SUNIL KUMAR JAIN AND OTHERS versus SUNDARESH BHATT AND OTHERS on 19 April 2022

1. Feeling aggrieved and dissatisfied with the impugned order dated31.05.2019 passed by the National Company Law Appellate Tribunal,New Delhi (hereinafter referred to as the ‘Appellate Tribunal’) inCompany Appeal (AT) (Insolvency) No. 605 of 2019, by which theAppellate Tribunal has dismissed the said appeal preferred by theGappellants herein – workmen/employees of M/s ABG Shipyard Limited(hereinafter referred to as the ‘Corporate Debtor’), working at Dahejand Mumbai, which was filed against the order passed by the NationalCompany Law Tribunal, Ahmedabad Bench, Ahmedabad (hereinafterreferred to as the ‘Adjudicating Authority’) dated 25.04.2019 not grantingany relief to them with regard to their claim relating to salary, which theyHclaimed for the period involving ‘Corporate Insolvency Resolution Process’ (hereinafter referred to as the ‘CIRP’) and the prior period,original applicants – workers/employees have preferred the presentappeal.

2. That the Corporate Debtor was a private sector Ship BuildingYard with its manufacturing activities at Dahej Yard and Surat Yard inGujarat and having its corporate office at Mumbai. That prior to theinitiation of CIRP, the Corporate Debtor had 562 workmen and 93employees at Dahej; 291 workmen and 99 employees at Surat and 101employees at its Mumbai Head Office. The appellants herein are the272 employees and workmen employed at Mumbai Head Office andDahej Yard of the Corporate Debtor. None of the 201 employees andworkmen at Surat Yard are the appellants herein.

3. Vide its order dated 1.8.2017, the Adjudicating Authorityadmitted an application under Section 7 of the Insolvency and BankruptcyCode, 2016 (hereinafter referred to as the ‘IBC Code’) and the CIRPwas initiated. The Adjudicating Authority also appointed the InterimResolution Professional of the Corporate Debtor who was thereafterconfirmed as the Resolution Professional (for short, ‘RP’) by theCommittee of Creditors (for short, ‘COC’) of the Corporate Debtor on7.9.2017. First meeting of the COC was held on 4.9.2017.

3.1 On 23.10.2017, Company Application No. 348 of 2017 wasfiled before the Adjudicating Authority, praying inter alia to direct theResolution Professional to make payment to the employees and theworkmen. On 9.3.2018, the appellants herein filed Company ApplicationNo. 78 of 2018 in Company Application No. 348/2017 before theAdjudicating Authority, praying inter alia to direct the RP to utilize theamount of Rs.9,75,33,236/- to be received from the Indian Coast Guardsolely for employees/workmen.

3.2 Vide order dated 25.04.2018 passed in Company ApplicationNo. 78/2018, the Adjudicating Authority directed the RP to depositRs.2,75,00,000/- in the Registry of the Adjudicating Authority, subject tothe outcome of Company Application No. 348/2017. In the meantime, inthe 4[th] meeting of the COC held on 08.12.2017, the issue with respect tothe payment of salaries/wages of the employees/workers respectivelywas discussed in view of the directions passed by the AdjudicatingAuthority vide its order dated 01.12.2017. However, the issue was notresolved and thereafter the appellants herein filed the aforesaid IA No.

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A78/2018 in which the Adjudicating Authority directed to deposit Rs. 2.75crores out of the total amount of Rs.9,75,33,236/- with the Registry ofthe NCLT towards disbursement of the outstanding salaries/wages tothe appellants, subject to the final outcome of IA No. 348/2017 and theAdjudicating Authority accordingly disposed of Company ApplicationNo. 78/2018.B

3.3 It appears that thereafter since no agreed resolution plan couldbe adopted of the Corporate Debtor, the RP filed IA No. 113/2019 beforethe Adjudicating Authority praying for an order of liquidation of CorporateDebtor. The Adjudicating Authority by order dated 25.04.2019, afterdeciding various other applications including the application of theCappellants being Company Application No. 348/2017 passed an order ofliquidation of the Corporate Debtor and appointed respondent no.1 hereinas Liquidator of the Corporate Debtor. While passing the order ofliquidation, the Adjudicating Authority also disposed of CompanyApplication No. 348/2017 in view of the order passed in CompanyDApplication No. 78/2018 by which the Adjudicating Authority earlierdirected to deposit Rs.2.75 crores towards the dues of the appellantswhich as such was subject to the final outcome of Company ApplicationNo. 348/2017. Therefore, as such, the Adjudicating Authority whiledisposing of Company Application No. 348/2017 did not grant the reliefclaimed by the appellants – 272 workers/employees working at DahejEYard and Mumbai Head Office for their claim relating to salary for theperiod involving CIRP and the prior period.

4. Feeling aggrieved and dissatisfied with the order passed by theAdjudicating Authority, not granting the relief to the appellants hereinwith regard to their claim relating to salary/wages, which they claimedFfor the period involving CIRP and prior period, the appellants-workmen/employees working at Dahej Yard and Mumbai Head Office preferredCompany Appeal No. 605/2019 before the Appellate Tribunal. By theimpugned order, the Appellate Tribunal has disposed of the said appealdeclining to interfere with the order passed by the Adjudicating Authority,Ghowever, allowed the appellants – 272 workmen/employees to file theirindividual claims before the Liquidator, who after going through the recordand taking into consideration the pleadings made by the workmen/employees will determine the claim. The Appellate Tribunal has alsofurther observed that if claim of one or other workmen/employee isrejected, it will be open to them to move before the Adjudicating Authority,H

which may decide the same in accordance with law. The AppellateTribunal has also observed that so far as the Gratuity and ProvidentFunds are concerned, the same cannot be treated to be the asset of theCorporate Debtor and they are to be disbursed amongst the employees/workmen who are entitled for the same.

5. Feeling aggrieved and dissatisfied with the impugned orderpassed by the Appellate Tribunal, the appellants-workmen/employees ofthe Corporate Debtor working at Dahej Yard and Mumbai Head Officehave preferred the present appeal.

6. Ms. Shobha Ramamoorthy, learned Advocate appearing onbehalf of the appellants has vehemently submitted that in the presentcase the respective appellants are all the workmen and employees –272 in number and were employed at Dahej Yard and Mumbai HeadOffice of the Corporate Debtor. It is submitted that in the present case,the CIRP period commenced from 01.08.2017 and ended on 25.04.2019– commencement of liquidation. It is submitted that for this entire periodof 20 months and 25 days, the respective employees and workmen wereon the payrolls of the Corporate Debtor. It is submitted that the RP didnot terminate the employment contracts or retrench or layoff the workmen.It is submitted that on the other hand, RP issued instructions dated4.9.2017 to all the employees and workmen to report to him and followhis instructions. It is submitted that on 15.11.2017, RP issued an email toHR Department of Corporate Debtor instructing strictly not to relieve orpermit resignation of any employee/workmen, without written approval.

6.1 It is further submitted that in the present case, the CorporateDebtor was managed as a going concern in accordance with Section 21of the IB Code. It is submitted that even the proposal to suspendoperations at Dahej Yard and provide workmen with paid leave wasrejected by the COC for lack of majority. It is submitted that thereforewhen the Corporate Debtor was managed as a going concern, which assuch is mandatory under Section 19 of the IB Code and when theoperations at Dahej Yard were not suspended, the workmen/employeesat Dahej Yard are entitled to at least the wages/salaries during the CIRPperiod. It is submitted that irrespective of whether the wages/salariesfor the period during CIRP are to be qualified as CIRP cost or not,provident fund, gratuity and pension fund are to be paid to the workmenand employees at Dahej Yard under Section 36(4) of the IB Code inpriority over other dues, which are also not paid till date.

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A6.2 It is further submitted that in the present case, throughout theCIRP period, the employees and workmen of Dahej Yard were asked toassemble at ABG Enclave and sign the attendance register sincetransportation to the yard was discontinued by the RP. It is submittedthat throughout the CIRP period, the employees of Mumbai office hadregularly attended the office; recorded their attendance with theBAttendance Reader installed at the Mumbai office. Learned counselappearing on behalf of the appellants has relied upon some documentsfrom the paper book as well as rejoinder affidavit in respect of proof ofwork done by the respective employees/workmen during the CIRPperiod.C

6.3 It is submitted that all claims filed by the employees/workmenin Form-E with the Liquidator have been verified. It is submitted that theverified and admitted claims of the employees and workmen of theCorporate Debtor for CIRP period on the basis of the records availableincluding the attendance register have been uploaded by the RP/LiquidatorDon 24.12.2020 on the official website of the Corporate Debtor as perregulations. It is submitted that therefore further verification in respectof the claims of the appellants based on their actual attendance isvexatious.

6.4 Learned counsel appearing on behalf of the appellants hasEtaken us to the relevant provisions of the IB Code in support of hersubmission that the workmen/employees of the Dahej Yard and MumbaiHead Office are at least entitled to the wages/salaries during the periodof CIRP and are also entitled to the amount due and payable towardsprovident fund, gratuity and pension. Learned counsel appearing on behalfof the appellants has taken us to Section 3(36); Section 5(13); SectionF5(14); Section 5(23); Section 17, Section 18; Section 19; Section 20;Section 25; Section 33(7); Section 36(4) and Section 53 of the IB Code.

6.5 It is further submitted that the objective of the IB Code is formaximising of value of assets of the Corporate Debtor so that they areefficiently run as a going concern. Reliance is placed on the decision ofGthis Court in the case of Swiss Ribbons Pvt. Ltd. v. Union of India,reported in (2019) 4 SCC 17 (para 37); and in the case of GujaratUrja Vikas Nigam Limited v. Amit Gupta, Civil Appeal No. 9241 of2019 decided on 8.3.2021 (para 57).

6.6 It is submitted that even under Section 20(1) of the IB Code,Hthe RP is mandated to manage the operations of the Corporate Debtor as a going concern. It is submitted that for this purpose he is vested withthe authority to issue instructions to the personnel of the Corporate Debtoras may be necessary for keeping the Corporate Debtor as a goingconcern. It is submitted that the RP is under the mandate to take all suchactions as are necessary to keep the Corporate Debtor as a goingconcern.

6.7 It is submitted that Section 5(13) of the IB Code defines“Insolvency Resolution Process Cost”. It is submitted that as per Section5(13) of the Code, “Insolvency Resolution Process Cost” means anycosts incurred by the RP in running the business of the Corporate Debtoras a going concern and any other costs as may be specified by the IBBI– Liquidator. It is submitted that in the present case, vide Circular dated12.06.2018, the Liquidator had clearly provided the costs on account ofemployees and workmen under the head “other services in a runningbusiness” in Forms I, II and III submitted by the RP with respect toCIRP costs incurred by him. It is submitted that therefore the salaries/wages and the dues payable to the employees/workmen during the CIRPperiod will be qualified as CIRP costs under Section 5(13) of the IBCode and are liable to be disbursed even prior to the amount distributedunder Section 53 of the IB Code.

6.8 It is further submitted that even otherwise the provident fund,gratuity and pension fund amounts remain outside the liquidation underSection 36(4) of the IB Code. It is submitted that the obligation to paythe provident fund, gratuity fund amount would arise as soon as theemployees and workmen are deemed to have been discharged underSection 33(7) of the IB Code. It is submitted that even the workmen/employees are required to be paid the wages/salaries for the pre-CIRPperiod as per the priorities mentioned in Section 53 of the IB Code.

6.9 It is further submitted by the learned counsel appearing onbehalf of the appellants that the salaries and wages payable to theworkmen/employees for the CIRP period are a component of theresolution professional costs and therefore the CIRP period salaries andwages payable to the respective workmen/employees are to be firstpaid and are not to be paid “pari passu” in terms of Section 53(1)(b)and (c) of the IB Code. It is submitted that even the ‘Workmen’s Dues’is explained in Explanation (ii) to Section 53 of the Code as the termhaving the same meaning as assigned to it in Section 326 of the CompaniesAct, 2013. It is submitted that Section 327 of the Companies Act provides A

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Afor preferential payments upon winding up of a company, enlists thecomponent of the wages or salary and dues payable to an employeeunder clauses b, c, e & f under sub-clause 1.

6.10. It is submitted that thus on a combined reading of theprovisions of Sections 326 & 327 of the Companies Act, it is clear thatBthe workmen’s dues and the employee’s dues are comprised of severalcomponents including wages or salary, holiday remuneration, sums duefrom the provident fund, pension fund and the gratuity fund amongstother items. It is submitted that as observed by this Court in the case ofSwiss Ribbons Pvt. Ltd. (supra), the costs and expenses of the RP/Liquidator are to be given preferential treatment by excepting them fromCthe pari passu principle.

6.11 It is submitted that Rs. 2.75 crores are earmarked and keptapart towards the dues of the workmen/employees. It is submitted thattherefore the said sum of Rs.2.75 crores which is deposited for thebenefit of the workmen/employees is liable to be disbursed in terms ofDSection 53(1)(a) r/w Section 5(13)(c) of the IB Code. It is submittedthat the amount in the sum of Rs.16.8 crores (approximately) payabletowards the provident fund, gratuity and pension in terms of Section36(4) to all the employees and workmen of the Corporate Debtor includingthe appellants and therefore is required to be paid in priority over theEdisbursement to be made under Section 53(1)(b) & (c).

6.12 Making the above submissions and relying upon the aforesaiddecisions, it is prayed to allow the present appeal.

7. The present appeal is vehemently opposed by Shri NakulDewan, learned Senior Advocate appearing on behalf of respondentFno.1 – Liquidator of Corporate Debtor.

7.1 Shri Nakul Dewan, learned senior counsel appearing on behalfof the Liquidator of Corporate Debtor has vehemently submitted thatthe wages and salaries claimed by the appellants who have done nowork during the CIRP period and have not assisted the RP/LiquidatorGduring the CIRP, would not fall within the parameters of CIRP costswithin the definition of Section 5(13)(c) of the IB Code.

7.2 It is submitted that only 8 employees at the Mumbai locationfor eight months during the CIRP and workmen/employees from Surat(from August 2017 to October 2017) assisted the RP in providing servicesHrequired under the CIRP process. It is submitted that the remaining employees and workmen including the appellants herein were not requiredto and did not perform any services to run the Corporate Debtor duringthe CIRP period. It is submitted that therefore the COC of the CorporateDebtor rightly did not approve any payments to the appellants as part ofthe CIRP costs. It is submitted that the wages and salaries of the appellants– workmen/employees of the Corporate Debtor would fall under Sections53(1)(b) and 53(1)(c) of the IB Code.

7.3 It is submitted that as per Section 5(13)(c) of the IB Code r/wRegulations 31 and 33 of the CIRP Regulations, cost incurred by the RPin running the business of the Corporate Debtor is required to be ratifiedby the COC for it to be classified as CIRP costs. It is submitted that onlythe costs for those employees who have assisted the RP during theCIRP period, have been approved by the COC in the first COC meeting,held on 4.9.2017. It is submitted that therefore no other costs can beclassified as CIRP costs, except unless it is ratified by the COC. It issubmitted that the remaining dues of the workmen will form part of thedues falling under Section 53(1)(b) of the IB Code.

7.4 It is submitted that in the meetings of the COC held periodicallyright from first meeting to fourth meeting, it was specifically recordedthat the Dahej Shipyard is not operational and that the Corporate Debtoris not in a position to pay the salaries of the workmen and employeesdue to paucity of funds since the Corporate Debtor was not a goingconcern and did not have a running business.

7.5 It is further submitted that the main business of the CorporateDebtor was shipbuilding and ship repairing which was carried out at itsYards at Surat and Dahej. It is submitted that the Yard at Dahej was notin operation since 2015 and the Yard at Surat was closed in October2017 and therefore it cannot be said that the Corporate Debtor was agoing concern during the CIRP and therefore all its employees would berequired to be treated as those who assisted the RP to run the CorporateDebtor as a going concern.

7.6 It is further submitted that as such there is no evidence tosuggest that the respective workmen/employees deployed at Dahej Yardand Mumbai Head Office have actually worked during the CIRP period.It is therefore submitted that the Appellate Tribunal has rightly observedthat the respective workmen/employees can at least have to prove theirclaims before the RP/Liquidator by submitting their respective claimsand the same are required to be adjudicated upon and/or verified by the AB

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ALiquidator. It is submitted that therefore the Appellate Tribunal has rightlynot interfered with the order passed by the Adjudicating Authority in notpassing any order in favour of the workmen/employees.

7.7 It is further submitted that Section 53 of the IB Code sets outthe waterfall mechanism in terms of which the dues of the creditors areBpaid. It is submitted that even the operational creditors fall sixth in lineafter payment of CIRP dues, dues of Secured Creditors etc. It is submittedthat even after the Corporate Debtor goes into liquidation in terms ofSection 33 of the IB Code, the dues of the employees and workmenbeing operational creditors would be paid in last in terms of the waterfallmechanism of Section 53(1)(f) of the IB Code. It is therefore submittedCthat the respective appellants – workmen/employees are not entitled toany wages/salaries for the period during CIRP as CIRP costs, as claimedby them.

7.8 Shri Nakul Dewan, learned Senior Advocate appearing onbehalf of respondent no.1 – RP/Liquidator has further submitted thatDthe costs incurred during the CIRP period by the Corporate Debtor/RPwill qualify as CIRP costs only with respect to costs incurred by the RPrunning the company as a going concern under Section 5(13) (c) of theIB Code and in a case where the same has been approved by the COCunder Regulations 31 and 33 of the CIRP Regulations.

EIt is submitted that in the present case the Corporate Debtor isneither a going concern nor the RP has incurred any costs. It is submittedthat therefore the wages/salaries of the workmen/employees at the DahejYard cannot be included in the CIRP costs.

7.9 It is further submitted that after the commencement of theFCIRP, workmen and employee’s dues which are outstanding as on thedate of CIRP, are treated as operational creditors in terms of Section5(20) and 5(21) of the IB Code. It is submitted that in terms of Section30(2)(b) of the IB Code, the amount payable to operational creditors bya prospective resolution applicant shall not be less than the amount to beGpaid to such creditors in the event of a liquidation of the corporate debtorunder Section 53; OR the amount that would have been paid to suchcreditors, if the amount to be distributed under the resolution plan hadbeen distributed in accordance with the order of priority in sub-section(1) of section 53, whichever is higher.

7.10 It is submitted that Section 53 of the IB Code sets out thewaterfall mechanism in terms of which the dues of the creditors arepaid. It is submitted that operational creditors fall sixth in line after paymentof CIRP dues, dues of secured creditors etc.

7.11 It is submitted that in the present case, it is only few of theSurat workmen/employees and 8 Mumbai employees who have renderedservices during the CIRP period to assist the RP to complete the CIRPprocess whose dues would be treated as CIRP costs. Otherwise, alldues of employees and workmen which have accrued prior to CIRPwould be paid in terms of Section 53(1)(f) of the IB Code, both duringCIRP and during liquidation. It is submitted that in the present case, theLiquidator has accepted the claim filed by the workmen and employees.However, the said claims filed by the workmen/employees cannot beconsidered as CIRP costs and cannot be paid in priority to all otherclaims. The treatment of the said claims of the workmen and employeeshave to be treated in accordance with the provisions of Section 53(1)(b)(i)and 53(1)(c) of the IB Code respectively, as applicable and not as CIRPcosts.

7.12 It is submitted that in the present case the appellants whoare the workmen at Dahej Yard and employees at Mumbai Head Office,did not help to maintain the Corporate Debtor as a going concern, since(i) the Corporate Debtor was never a going concern and (ii) the DahejYard was not in operation since June, 2015 and (iii) Operations at theSurat Shipyard were completely shut from October, 2017. It is submittedthat therefore the appellants who are the workmen of the Dahej Yardand employees of the Mumbai Head Office, cannot claim any amountstowards wages/salaries for the CIRP period, since no work/serviceswere rendered by them, except for the critical Mumbai employees whosesalaries were ratified by the COC during the first COC meeting.

7.13 Making the above submissions, it is submitted that the wagesand salaries of the workmen/employees at Dahej Yard and the employeesat Mumbai Head Office, except those who worked during the CIRPperiod, cannot be included and/or considered as CIRP costs and thereforethey have to be paid as per the waterfall mechanism mentioned in Section53(1)(b) & (c) of the IB Code.

7.14 It is submitted that therefore the respective workmenemployed at Dahej Yard and some of the employees employed at Mumbai ABC

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AHead Office were required to submit their individual claims and theyhave to establish before the RP/Liquidator that in fact they actuallyworked during the CIRP period, the Appellate Tribunal has rightlyobserved that the respective workmen/employees have to submit theirclaims before the RP/Liquidator, who is required to verify whether theCorporate Debtor was a going concern during the CIRP period andBwhether in fact the concerned workmen/employees actually workedduring the CIRP period or not. It is submitted that therefore nointerference of this Court is called for.8. We have heard the learned counsel for the respective partiesat length.C

The issue before this Court is with respect to wages/salaries ofthe workmen/employees during the CIRP period and the amount dueand payable to the respective workmen/employees towards Pension Fund,Gratuity Fund and Provident Fund.

D8.1 While considering the aforesaid claims, the legislative historyand the relevant provisions of the IB Code are required to be referredto.

Relevant Provisions of the IB Code:

“Section 3(36)

ESection 3(36) “workman” shall have the same meaning as assignedto it in clause (s) of section 2 of the Industrial Disputes Act, 1947(14 of 1947);

F(13) “insolvency resolution process costs” means—(a) the amount of any interim finance and the costs incurred inraising such finance; (b) the fees payable to any person acting as a resolutionprofessional;G(c) any costs incurred by the resolution professional in runningthe business of the corporate debtor as a going concern; (d) any costs incurred at the expense of the Government tofacilitate the insolvency resolution process; and H(e) any other costs as may be specified by the Board;

5(14) “insolvency resolution process period” means the period ofone hundred and eighty days beginning from the insolvencycommencement date and ending on one hundred and eightiethday; Section 17

17. Management of affairs of corporate debtor by interimresolution professional. (1) From the date of appointment ofthe interim resolution professional, —

(a) the management of the affairs of the corporate debtor shallvest in the interim resolution professional; (b) the powers of the board of directors or the partners of thecorporate debtor, as the case may be, shall stand suspended andbe exercised by the interim resolution professional;

(c) the officers and managers of the corporate debtor shall reportto the interim resolution professional and provide access to suchdocuments and records of the corporate debtor as may be requiredby the interim resolution professional; (d) the financial institutions maintaining accounts of the corporatedebtor shall act on the instructions of the interim resolutionprofessional in relation to such accounts and furnish all informationrelating to the corporate debtor available with them to the interimresolution professional.

(2) The interim resolution professional vested with the managementof the corporate debtor shall—

(a) act and execute in the name and on behalf of the corporatedebtor all deeds, receipts, and other documents, if any; (b) take such actions, in the manner and subject to such restrictions,as may be specified by the Board;

(c) have the authority to access the electronic records of corporatedebtor from information utility having financial information of thecorporate debtor; (d) have the authority to access the books of account, recordsand other relevant documents of corporate debtor available with A

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Agovernment authorities, statutory auditors, accountants and suchother persons as [may be specified; and]

[(e) be responsible for complying with the requirements underany law for the time being in force on behalf of the corporatedebtor.]

BSection 20

20. Management of operations of corporate debtor as goingconcern. -(1) The interim resolution professional shall make everyendeavour to protect and preserve the value of the property ofthe corporate debtor and manage the operations of the corporateCdebtor as a going concern.

(2) For the purposes of sub-section (1), the interim resolutionprofessional shall have the authority—

(a) to appoint accountants, legal or other professionals as may beDnecessary; (b) to enter into contracts on behalf of the corporate debtor or toamend or modify the contracts or transactions which were enteredinto before the commencement of corporate insolvency resolutionprocess; E(c) to raise interim finance provided that no security interest shallbe created over any encumbered property of the corporate debtorwithout the prior consent of the creditors whose debt is securedover such encumbered property:

Provided that no prior consent of the creditor shall be requiredFwhere the value of such property is not less than the amountequivalent to twice the amount of the debt.

(d) to issue instructions to personnel of the corporate debtor asmay be necessary for keeping the corporate debtor as a goingconcern; and G(e) to take all such actions as are necessary to keep the corporatedebtor as a going concern.

Section 25

25. Duties of resolution professional - (1) It shall be the dutyof the resolution professional to preserve and protect the assets H

of the corporate debtor, including the continued business operationsof the corporate debtor.

(2) For the purposes of sub-section (1), the resolution professionalshall undertake the following actions, namely: —

(a) take immediate custody and control of all the assets of thecorporate debtor, including the business records of the corporatedebtor; (b) represent and act on behalf of the corporate debtor with thirdparties, exercise rights for the benefit of the corporate debtor injudicial, quasi-judicial or arbitration proceedings;

(c) raise interim finances subject to the approval of the committeeof creditors under section 28; (d) appoint accountants, legal or other professionals in the manneras specified by Board; (e) maintain an updated list of claims; (f) convene and attend all meetings of the committee of creditors; (g) prepare the information memorandum in accordance withsection 29; (h) invite prospective resolution applicants, who fulfil such criteriaas may be laid down by him with the approval of committee of thecreditors, having regard to the complexity and scale of operationsof the business of the corporate debtor and such other conditionsas may be specified by the Board, to submit a resolution plan orplans.

(i) present all resolution plans at the meetings of the committee ofcreditors; (j) file application for avoidance of transactions in accordancewith Chapter III, if any; and (k) such other actions as may be specified by the Board.

33(7). The order for liquidation under this section shall be deemedto be a notice of discharge to the officers, employees and workmen A

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of the corporate debtor, except when the business of the corporatedebtor is continued during the liquidation process by the liquidator.

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Section 36(4)

–Section 36 (4) Liquidation Estate

B(4) The following shall not be included in the liquidation estateassets and shall not be used for recovery in the liquidation: —

(a) assets owned by a third party which are in possession of thecorporate debtor, including—

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(ii) bailment contracts;

(iii) all sums due to any workman or employee from the providentfund, the pension fund and the gratuity fund;

(iv) other contractual arrangements which do not stipulate transferof title but only use of the assets; and D

(v) such other assets as may be notified by the Central Governmentin consultation with any financial sector regulator; (b) assets in security collateral held by financial services providersand are subject to netting and set-off in multi-lateral trading orEclearing transactions;

(c) personal assets of any shareholder or partner of a corporatedebtor as the case may be provided such assets are not held onaccount of avoidance transactions that may be avoided under thisChapter; F

(d) assets of any Indian or foreign subsidiary of the corporatedebtor; or (e) any other assets as may be specified by the Board, includingassets which could be subject to set-off on account of mutualdealings between the corporate debtor and any creditor.

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Section 53

53. Distribution of assets -(1) Notwithstanding anything to thecontrary contained in any law enacted by the Parliament or anyState Legislature for the time being in force, the proceeds fromthe sale of the liquidation assets shall be distributed in the following H

order of priority and within such period and in such manner asmay be specified, namely :—

(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 precedingthe 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 thanworkmen 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 thefollowing: —

(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 oftwo 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) 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 of A

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SUPREME COURT REPORTS

Arecipients 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, eachBof 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).”

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Legislative History with respect to workmen/employee’sdues towards the wages/salaries including the amount dueand payable towards provident fund, gratuity and pensionfund:

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8.2 Under the Companies Act, 1956 (hereinafter referred to as“1956 Act”), Section 59A provided that workmen’s dues and debts dueto secured creditors in terms of Section 529A(1)(c) of the 1956 Actshall be paid in priority to other debts. Further, it provided that in case ofinsolvent company, winding up should be undertaken in terms of laws ofEinsolvency with respect to the status of persons adjudged insolvent.

8.2.1 The proviso to Section 59(1) of 1956 Act provided thatworkmen shall deem to have pari passu charge in his favour to theextent of workmen’s portion. It further stated that where the securedcreditor (instead of relinquishing) is enforcing his security, the debt dueFto the extent of workmen’s share/ portion in the security shall rank paripassu with workmen’s dues for the purposes of Section 529A. The saidsection was brought in by way of Companies (Amendment) Bill, 1985with the objective to introduce necessary legislation for the legitimatedues of workers rank pari pasu with the secured creditors in the eventof the closure of the Company. The laudable objective was that in theGunfortunate event of liquidation, workers whose labour and effortconstitute an invisible but easily perceivable part of the capital of thecompany, are not deprived of their legitimate right to participate in theproduct of their labour and effort.

8.2.2 Section 530 of 1956 Act provided the waterfall mechanismas per which priority is to be given to different kinds of debts.Subsequently, the Companies Bill, 2009 and 2011 were introduced whereinwages/salaries payable to workmen for a period of 2 years wereprotected in case of winding up of the Company. Thereafter, under theCompanies Act, 2013 (hereinafter referred to as “2013 Act”), Section326 and Section 327 i.e. “Overriding Preferential Payment” and“Preferential Payments” were introduced wherein a proviso to Section326 of the 2013 Act was inserted. Initially the insolvency process incase of winding up of insolvent companies were provided under Section325 of 2013 Act. However, Section 325 of the 2013 Act was omittedw.e.f. 15.11.2016 on the coming into force the IB Code. On enactmentof the IB Code, the winding up proceedings in case of insolvency are tobe governed by the provisions of the IB Code and the provisions of theIB code only shall be applicable to deal with the winding up proceedingsas the IB Code is a complete Code in itself. That thereafter, an amendmentw.e.f. 15.11.2016 has been brought in under Section 327 (7) of 2013 Actwherein it has been clarified that the provisions of Section 326 and Section327 of the 2013 Act will not be applicable in the event of liquidationunder the IB Code.

8.2.3 In case of any insolvency, in a winding up of a companyunder Section 326 and 327 of the Companies Act, the workmen duesare to be paid as under: -

• 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 forthe period of 24 months, shall be paid in priority to all other debts(including debts due to secured creditors). This means that wages/salary for the period of 24 months is over and above every otherclaim/debts (including debts due to secured creditors).

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

8.2.4 Under the IB Code, the workmen dues have been dulyprotected and the provident fund, gratuity and pension fund have beenexcluded from the liquidation estate assets (Section 36(4) of the IB Code).

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AFurthermore, as per Section 53 of the IB Code, the workmen dues aregiven the top priority in the waterfall mechanism.

8.2.5 The issue of giving priority to the workmen dues have beenconsidered time and again in the various Committee’s Reports:

In the Bankruptcy Law Reforms Committee (Volume 1)B(November, 2015), it was agreed that the assets held in by theentity in trust (such as employee pensions), assets held as collateralto certain financial market institutions and assets held as part ofoperational transactions where the entity has right over the assetbut is not the owner of the same shall be excluded from theCliquidation estate. Furthermore, it was also debated with respectto the waterfall mechanism under the Code and was agreed thatthe workmen dues capped up to 3 months will be given the secondpriority with the secured creditor after the costs of the corporateinsolvency and resolution process and liquidation.

DSubsequently, a report of the Joint Committee on the Insolvencyand Bankruptcy Code, 2015 was prepared and presented in LokSabha on 28.04.2016 wherein the issue of exclusion of providentfund, pension fund and gratuity fund from the liquidation estateassets and estate of bankrupt was debated. The Committee, afterin dept examination, was of the view that provident fund, pensionEfund and gratuity fund provide the social safety net to the workmenand employees and hence, need to be secured in the event ofliquidation of a company or bankruptcy of partnership firm. TheCommittee observed that the workers are the nerve center ofany company and in the event of any company becoming insolventFor bankrupt, the workmen get affected adversely and therefore,priority must be given to their outstanding dues. Therefore, allsums due to any workman or employee from the provident fund,gratuity fund or pension fund should not be included in the liquidationestate assets. Thus, to protect the interest of the workmen, theCommittee decided that that the workmen dues for a period of 12Gmonths as provided under Section 53 of the Code be increased to24 months preceding liquidation commencement date. 6

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In light of the same, the Section 36 of the Code has clearly givenoutright protection to workmen’s dues under Provident Fund,Pension Fund and Gratuity Fund which is not treated as liquidation H

assets and liquidator has no claim over such funds. Therefore,this share of workmen’s dues has consciously been taken outsidethe liquidation process.

8.2.6 In light of the above statutory provisions under the IB Codeand the legislative history, the claims of the workmen/employees towardswages/salaries prior to CIRP and during the CIRP are required to beconsidered.

9. It cannot be disputed that as per Section 5(13) of the IB Code,“insolvency resolution process costs” shall include any costs incurred bythe resolution professional in running the business of the corporate debtoras a going concern. It is also true that Section 20 of the IB Code mandatesthat the interim resolution professional/resolution professional is to managethe operations of the corporate debtor as a going concern and in caseduring the CIRP the corporate debtor was a going concern, the wages/salaries of such workmen/employees who actually worked, shall beincluded in the CIRP costs and in case of liquidation of the corporatedebtor, dues towards the wages and salaries of such workmen/employeeswho actually worked when the corporate debtor was a going concernduring the CIRP, being a part of the CIRP costs are entitled to have thefirst priority and they have to be paid in full first as per Section 53(1)(a)of the IB Code. Therefore, while considering the claims of the concernedworkmen/employees towards the wages/salaries payable during CIRP,first of all it has to be established and proved that during CIRP, thecorporate debtor was a going concern and that the concerned workmen/employees actually worked while the corporate debtor was a goingconcern during the CIRP. The wages and salaries of all other workmen/employees of the Corporate Debtor during the CIRP who actually havenot worked and/or performed their duties when the Corporate Debtorwas a going concern, shall not be included automatically in the CIRPcosts. Only with respect to those workmen/employees who actuallyworked during CIRP when the Corporate Debtor was a going concern,their wages/salaries are to be included in the CIRP costs and they shallhave the first priority over all other dues as per Section 53(1)(a) of theIB Code. Any other dues towards wages and salaries of the employees/workmen of the corporate debtor shall have to be governed by Section53(1)(b) and Section 53(1)(c) of the IB Code. Any other interpretationwould lead to absurd consequences and violate the scheme of Section53 r/w Section 5(13) of the IB Code. If any other interpretation, more AB

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Aparticularly, the interpretation canvassed on behalf of the appellants isaccepted, in that case, the wages/salaries of those workmen/employeeswho had not worked at all during CIRP shall have to be treated and/orincluded in the CIRP costs, which cannot be the intention of the legislature.

10. On a fair reading of Section 5(13) of the IB code which definesB“insolvency resolution process costs”, it is observed and held that thedues towards the wages/salaries of only those workmen/employees whoactually worked during the CIRP are to be included in the CIRP costs.The rests of the claims towards the wages/salaries of the workmen/employees, as observed hereinabove, shall be governed by Sections53(1)(b) & (c) of the IB Code.C

11. In the present case, the RP/Liquidator has seriously disputedthat during the CIRP, the Corporate Debtor was a going concern. It isseriously disputed that the respective appellants – workmen/employeesemployed at Dahej Yard and Mumbai Head Office actually worked duringthe CIRP. It is true that while submitting the claims towards CIRP costs,Dthe RP has not submitted the claims towards the wages/salaries of theappellants, however, still the claims submitted/to be submitted by theappellants will have to be adjudicated upon and considered by theLiquidator and the Liquidator has to adjudicate and consider, (i) whetherthe Corporate Debtor was a going concern during the CIRP; (ii) howEmany workmen/employees actually worked during the CIRP while theCorporate Debtor was a going concern.

If on adjudication of the claims made by the respective workmen/employees, if it is established and proved that during CIRP, the CorporateDebtor was a going concern and the concerned workmen/employeesFactually worked during the CIRP when the Corporate Debtor was agoing concern, the wages and salaries of such workmen/employees tobe included in the CIRP costs as defined under Section 5(13) of the IBCode and they will have to be paid such wages/salaries as per Section53(1)(a) of the IB Code as part of the CIRP costs in full before makingany payment as per priorities mentioned in Section 53(1) of the IB code.G

12. Now so far as the submission on behalf of the appellants thatas per Section 20 of the IB Code and even as per the decisions of thisCourt in the cases of Swiss Ribbons Pvt. Ltd. (supra) and GujaratUrja Vikas Nigam Ltd. v. Amit Gupta (supra), the RP is under mandateto manage the operations of the Corporate Debtor as a going concernH

and therefore it is to be believed that during CIRP, the Corporate Debtorwas a going concern, managed and/or operated as a going concern cannotbe accepted. It is true that under Section 20 of the IB Code, it is the dutyof the RP to manage and run the operations of the Corporate Debtor asa going concern. However, the words used in Section 20 are “the interimresolution professional shall make every endeavour to …. manage theoperations of the corporate debtor as a going concern”. Therefore, evenif it is found that the Corporate Debtor was not a going concern duringthe CIRP despite best efforts by the resolution professional, it cannot bepresumed that still the Corporate Debtor was a going concern during theCIRP period. It depends on the facts of each case. In a given case, theCorporate Debtor may be a going concern and in a given case, thecorporate debtor might not be a going concern. Therefore, submissionon behalf of the appellants that as the RP is under mandate to managethe operations of the corporate debtor as a going concern under Section20 of the IB code and therefore it is to be presumed that the RP managedthe operations of the Corporate Debtor as a going concern and thereforethe workmen/employees are entitled to their wages and salaries duringthe CIRP, as their wages/salaries to be included in the CIRP costs cannotbe accepted. However, the wages and salaries of the workmen/employees of pre-CIRP period will have to be governed as per the prioritiesmentioned in Section 53(1) of the IB Code.

Dues of the workmen/employees towards Provident Fund,Gratuity Fund and Pension Fund”

13. Now so far as the dues of the workmen/employees on accountof provident fund, gratuity and pension are concerned, they shall begoverned by Section 36(4) of the IB Code. Section 36(4)(iii) of the IBCode specifically excludes “all sums due to any workman or employeefrom the provident fund, the pension fund and the gratuity fund”, fromthe ambit of “liquidation estate assets”. Therefore, Section 53(1) of theIB Code shall not be applicable to such dues, which are to be treatedoutside the liquidation process and liquidation estate assets under the IBCode. Thus, Section 36(4) of the IB Code has clearly given outrightprotection to workmen’s dues under provident fund, gratuity fund andpension fund which are not to be treated as liquidation estate assets andthe Liquidator shall have no claim over such dues. Therefore, theconcerned workmen/employees shall be entitled to provident fund, gratuityfund and pension fund from such funds which are specifically kept out AB

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Aof liquidation estate assets and as per Section 36(4) of the IB Code, theyare not to be used for recovery in the liquidation.

14. In view of the above and for the reasons stated above, it isheld as under:

i) that the wages/salaries of the workmen/employees of theBCorporate Debtor for the period during CIRP can be included in theCIRP costs provided it is established and proved that the InterimResolution Professional/Resolution Professional managed the operationsof the corporate debtor as a going concern during the CIRP and that theconcerned workmen/employees of the corporate debtor actually workedCduring the CIRP and in such an eventuality, the wages/salaries of thoseworkmen/employees who actually worked during the CIRP period whenthe resolution professional managed the operations of the corporate debtoras a going concern, shall be paid treating it and/or considering it as partof CIRP costs and the same shall be payable in full first as per Section53(1)(a) of the IB Code;Dii) considering Section 36(4) of the IB code and when the providentfund, gratuity fund and pension fund are kept out of the liquidation estateassets, the share of the workmen dues shall be kept outside the liquidationprocess and the concerned workmen/employees shall have to be paidthe same out of such provident fund, gratuity fund and pension fund, ifEany, available and the Liquidator shall not have any claim over suchfunds.

15. As observed hereinabove, there are disputed questions, whetherin fact the IRP/RP managed the operations of the corporate debtor as agoing concern during the CIRP and there is a serious dispute whetherFDahej Yard was operational during the CIRP or not and there is a seriousdispute that the concerned workmen/employees of the Dahej Yard andthe concerned employees of the Mumbai Head Office actually workedduring the CIRP or not and therefore it is directed that let the appellantssubmit their claims before the Liquidator and establish and prove thatGduring CIRP, IRP/RP managed the operations of the corporate debtoras a going concern and that they actually worked during the CIRP andthe Liquidator is directed to adjudicate such claims in accordance withlaw and on its own merits and on the basis of the evidence which maybe laid/produced, irrespective of the fact whether the RP who himself isnow the Liquidator included the claims of the appellants being wages/H

salaries during CIRP as CIRP costs or not. The Liquidator is directed toadjudicate such claims independently. If it is found that in fact the IRP/RP managed the operations of the corporate debtor as a going concernduring the CIRP and the concerned workmen/employees actually workedduring CIRP, their wages and salaries be considered and included inCIRP costs and they will have to be paid as per Section 53(1)(a) of theIB Code in full before distributing the amount in the priorities as mentionedin Section 53 of the IB Code. The aforesaid exercise shall be completedwithin a period of twelve weeks from today and such amount shall bepaid out of the amount which is directed to be kept aside earlier by theAdjudicating Authority/Appellate Tribunal and thereafter by this Court.Till such claims are adjudicated upon, the Liquidator is directed to keepaside the said amount exclusively to be used for the workmen/employee’sdues which is to be paid on adjudication as above.

16. The present appeal is partly allowed to the aforesaid extentand disposed of accordingly. No costs.

Divya Pandey and Amarendra Kumar

Appeal partly allowed.

(Assisted by : Adnan Khan, LCRA)

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