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SECTION 327 OF THE COMPANIES ACT, 2013, NOT ARBITRARY OR VIOLATIVE OF ARTICLE 21, SC UPHELDS
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SECTION 327 OF THE COMPANIES ACT, 2013, NOT ARBITRARY
OR VIOLATIVE OF ARTICLE 21, SC UPHELDS
AUTHORED
BY - ADV. VRINDA GOEL
In
the case where the liquidation process is initiated under the
Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the
Code”), Section 327(7) of the Companies Act, 2013(hereinafter
referred to as “the Act”) provides
for the non-applicability of Section 326 and 327 of the Act in that case, as
held by the Hon’ble Supreme Court in Moser Baer Karamchari Union Through President
Mahesh Chand Sharma v Union of India and Ors[1].
Further, the Hon’ble Court held that the distribution of assets, in the event
of liquidation under IBC, shall be made in accordance with Section 53 of the
Code subject to the provisions of Section 36(4) of the Code.
The contention of the Petitioner was that by not defining “Workmen Dues”
in the Code itself and also by debarring the application of the Act by the
impugned Section, a void has been created, with respect to the definition of
workmen dues under the Code. Moreover, by excluding the applicability of
the Act, especially Sections 326 and 327, from the proceedings under the Code,
it has created an “unreasonable classification for the distribution of dues
of the Workmen” under the Code, being in stark violation of Article 14 of
the Constitution.
Objects and Purposes of Companies (Amendment) Act,
2013
It was
necessary to exclude the applicability of Sections 326 and 327 of the Act,
2013, as the two distinct provisions cannot be adopted in case of liquidation
of a company, which cannot be deemed to be arbitrary as claimed on behalf of
the petitioner in light of the implementation of the IBC.
Whether the
Extent of Workmen Dues as provided Under IBC is violative of Article 21 of the
Constitution of India?
The
court observed after perusing Section 36(4) of the IBC that it has been a
conscious choice made by the Parliament to keep out of the liquidation estate
assets any sums owed to any worker/employee from the provident fund, the
pension fund, and the gratuity fund, and that the workmen's dues for the
twenty-four months prior to the liquidation commencement date shall rank equally
between the workmen's dues to the said extent and the dues to the secured
creditor. Hence, it cannot be held arbitrary and violative of the Article 21 of
the Constitution of India. Further, since the Code is an entirely new
insolvency mechanism, its provisions cannot be compared to those of the prior
one, namely the Companies Act of 1956/2013.
‘Waterfall
Mechanism’
The ‘waterfall mechanism’ is referred
to the system of distribution of assets as provided under Section 53 of the
Code, providing the hierarchy of the creditors as to who will be given priority
during the liquidation process. The Hon’ble Court observed, in the present
case, that the Code acknowledges the economic effect on secured creditors or
financial institutions that handle public funds because their financial
stability is crucial to both the welfare of the general population and the
overall health of the national economy.
Moreover, the intricate economic issues call for balancing numerous
competing interests and a comprehensive rather than partial solution. Each
position may be valid, but the court cannot realistically substitute its own
wisdom or opinion for that of the legislature, particularly when legislation is
the result of a carefully considered and deliberate analysis of the difficult
fiscal and commercial issues facing the country. Further, it was stated by the
Hon’ble Court that when Section 53 of the Code is in effect, as a result,
subsection (1) of the Section 53 will take precedence over all other rights,
including those of the secured creditor. Section 53 of the Code is entire and
comprehensive in the sense that it ensures asset collection and subsequently
specifies how creditors are to be compensated.
Difference Between Winding Up of the
Company on Ground Of Insolvency And Inability To Pay Debts And Cases Where
Companies are Wound Up Under Section 271 of the Companies Act 2013
The two scenarios, winding up of the
company on the ground of insolvency and inability to pay debts and cases where
companies are wound up under Section 271 of the Act, are not the same.
The Hon’ble Court noted that to
determine whether there is discrimination or violation of Article 14 of the
Constitution of India, we must consider two laws that deal with two different
situations and which, in our opinion, cannot be compared. The Hon’ble Court
emphasized that all the parties, including employees, must make some sacrifices
in order to revitalize and rebuild businesses and everyone, even the secured
creditors and the Central, and the State Government, must make sacrifices
for an insolvent company's survival and rehabilitation and workmen also have an
interest in and benefit from the revival of the company, so unless it is
determined that the sacrifices envisioned for workmen, who unquestionably
constitute a separate class, are onerous and burdensome to the point of being
manifestly unjust and arbitrary, we will not disregard the law merely because
some or minimal sacrifice is to be made by workers.
The grounds and justifications for
winding up under Section 271 of the Act are very different from justifications
and arguments for the Code's resurrection and rehabilitation programme. The
Hon’ble Court further observed that “We would also reject the argument that
to find out whether there was a violation of Article 14 of the Constitution of
India or whether the right to life under Article 21 Constitution of India was
infringed, we must word by word examine the waterfall mechanism envisaged under
the Act, where the company is wound up in terms of grounds (a) to (e) of
Section 271 of the Act; and the rights of the workmen when the insolvent
company is sought to be revived, rehabilitated or wound up under the Code. The
grounds and situations in the context of the objective and purpose of the two
enactments are entirely different.”
In conclusion, the present case clarifies that ‘Workmen Dues’ as
under the Act during the liquidation process cannot be claimed if the
liquidation process is initiated under IBC. However, it raises a question on
the rights of the other creditors with respect to their claims/dues and whether
they can be determined in a similar manner in the event of liquidation process
and will be applicable as per the respective legislation that was put in force
by the initiation of the liquidation process, given that the grounds for initiating
the liquidation process under the Act, and the Code are distinct.
Article Information
SECTION 327 OF THE COMPANIES ACT, 2013, NOT ARBITRARY OR VIOLATIVE OF ARTICLE 21, SC UPHELDS
Authors: ADV. VRINDA GOEL
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/03/02
- Issue 7
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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