companies Act, 2013, which areCpayable for a period of two years preceding the winding up order orsuch other period as may be prescribed, shall be paid in priority to allother debts, including debts due to secured creditors. This payment is tobe made within a period of thirty days from the sale of assets and shallbe subject to such charge over the security of the secured creditors.DSub-clause (i) to clause (b) of the Explanation to Section 326 of theCompanies Act, 2013 refers to all wages or salary, including wagespayable 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 of the Companies Act,2013 deals with all accrued holiday remuneration payable to any workmen Eor, in the case of his death, to any other person in his right on terminationof his employment, etc. Sub-clauses (iii) and (iv) of clause (b) of theExplanation to Section 326 of the Companies Act, 2013 are excludedfrom the proviso. These sub-clauses deal with liability of compensationunder the Workmen’s Compensation Act, 1923 in respect of death or Fdisablement of the workmen or all sums due to any workman from theprovident fund, the pension fund, the gratuity fund or any other fund ofthe welfare of the workmen[8]. What is clear from the provision is thatthe proviso applies in case of winding up of a company to the sumsreferred 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 periodG

8 For the purpose of the present decision, we are not required to comment on theprovisions of the Employees’ Provident Funds and Miscellaneous Provisions Act,1952 and the payment of workmen’s dues under the Companies Act,1956 or evenSection 36 (4)(a)(iii) of the Code. However, see - Employees Provident FundCommissioner v. Official Liquidator of Esskay Pharmaceuticals Limited, (2011) 10HSCC 727 and Bhupinder Singh v. Unitech Limited, (2022) 8 SCC 749.

of two years preceding the winding up order or such other period asmay be prescribed. We are not informed that a different period has beenprescribed 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 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 uporder, 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 whichpayment under sub-clauses (i) and (ii) to clause (b) of the Explanation toSection 326 of the Companies Act, 2013 would apply. Entire unpaiddues are not covered by the proviso to sub-section (1) to Section 326 ofthe Companies Act, 2013.

12. When we turn our attention to the Code, it is to be first notedthat in terms of Section 36(4)(a)(iii) of the Code, all sums due to anyworkman or employee from the provident fund, the pension fund and thegratuity fund, do not form part and are not to be included in the liquidationproceedings.[9] Sub-section (1) to Section 52 of the Code gives two optionsto a secured creditor. First, the secured creditor in a liquidation proceedingmay relinquish its security interest and receive the proceeds from thesale of assets by the liquidator in the manner specified in Section 53 ofthe Code. The second option is to realise the security interest, but in themanner specified in Section 52 of the Code. Sub-section (2) to Section52 of the Code states that where the secured creditor realises the securityinterest, he shall inform the liquidator of such security interest and identifythe asset subject to such security interest to be realised. The liquidator isto verify the security interest and shall permit the secured creditor torealise such security interest, which is proved either by records of suchsecurity interest maintained by an information utility, or by such othermeans as may be specified by the Board. Sub-section (4) to Section 52of the Code states that the secured creditor may enforce, realise, settle,compromise or deal with the secured asset in accordance with such lawas applicable to the security interest being realised and to the secured creditor. The secured creditor is to accordingly apply the proceeds to 9 For the purpose of the present decision, we are not interpreting sub-clause (iii) toclause (a) of sub-section (4) to Section 36 of the Code as this is an issue of some debateand pending consideration in other matters. The legal effect of exclusion is that, theamount of sums due to any workmen or employee from the provident fund, the pensionfund or the gratuity fund cannot be made subject matter of reduction or dilution even ina rehabilitation or revival plan. They are excluded from the waterfall mechanism andwould not be used in recovery on liquidation, and they cannot be shared.

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Arecover the debts due to him. We need not refer to sub-section (5) toSection 52 of the Code as it relates to the action which the securedcreditor may take if he faces resistance from the corporate debtor orany other person connected therewith in taking possession of, selling orotherwise disposing off the security. Sub-section (6) to Section 52 of theCode applies when an adjudicating authority is in receipt of an applicationBunder sub-section (5) to Section 52 of the Code. Sub-section (7) to Section52 of the Code, however, is important as it states that where onenforcement of the security interest, an amount by way of proceeds is inexcess of the debts due to the secured creditor, the secured creditorshall account for and pay the excess/surplus amount to the liquidatorCfrom enforcement of such secured assets. The amount of insolvencyresolution process costs, due from secured creditors who realise theirsecurity interests in the manner provided in the section, are to be deductedfrom the proceeds of any realisation by such secured creditors. Theyare to be transferred and included in the liquidation estate. Sub-section(9) to Section 52 of the Code states that where proceeds for realisationDof the secured assets are not adequate to repay the debts owed to thesecured creditor, the unpaid debts of such secured creditor shall be paidby 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 securedEcreditor does not relinquish its security interest to fall under Section 53of the Code, Regulation 21A[10] of the Insolvency and Bankruptcy Board

10 21A. Presumption of security interest.-— (1) A secured creditor shall inform theliquidator of its decision to relinquish its security interest to the liquidation estate orrealise its security interest, as the case may be, in Form C or Form D of Schedule II:FProvided that, where a secured creditor does not intimate its decision withinthirty days from the liquidation commencement date, the assets covered under thesecurity 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 thesecurity interest, to the liquidator within ninety days from the liquidation commencementGdate; 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 eightydays from the liquidation commencement date:

Provided that where the amount payable under this sub-regulation is notcertain by the date the amount is payable under this sub-regulation, the secured creditorshall pay the amount, as estimated by the liquidator:H

of India (Liquidation Process) Regulations, 2016 has been enacted, andit requires that the secured creditor, who opts to realise its security interestas per section 52 of the Code, has to pay as much towards the amountpayable 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 andthe manner stipulated therein. The workmen’s dues, even when thesecured creditor opts to proceed under Section 52 of the Code, aretherefore protected in terms of sub-clause (b) of sub-section (1) to Section53 of the Code.

14. Before we refer to Section 53 of the Code, we would like totake note of Section 30 of the Code, which relates to the submission ofresolution plan, which is required to be examined by the resolutionprofessional in the manner stipulated in sub-section (2) to Section 30[11]

Provided further that any difference between the amount payable under thissub-regulation and the amount paid under the first proviso shall be made good by thesecured creditor or the liquidator, as the case may be, as soon as the amount payableunder 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 issubject to security interest, shall become part of the liquidation estate.

11 30. Submission of resolution plan.—(1) A resolution applicant may submit aresolution plan along with an affidavit stating that he is eligible under Section 29-A tothe resolution professional prepared on the basis of the information memorandum.(2) The resolution professional shall examine each resolution plan received by him toconfirm that each resolution plan—

(a) provides for the payment of insolvency resolution process costs in a manner specifiedby 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 maybe 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 corporatedebtor under Section 53; or

(ii) the amount that would have been paid to such creditors, if the amount to bedistributed under the resolution plan had been distributed in accordance with the orderof priority in sub-section (1) of Section 53, whichever is higher, and provides for thepayment of debts of financial creditors, who do not vote in favour of the resolutionplan, in such manner as may be specified by the Board, which shall not be less than theamount to be paid to such creditors in accordance with sub-section (1) of Section 53 inthe event of a liquidation of the corporate debtor.

Explanation 1.—For the removal of doubts, it is hereby clarified that a distribution inaccordance 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 fromthe date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act,2019, the provisions of this clause shall also apply to the corporate insolvency resolutionprocess of a corporate debtor—

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Aof the Code. Substantial part of clause (b) of sub-section (2) to Section30 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) ofsub-section (2) to Section 30 of the Code provides for the payment ofdebts of financial creditors who do not vote in favour of the resolutionplan. The amount payable to them, it stipulates, shall not be less than theBamount 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 corporatedebtor. Sub-section (4) to Section 30 of the Code states when and howa Committee of Creditors is to approve the resolution plan. Sub-section

(6) states that the resolution professional shall submit the resolution planCas approved by the Committee of Creditors to the adjudicating authority.Section 31[12] of the Code relates to approval of the resolution plan. The

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

(ii) where an appeal has been preferred under Section 61 or Section 62 or such an appealDis 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 theAdjudicating Authority in respect of a resolution plan;

(c) provides for the management of the affairs of the corporate debtor after approval ofthe 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;E(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 requiredunder the Companies Act, 2013 (18 of 2013) or any other law for the time being in forcefor the implementation of actions under the resolution plan, such approval shall bedeemed to have been given and it shall not be a contravention of that Act or law.

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12 31. Approval of resolution plan.—(1) If the Adjudicating Authority is satisfied thatFthe resolution plan as approved by the committee of creditors under sub-section (4) ofSection 30 meets the requirements as referred to in sub-section (2) of Section 30, it shallby order approve the resolution plan which shall be binding on the corporate debtorand its employees, members, creditors, including the Central Government, any StateGovernment or any local authority to whom a debt in respect of the payment of duesarising under any law for the time being in force, such as authorities to whom statutorydues are owed, guarantors and other stakeholders involved in the resolution plan:GProvided that the Adjudicating Authority shall, before passing an order for approval ofresolution plan under this sub-section, satisfy that the resolution plan has provisionsfor its effective implementation.

(2) Where the Adjudicating Authority is satisfied that the resolution plan does notconfirm to the requirements referred to in sub-section (1), it may, by an order, reject theresolution plan.

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adjudicating authority is to satisfy that the resolution plan as approved bythe Committee of Creditors under sub-section (4) of Section 30 of theCode, meets the requirements as referred to in sub-section (2) to Section30 of the Code. Further, the resolution plan has provisions for its effectiveimplementation. Sub-section (2) to Section 31 of the Code states thatwhere the adjudicating authority is satisfied that the resolution plan doesnot confirm to the requirements referred to in sub-section (1) to Section31 of the Code, it may by an order reject the resolution plan. We neednot refer to other sub-sections of Section 31 of the Code.

15. We now turn our attention to Section 53 of the Code whichbegins with a non-obstante clause and states that notwithstandinganything to the contrary contained in any law enacted by the Parliamentor any State Legislature for the time being in force, the proceeds fromthe sale of liquidation assets shall be distributed in the order of priority,which is stipulated, and within such period and such manner as may bespecified. The consequence of sub-section (1) to Section 53 of the Codeis that it will override the rights of parties, including the secured creditor,when the said provision applies. Section 53 of the Code is the completeand comprehensive code which ensures collection of assets and thenprovides the manner in which the creditors are to be paid. Even therights of the secured creditor falling under Section 53 of the Code toenforce, realise, settle, compromise or deal with the secured assets asapplicable to the security interest are diluted and compromised.

15.1 Clause (a) to sub-section (1) to Section 53 deals withinsolvency resolution process costs and the liquidation costs which areto be paid in full. No grievance or issue can be raised in respect of thesaid clause. Clause (b) to sub-section (1) to Section 53 states that thedebts due in the form of workmen’s dues for a period of twenty fourmonths preceding the liquidation commencement date and the debts owedto the secured creditor in the event such secured creditor has relinquishedsecurity in the manner set out in Section 52 of the Code shall rank equallybetween and amongst the workmen and the secured creditors. TheExplanation to Section 53 of the Code states that ‘workmen’s dues’shall have the same meaning as assigned to it in Section 326 of theCompanies Act, 2013. In other words, Explanation to Section 326 of theCompanies Act, 2013 has been incorporated and applies to the waterfallmechanism as prescribed in clause (b) to sub-section (1) to Section 53of the Code. What is significant here is that under clause (b) to sub- AB

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Asection (1) to Section 53 of the Code, the workmen’s dues are for theperiod of twenty four months preceding the liquidation commencementdate. 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 andneed not coincide with the date of winding up. This is in the interest ofthe workmen. Clause (i) of Explanation to Section 53 of the Code statesBthat where the distribution of proceeds in respect of class of recipientsthat rank equally, each of the debts would be paid either in full or wouldbe paid in equal proportion within the same class of recipients, if theproceeds are insufficient to meet the debts in full. Ex facie, the clause isvery just and fair. It is to be noted that the wages and unpaid dues owedCto employees other than the workmen fall in clause (c), which is belowclause (b) to sub-section (1) to Section 53 of the Code. They are to bepaid wages and unpaid dues only for a period of twelve months precedingthe liquidation commencement date, and that too only if surplus fundsare available after making payment in terms of clause (a) and (b) ofsub-section (1) to Section 53 of the Code. Clause (d) of sub-section (1)Dto Section 53 of the Code relates to financial debts owed to unsecuredcreditors. The amounts due to the Central Government and the StateGovernment, etc., and the debts owed to a secured creditor for anyamount that remains unpaid following the enforcement of security interest,have been clubbed together in clause (e) of sub-section (1) to Section 53Eof the Code, and have to be ranked equally between and among both ofthem. The remaining debts and dues fall in clause (f) of sub-section (1)to Section 53 of the Code. Preference shareholders fall under clause (g)of sub-section (1) to Section 53 of the Code, and equity shareholders orpartners fall under clause (h) of sub-section (1) to Section 53 of theCode. Sub-section (2) to Section 53 of the Code states that anyFcontractual arrangements between recipients under sub-section (1) withequal ranking, if disrupting the order of priority under the said sub-sectionwill be disregarded by the liquidator.

16. The waterfall mechanism is based on a structuredmathematical formula, and the hierarchy is created in terms of paymentGof debts in order of priority with several qualifications, striking down anyone of the provisions or rearranging the hierarchy in the waterfallmechanism may lead to several trips and disrupt the working of theequilibrium as a whole and stasis, resulting in instability. Every change inthe waterfall mechanism is bound to lead to cascading effects on theHbalance of rights and interests of the secured creditors, operational creditors and even the Central and State Governments. Depending uponthe facts, in some cases, the waterfall mechanism in the Code may bemore beneficial than the hierarchy provided under Section 326 of theCompanies Act, 2013 and vice-versa. Therefore, we hesitate and donot accept the arguments of the petitioners.

17. The Code is based on the organic evolution of law and is aproduct of an extensive consultative process to meet the requirementsof the Code governing liquidation. It introduced a comprehensive andtime-bound framework to maximise the value of assets of all personsand balance the interest of the stakeholders. The guiding principle forthe Code in setting the priority of payments in liquidation was to bringthe practices in India in line with global practices. In the waterfallmechanism, after the costs of the insolvency resolution process andliquidation, secured creditors share the highest priority along with a definedperiod of dues of the workmen. The unpaid dues of the workmen areadequately and significantly protected in line with the objectives soughtto be achieved by the Code and in terms of the waterfall mechanismprescribed by Section 53 of the Code. In either case of relinquishmentor non-relinquishment of the security by the secured creditor, the interestsof workmen are protected under the Code. In fact, the secured creditorsare taking significant hair-cut and workmen are being compensated onan equitable basis in a just and proper manner as per Section 53 of theCode. The Code balances the rights of the secured creditors, who arefinancial institutions in which the general public has invested money, andalso ensures that the economic activity and revival of a viable companyis not hindered because it has suffered or fallen into a financial crisis.The Code focuses on bringing additional gains to both the economy andthe exchequer through efficiency enhancement and consequent greatervalue capture. In economic matters, a wider latitude is given to the law-maker and the Court allows for experimentation in such legislations basedon practical experiences and other problems seen by the law-makers. Ina challenge to such legislation, the Court does not adopt a doctrinaireapproach. Some sacrifices have to be always made for the greater good,and unless such sacrifices are prima facie apparent and ex facie harshand unequitable as to classify as manifestly arbitrary, these would beinterfered with by the court.

18. In view of the above and for the reasons stated above and assub-section (7) of Section 327 of the Act, 2013 provides that Sections A

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A326 and 327 of the Act, 2013 shall not be applicable in the event ofliquidation under the IBC, which has been necessitated in view of theenactment of IBC and it applies with respect to the liquidation of acompany under the IBC, Section 327(7) of the Act, 2013 cannot be saidto 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 ofBthe assets shall have to be made as per Section 53 of the IBC subject toSection 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, thewrit petition(s) lack merits and the same deserve to be dismissed andare accordingly dismissed. However, in the facts and circumstances ofCthe case, there shall be no order as to costs.

Pending applications, if any, also stand disposed of.

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Nidhi Jain

(Assisted by : Mayank Batra, LCRA)

Writ petitions dismissed.

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