MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH CHAND SHARMA versus UNION OF INDIA AND ORS.

Citation: [2023] 6 S.C.R. 85 · Decided: 02-05-2023 · Supreme Court of India · Bench: M.B. SHAH · Disposal: Dismissed
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Judgment (excerpt)

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MOSER BAER KARAMCHARI UNION THR. PRESIDENT
MAHESH 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 applicable
in the event of liquidation under the IBC, in view of the enactment
of IBC and it applies with respect to the liquidation of a company
under the IBC, thus, s. 327(7) cannot be said to be arbitrary and/or
violative of Art. 21 – In case of liquidation of a company under
IBC, the provisions of s. 53 IBC and other provisions of the IBC
shall be applicable as the company is ordered to be liquidated or
wound up under the provisions of IBC – Distribution of the assets
shall have to be made as per s. 53 IBC subject to s. 36(4) IBC – As
per s. 53(1)(b) the workmen’s dues for the period of twenty-four
months preceding the liquidation commencement date shall rank
equally between the workmen and the secured creditor in the event
such secured creditor has relinquished security – Thus, the same
cannot be said to be arbitrary and violative of Art. 21 – Insolvency
and Bankruptcy Code, 2016 – ss. 53 and 36(4).
Insolvency and Bankruptcy Code, 2016: s. 53 – Waterfall
mechanism under – Held: Waterfall mechanism is based on a
structured mathematical formula, and the hierarchy is created in
terms of payment of debts in order of priority with several
qualifications – Striking down any one of the provisions or
rearranging the hierarchy in the waterfall mechanism may lead to
several trips and disrupt the working of the equilibrium as a whole
and stasis, resulting in instability – Every change in the waterfall
mechanism is bound to lead to cascading effects on the balance of
rights and interests of the secured creditors, operational creditors
and even the Central and State Governments – In the waterfall
mechanism, after the costs of the insolvency resolution process and
liquidation, secured creditors share the highest priority along with
[2023] 6 S.C.R. 85
85
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SUPREME COURT REPORTS
[2023] 6 S.C.R.
a defined period of dues of the workmen – Unpaid dues of the
workmen are adequately and significantly protected in line with the
objectives sought to be achieved by the Code and in terms of the
waterfall mechanism prescribed by s.53.
Dismissing the writ petitions, the Court
HELD: 1.1 In view of the enactment of Insolvency and
Bankruptcy Code, 2016  and Section 53 of the IBC, it
necessitated to amend the Act, 2013. As per Sub-Section (7) of
Section 327, Sections 326 and 327 shall not be applicable in the
event of liquidation under the IBC. The object and purpose of
amending the Act, 2013 and to exclude Sections 326 and 327 in
the event of liquidation under the IBC seems to be that there
may not be two different provisions with respect to winding up/
liquidation of a company. Therefore, in view of the enactment of
IBC, it necessitated to exclude the applicability of Sections 326
and 327 of the Act, 2013 which cannot be said to be arbitrary.
[Para 6][111-E-F]
1.2. Sub-Section (7) of Section 327 shall be applicable in
case of liquidation of a company under the IBC. In case of
liquidation of a company under IBC, the provisions of Section 53
of the IBC and other provisions of the IBC shall be applicable as
the company is ordered to be liquidated or wound up under the
provisions of IBC. Therefore, merely because under the earlier
regime and in case of winding up of a company under the
Companies Act, 1956/2013, the dues of the workmen may have
pari passu with that of the secured creditor, the petitioner cannot
claim the same benefit in case of winding up/liquidation of the
company under IBC. The parties shall be governed by the
provisions of the IBC in case of liquidation of a company under
the provisions of the IBC. [Para 6.1][111-G-H; 112-A-B]
1.3. Section 53 of the IBC provides for distribution of the
assets in case of liquidation of a company under IBC. As per
Section 53(1)(b) the workmen’s dues for the period of twenty-
four months preceding the liquidation commencement date shall
rank equally between the workmen and the secured creditor in
the event such secured creditor has relinquished security in the
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manner set out in Section 52. Therefore, workmen’s dues for the
period of twenty-four months preceding the liquidation
commencement date shall have pari passu with the dues of secured
creditor. At t
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