Workers' dues to not get priority in case of IBC liquidation: SC

The Supreme Court on Tuesday said workers’ dues would not get preferential payment when a company was going through liquidation under the Insolvency and Bankruptcy Code (IBC), 2016.

Justice M R Shah and Justice Sanjiv Khanna dismissed a batch of petitions challenging the constitutionality of Section 327(7) of the Companies Act, 2013.

In doing so, the court upheld the provision.

Under Sections 326 and 327 of the Companies Act, certain payments such as workers’ dues, revenues, taxes, and cesses due from the company to the Central government, a state government or a local authority get priority in case a company is wound up.

 

However, Section 327(7) of the Act excludes the application of Sections 326 and 327 to the liquidation process.

This provision was introduced in the Companies Act in 2016 to preclude any inconsistency with the IBC.

Section 53 of the IBC lays down the order of priority in getting the proceeds from the sale of liquidation assets. Under this, the costs of insolvency resolution process and liquidation have been given priority. They are followed by workmen’s dues and debts owed to a secured creditor on an equal footing.

Experts said the judgment was a welcome step because the language of Section 53 of the IBC, which is framed as a non-obstante clause, made it amply clear that it shall prevail over anything inconsistent contained in any law for the time being.

“This judgment comes in the backdrop of another Supreme Court verdict passed last month in the liquidation of Moser Baer. That had given clarity on the exclusion of the provident fund, pension fund, and gratuity fund dues from liquidation estate. These two judgments provide the much-needed clarity on treating employees’ and workmen’s,” said Anoop Rawat, partner, insolvency and bankruptcy, Shardul Amarchand Mangaldas & Co.

However, Wasim Beg, partner, Luthra and Luthra Law Offices, India, said “saying that workers’ dues will not get priority” might not be entirely correct.

“We need to bear in mind that any distribution of assets to be made in accordance with Section 53 is subject to Section 36(4), which anyhow protects all sums due to any worker or employee from the provident fund, the pension fund, and the gratuity fund. What may remain out of the scope are entitlements like bonus and leave encashment,” he said.

Anindya Mazumdar, partner, Singhania & Co, said: “In the case of insolvency proceedings under the IBC, if there is a conflict between the IBC and Companies Act, the former will prevail and the court has held so. As a consequence, distribution of assets will be in accordance with the IBC.”