Holding

Section 327(7) of the Companies Act, 2013 and the waterfall mechanism under Section 53 of the IBC are constitutionally valid and do not violate Articles 14 or 21.

Summary

The petitioners, representing workmen of Moser Baer Karamchari, challenged the constitutional validity of Section 327(7) of the Companies Act, 2013 and the waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code (IBC), alleging violation of Articles 14 and 21 of the Constitution. The Court examined the legislative intent behind amending the Companies Act to exclude Sections 326 and 327 in IBC liquidations and the priority given to workmen’s dues for the preceding 24 months. It held that the IBC is a comprehensive code with a distinct purpose from the Companies Act, and that the provisions in question are a reasoned classification aimed at balancing the interests of workmen, secured creditors, and the government. The Court found no arbitrariness or constitutional infirmity in the provisions and upheld the statutory scheme. Consequently, the writ petitions were dismissed.

Issues considered

The constitutionality of Section 327(7) of the Companies Act, 2013 in light of Articles 14 and 21.
Whether the waterfall mechanism under Section 53 of the IBC, which ranks workmen’s dues pari‑passu with secured creditors, is arbitrary or violative of constitutional rights.
Whether Sections 326 and 327 of the Companies Act, 2013 should apply to liquidations under the IBC.
Validity of the exclusion of provident‑fund, pension‑fund and gratuity amounts from the liquidation estate under Section 36(4) of the IBC.
Whether the IBC’s priority scheme constitutes a reasonable classification under Article 14.

Legislation cited

Companies Act, 2013s. 271, s. 324, s. 326, s. 326(1), s. 326(2), s. 327, s. 327(7)
Insolvency and Bankruptcy Code, 2016s. 30, s. 31, s. 36(4), s. 5, s. 5(17), s. 52, s. 53

Subjects

Companies Act 2013Insolvency and Bankruptcy CodeSection 327(7)Section 53 IBCWorkmen’s duesLiquidationArticle 14Article 21Constitutional validityWaterfall mechanismSecured creditors

Judgment

[2023] 6 S.C.R. 85 85

MOSER BAER KARAMCHARI UNION THR. PRESIDENT A
MAHESH CHAND SHARMA
v.
UNION OF INDIA AND ORS.
(Writ Petition (C) No. 421 of 2019) B
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
C
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 D
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
E
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
F
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 G
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
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86 SUPREME COURT REPORTS [2023] 6 S.C.R.

A 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
B 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
C 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.
D [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
E 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
F 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
G 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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MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 87
CHAND SHARMA v. UNION OF INDIA

manner set out in Section 52. Therefore, workmen’s dues for the A
period of twenty-four months preceding the liquidation
commencement date shall have pari passu with the dues of secured
creditor. At this stage, it is required to be noted that as per Section
36(4) of IBC, all sums due to any workman or employee from the
provident fund, the pension fund and the gratuity fund shall not
B
be included in the liquidation estate assets and shall not be used
for the recovery in the liquidation. Therefore, a conscious decision
has been taken by the Parliament/Legislature in its wisdom to
keep out of all sums due to any workman/employee from the
provident fund, the pension fund and the gratuity fund from the
liquidation estate assets [as per Section 36(4)] and that the C
workmen’s dues for the period of twenty-four months preceding
the liquidation commencement date shall rank equally between
the workmen’s dues to the said extent and the dues to the secured
creditor. Therefore, the same cannot be said to be arbitrary and
violative of Article 21 of the Constitution of India. [Para 6.2][112-
D
B-F]
1.4 As per the settled position of law, IBC is a complete
Code and the object and purpose of IBC is altogether different
than that of the Act, 1956/2013. The IBC is a new insolvency
mechanism, therefore, the provisions under the IBC cannot be
compared with that of the earlier regime, namely, the Companies E
Act, 1956/2013. [Para 6.2][112-F]
1.5 The legislature has now removed clause (a) to Section
271 of the Companies Act, 2013, when a company is unable to
pay the debts, and clause (d) to Section 271 of the Companies
Act, 2013, when a company is directed to be wound up under the F
Chapter XIX of the Companies Act, 2013. In fact, Chapter XIX of
the Companies Act 2013 was deleted/omitted in terms of Act No.
31 of 2016 and the Eleventh Schedule in the Code, with effect
from 15th November 2016. The Code, as enacted, is a separate
and consolidated enactment specifically relating to and dealing G
with companies which are insolvent and unable to pay dues, and
envisages a procedure with a mandate to first explore possibility
of rehabilitation and revival of the company, and the dissolution/
winding up as the last call. This is significant and completely
replaces the then existing framework for insolvency and
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88 SUPREME COURT REPORTS [2023] 6 S.C.R.

A bankruptcy resolution that was inadequate, ineffective and guilty
of causing undue delays. The enactment of the Code and the
amendments thereafter are a consequence of detailed
consultation and deliberations by several committees,
commissions and experts , in a matter which deals with the
economy of the country as a whole. [Para 7.2, 7.3][115-A-E]
B
1.6 The waterfall mechanism now prescribed in the Code
with reference to the workmen’s dues is a well-considered and
thought-out decision. The waterfall mechanism and the hierarchy
prescribed to the workmen’s dues should be seen in the overall
objective of the Code, which is to explore whether the corporate
C debtor can be revived so that jobs are not lost, the use of economic
assets is maximised, and there is an effective legal framework
which enhances the viability of credit in the hands of banks and
financial institutions. The Code recognises the financial impact
on secured creditors or financial institutions dealing with public
D money, as their economic health is equally important for the
general public as well as the national economy. Unless there is
economic growth and fresh investments in the industry,
employment opportunities will not be available, which would in
turn lead to economic woes, insolvencies and bankruptcies. These
are all complex economic matters wherein various conflicting
E interests 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 can hardly substitute its own wisdom or view for that of
the legislature, especially when the enactment is the outcome of
a thought-out and ruminated review on complex fiscal and
F commercial challenges facing the economy. [Para 8][116-B-F]
1.7 The Companies Act, 2013 does not deal with insolvency
and bankruptcy when the companies are unable to pay their debts
or the aspects relating to the revival and rehabilitation of the
companies and their winding up if revival and rehabilitation is
G not possible. In principle, it cannot be doubted that the cases of
revival or winding up of the company on the ground of insolvency
and inability to pay debts are different from cases where companies
are wound up under Section 271 of the Companies Act 2013. The

H
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 89
CHAND SHARMA v. UNION OF INDIA

two situations are not identical. Under Section 271 of the A
Companies Act, 2013, even a running and financially sound
company can also be wound up for the reasons in clauses (a) to
(e). The reasons and grounds for winding up under Section 271
of the Companies Act, 2013 are vastly different from the reasons
and grounds for the revival and rehabilitation scheme as envisaged
B
under the Code. The two enactments deal with two distinct
situations and they cannot be equated when it is examined
whether there is discrimination or violation of Article 14 of the
Constitution of India. The workmen also have a stake and benefit
from the revival of the company, and therefore unless it is found
that the sacrifices envisaged for the workmen, which certainly C
form a separate class, are onerous and burdensome so as to be
manifestly unjust and arbitrary, the legislation will not be set aside,
solely on the ground that some or marginal sacrifice is to be made
by the workers. The submission is rejected that to find out
whether there was a violation of Article 14 of the Constitution of
D
India or whether the right to life under Article 21 Constitution of
India was infringed, this Court must word by word examine the
waterfall mechanism envisaged under the Companies Act, 2013,
where the company is wound up in terms of grounds (a) to (e) of
Section 271 of the Companies Act, 2013; and the rights of the
workmen when the insolvent company is sought to be revived, E
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. [Para 9][123-A-G]
1.8 Section 53 of the Code which begins with a non-obstante
clause and states that notwithstanding anything to the contrary F
contained in any law enacted by the Parliament or any State
Legislature for the time being in force, the proceeds from the
sale of liquidation assets shall be distributed in the order of
priority, which is stipulated, and within such period and such
manner as may be specified. The consequence of sub-section (1)
to Section 53 of the Code is that it will override the rights of G
parties, including the secured creditor, when the said provision
applies. Section 53 of the Code is the complete and
comprehensive code which ensures collection of assets and then
provides the manner in which the creditors are to be paid. Even
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90 SUPREME COURT REPORTS [2023] 6 S.C.R.

A the rights of the secured creditor falling under Section 53 of the
Code to enforce, realise, settle, compromise or deal with the
secured assets as applicable to the security interest are diluted
and compromised. [Para 15][131-C-E]
1.9 Clause (a) to sub-section (1) to Section 53 deals with
B insolvency resolution process costs and the liquidation costs
which are to be paid in full. No grievance or issue can be raised
in respect of the said clause. Clause (b) to sub-section (1) to
Section 53 states that the debts due in the form of workmen’s
dues for a period of twenty four months preceding the liquidation
commencement date and the debts owed to the secured creditor
C in the event such secured creditor has relinquished security in
the manner set out in Section 52 of the Code shall rank equally
between and amongst the workmen and the secured creditors.
The Explanation to Section 53 of the Code states that ‘workmen’s
dues’ shall have the same meaning as assigned to it in Section
D 326 of the Companies Act, 2013. In other words, Explanation to
Section 326 of the Companies Act, 2013 has been incorporated
and applies to the waterfall mechanism as prescribed in clause
(b) to sub-section (1) to Section 53 of the Code. What is significant
here is that under clause (b) to sub-section (1) to Section 53 of
the Code, the workmen’s dues are for the period of twenty four
E months preceding the liquidation commencement date. [Para
15.1][131-E-H; 132-A]
1.10 The 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,
F 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
G interests of the secured creditors, operational creditors and even
the Central and State Governments. Depending upon the facts,
in some cases, the waterfall mechanism in the Code may be more
beneficial than the hierarchy provided under Section 326 of the
Companies Act, 2013 and vice-versa. [Para 16][132-G-H; 133-
A]
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MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 91
CHAND SHARMA v. UNION OF INDIA

1.11. In the waterfall mechanism, after the costs of the A
insolvency resolution process and liquidation, secured creditors
share the highest priority along with a defined period of dues of
the workmen. The 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
B
prescribed by Section 53 of the Code. In either case of
relinquishment or non-relinquishment of the security by the
secured creditor, the interests of workmen are protected under
the Code. In fact, the secured creditors are taking significant
hair-cut and workmen are being compensated on an equitable
basis in a just and proper manner as per Section 53 of the Code. C
In economic matters, a wider latitude is given to the lawmaker
and the Court allows for experimentation in such legislations based
on practical experiences and other problems seen by the law-
makers. In a challenge to such legislation, the Court does not
adopt a doctrinaire approach. Some sacrifices have to be always
D
made for the greater good, and unless such sacrifices are prima
facie apparent and ex facie harsh and unequitable as to classify as
manifestly 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, 2013
provides that Sections 326 and 327 of the Act, 2013 shall not be E
applicable in the event of liquidation under the IBC, which has
been necessitated in view of the enactment of IBC and it applies
with respect to the liquidation of a company under the IBC,
Section 327(7) of the Act, 2013 cannot be said to be arbitrary
and/or violative of Article 21 of the Constitution of India. In case F
of the liquidation of a company under the IBC, the distribution of
the assets shall have to be made as per Section 53 of the IBC
subject to Section 36(4) of the IBC, in case of liquidation of
company under IBC. [Para 18][133-H; 134-A-B]
Manish Kumar v. Union of India and Anr. (2021) 5 SCC G
1; Swiss Ribbons Private Limited and Anr. v. Union of
India 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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92 SUPREME COURT REPORTS [2023] 6 S.C.R.

A 511; Committee of Creditors of Essar Steel India Limited
v. Satish Kumar Gupta and Ors. (2020) 8 SCC 531 :
[2019] 16 SCR 275; Ghanashyam Mishra and Sons
Private Limited v. Edelweiss Asset Reconstruction
Company Limited (2021) 9 SCC 657; Allahabad Bank
v. Canara Bank and Anr. (2000) 4 SCC 406 : [2000] 2
B
SCR 1102; Andhra Bank v. Official Liquidator and Anr.
(2005) 5 SCC 75 : [2005] 2 SCR 776; Innoventive
Industries Limited v. ICICI Bank and Anr. (2018) 1 SCC
407 : [2017] 8 SCR 33; Arcelormittal India Private
Limited v. Satish Kumar Gupta and Ors. (2019) 2 SCC
C 1 : [2018] 12 SCR 362; Arun Kumar Jagatramka v.
Jindal Steel and Power Limited and Anr. (2021) 7 SCC
474; Sesh Nath Singh and Anr. v. Baidyabati
Sheoraphuli 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 Cavasjee
D
Cooper v. Union of India (1970) 1 SCC 248 : [1970] 3
SCR 530; Delhi Science Forum and Ors. v. Union of
India and Anr. (1996) 2 SCC 405 : [1996] 2 SCR 767;
BALCO Employees’ Union (Regd.) v. Union of India and
Ors. (2002) 2 SCC 333 : [2001] 5 Suppl. SCR 511;
E Employees Provident Fund Commissioner v. Official
Liquidator of Esskay Pharmaceuticals Limited (2011)
10 SCC 727 : [2011] 15 SCR 336; Bhupinder Singh v.
Unitech Limited (2022) 8 SCC 749; Swiss Ribbons
Private Limited and Another. v. Union of India and
Others (2019) 4 SCC 17 : [2019] 3 SCR 535 – referred
F
to.
Case Law Reference
(2021) 5 SCC 1 referred to Para 3.15
[2019] 3 SCR 535 referred to Para 3.15
G
(2021) 8 SCC 511 referred to Para 3.15
[2019] 16 SCR 275 referred to Para 3.17
(2021) 9 SCC 657 referred to Para 3.18
[2000] 2 SCR 1102 referred to Para 3.19
H
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 93
CHAND SHARMA v. UNION OF INDIA

[2005] 2 SCR 776 referred to Para 3.19 A
[2017] 8 SCR 33 referred to Para 4.9
[2018] 12 SCR 362 referred to Para 4.9
(2021) 7 SCC 474 referred to Para 4.9
(2021) 7 SCC 313 referred to Para 4.9 B
[1982] 1 SCR 947 referred to Para 4.20
[1970] 3 SCR 530 referred to Para 4.21
[1996] 2 SCR 767 referred to Para 4.21
C
[2001] 5 Suppl. SCR 511 referred to Para 4.21
[2019] 3 SCR 535 referred to Para 8
[2011] 15 SCR 336 referred to Para 11
(2022) 8 SCC 749 referred to Para 11
D
CIVIL ORIGINAL JURISDICTION: Writ Petition (C) No. 421
of 2019.
Under Article 32 of The Constitution of India.
With
E
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. (Amici
Curiae)
Gopal Sankaranarayanan, Sr. Adv., Ujjal Banerjee, Swapnil Gupta, F
Dinkar Singh, Gagan Garg, Rohit Singh, Ms. Aditi Gupta, Deepak Goel,
Advs. for the Petitioner.
Balbir Singh, ASG, Naman Tandon, Ms. Surbhi Singh, Samarvir
Singh, Ms. Sagarika Kaul, Ms. Monica Benjamin, K. Gurumurthy,
Ms. Aakanksha Kaul, Navanjay Mahapatra, Kanu Agrawal, T.S. Sabarish, G
Arvind Kumar Sharma, Sanchar Anand, Arvind Kumar, Prahlad Narayan
Singh, Mrs. Lara Siddiqui, Devendra Singh, Ankur Mittal, Ms. Meera
Murali, Ms. Aishwarya Pandey, Ms. Pallavi Pratap, Ms. Prachi Pratap,
Prashant Pratap, Ms. Neema, Advs. for the Respondents.

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94 SUPREME COURT REPORTS [2023] 6 S.C.R.

A The 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 Constitution
B of India, filed by the writ petitioner – Moser Baer Karamchari Union
have prayed for an appropriate writ, direction or order striking down
Section 327(7) of the Companies Act, 2013 (hereinafter referred to as
“Act, 2013”) as arbitrary and violative of Article 21 of the Constitution
of India.
C It is also prayed to issue an appropriate writ, direction or order in
the nature of Mandamus so as to leave the statutory claims of the
“workmen’s dues” out of the purview of waterfall mechanism under
Section 53 of the Insolvency and Bankruptcy Code, 2016 (hereinafter
referred to either as “IBC” or “Code”).
D It is further prayed to issue an appropriate writ in the nature of
Mandamus by giving a purposive interpretation to Section 53 of the IBC
and pass necessary directions which will enable the petitioners to get
their dues of 24 months released without any further delay.
Writ Petition (C) Nos. 777 and 712 of 2020
E 1.1 By way of these writ petitions under Article 32 of the
Constitution of India, the respective writ petitioners have prayed that
Clause 19(a) of the Eleventh Schedule of the IBC pursuant Section 255
of the IBC, be declared as unreasonable and violative of Article 14 of
the Constitution of India as Clause 19(a) of the Eleventh Schedule of the
F IBC inserts sub-section (7) in Section 327 of the Companies Act, 2013,
which puts statutory bar on the application of Sections 326 and 327 of
the Companies Act, 2013, to the liquidation proceedings under the IBC.
It is further prayed that sub-section (7) of Section 327 of the
Companies Act, 2013, be declared as unreasonable and violative of Article
G 14 of the Constitution of India as sub-section (7) of Section 327 of the
Companies Act, 2013, which was inserted in Section 327 of the
Companies Act, 2013 pursuant to Section 255 and the Eleventh Schedule
of the Insolvency and Bankruptcy Code, 2016, Act 31 of 2016, creates
unreasonable classification for the distribution of legitimate dues of
workmen in the event of liquidation of the Company under the IBC and
H liquidation of Company under the provisions of the Companies Act, 2013.
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 95
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

It is also prayed that distribution of the workmen’s due as A
envisaged under Section 53(1)(b)(i) of the IBC, be declared as
unreasonable and violative of Article 14 of the Constitution of India, as
Section 53(1)(b)(i) of the IBC limits the workmen’s dues payable to
workmen to twenty-four months only preceding the date of order of
Liquidation and then rank the said workmen’s dues equally with the
B
secured creditors in the events such secured creditors has relinquished
security in the manner set out in Section 52 of the IBC.
It is further prayed that settlement of Workmen Dues should be
done in accordance with the reasonable principles laid down under Section
326 even in the event of liquidation under the IBC.
C
2. Shri K.V. Viswanathan, learned Senior Advocate has appeared
as Amicus Curiae. Shri Gopal Sankaranarayanan, learned Senior
Advocate, 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 of D
all taken us to the legislative history of the Companies Act and the
Preferential Payments and also the framing of the Insolvency and
Bankruptcy Code.
3.1 It is submitted that the Companies Act, 1956, as it existed
prior to the Companies (Amendment) Act, 1985, did not provide for any E
“overriding preferential payments” to any party. It is submitted that in
1985, the Companies (Amendment) Bill, 1985 sought to introduce the
proviso to sub-section (1) of Section 529, definition of “workmen”,
“workmen’s dues” and “workmen’s portion” through insertion of Section
529(3) and the “overriding preferential payments” through Section 529-
A. F
3.2 It is submitted that the Statement of Objects and Reasons for
bringing these changes into effect was to ensure that the resources of
the company are distributed even to workers whose labour and effort
form a part of the capital of the Company. Resultantly, through Companies
(Amendment) Act, 1985, the idea of “workmen’s portion” and the G
“overriding preferential payments” were introduced and crystallised in
the Companies Act, 1956.
3.3 It is submitted that a cumulative reading of Section 529 and
Section 529-A of the Companies Act, 1956 indicates that firstly, the
security of every secured creditor is deemed to be subject to a pari H
96 SUPREME COURT REPORTS [2023] 6 S.C.R.

A passu charge in favour of the appellant - workmen, to the extent of the
workmen’s portion. Secondly, when the secured creditor opts to realise
his security, so much of the debt due to such secured creditor as could
not be realised by him by virtue of the proviso or the amount of workmen’s
portion in his security, whichever is less, will rank pari passu with the
workmen’s dues. Thirdly, the workmen’s dues and debts of secured
B
creditor as described in Section 529(1) Proviso (c) get overriding
preferential payment and rank pari passu. These debts are payable in
full, unless the assets are insufficient to meet them, in which case they
shall abate in equal proportions.
3.4 It is submitted that Section 530, when it provides for
C “Preferential Payments”, restricts Government dues to a period of 12
months and wages or salary of an employee to a period not exceeding 4
months within 12 months next before the relevant date, subject to limit in
sub-section (2) of Section 530(1)(b).
3.5 It is submitted that prior to enactment of the Companies Act,
D 2013, there were several Committees that were set-up in order to consider
the proposals for reformation of the Companies Act, 1956. It is submitted
that two of these Committees and their proposals are indicative of the
issues that were sought to be addressed through a new, refurbished
legislation. In the year 2000, the Report of the High-Level Committee
E on Law relating to Insolvency and Winding Up of Companies was
submitted under the chairmanship of Justice V. Balakrishna Eradi
(popularly known as “Eradi Committee”). On consideration of various
suggestions received by it, the Eradi Committee inter alia recommended
that appropriate legislative action must be taken to ensure that the claims
of all “employees of a company” and its secured creditors are ranked
F pari passu. Thereafter, in 2005, the Report of Expert Committee on
Company Law, 2005 was submitted under the chairmanship of Dr.
Jamshed J. Irani. The Irani Committee, on consideration of proposals
before it, recommended that the status of secured creditors should be
pari passu with “employees” in respect of their claims after payment
G of claims related to costs and expenses of administration of liquidation.
3.6 It is submitted that the focus of these two Committees was
on bringing the claims of “employees of a company” pari passu with
the secured creditors, when the existing provision as on that day only
specified that “workmen’s dues” would rank pari passu with secured
H creditors. It is submitted that these two Reports were followed by the
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 97
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

introduction of the Companies Bill, 2009 which retained the same structure A
as that of Section 529, 529-A and 530 of the Companies Act, 1956. It is
submitted that it was clear that the recommendations qua ranking of
dues of “employees of a company” were not accepted as the existing
structure had been retained. It is submitted that however, this Companies
Bill, 2009 lapsed and, therefore, the same was not given effect to.
B
3.7 It is submitted that thereafter, again, the Companies Bill, 2011
was introduced, which was then referred to a Standing Committee. The
Report of the Standing Committee of 15th Lok Sabha on Companies
Bill, 2011 notes the legislative changes made to the Companies Act,
1956 and the Companies Bill, 2009. It is submitted that this indicates that
Section 326, which was being introduced in lieu of Section 529-A of C
Companies Act, 1956, will now include a proviso to Section 326(1) and
amendment to Section 326(2) to ensure that wages/salaries payable to
workmen 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 of
workmen in case of winding up. It is submitted that resultantly, the D
Companies Act, 2013, as enacted, while mostly retaining the structure
of Section 529 and 529-A of the Companies Act, 1956, introduced the
proviso to Section 326(1) and also modified Section 326(2).
3.8 It is submitted that the consequence of this change was that
while workmen’s dues and dues owed to secured creditors as per Section E
325(1) Proviso (c) ranked pari passu, the wages and salaries due to
workmen for a period of 2 years preceding winding up order, shall be
paid in priority to all other debts, within a period of 30 days of sale of
assets and shall be subject to such charge over the security of secured
creditors as may be prescribed. Importantly, the Government Dues and
wages or salary owned to employees remained restricted to periods as F
they were in the Companies Act, 1956. It is submitted that another
important aspect to be noted is that the definition of “workmen’s dues”
includes the Pension Fund, Gratuity Fund and the Provident Fund amounts
and there was no exclusion of the said amounts in the case of liquidation.
It is submitted that therefore, the position of law regarding “overriding G
preferential payments” and “preferential payments”, as per the
Companies Act, 1956 and the Companies Act, 2013, is that workmen
have a charge over the property of the security of every secured creditor
to the extent of workmen’s portion, the workmen’s dues rank pari passu
with the debts owed to secured creditors and specifically wages or salary
H
98 SUPREME COURT REPORTS [2023] 6 S.C.R.

A due to workmen for a period of 2 years preceding the winding up order
shall be paid in priority to all other debts.
3.9 That thereafter, Shri K.V. Viswanathan, learned Senior
Advocate and Amicus Curiae has taken us to the framing of the IBC. It
is submitted that the Bankruptcy Law Reforms Committee submitted its
B Report on 04.11.2015. The said Report discussed the changes that are
to be made to the existing regime of insolvency and bankruptcy
proceedings and inter alia provided for reasons as to why changes
were being made to the existing position of law. It is submitted that
important parts of the Bankruptcy Law Reforms Committee (BLRC)
Report may be summarized as follows:
C
i. The Committee noted that operational creditors will include
workmen and employees whose past payments are due.
ii. Further, the Committee notes that the Central and State
Government dues will be kept at a priority below the
D unsecured financial creditors in addition to all kinds of
secured creditors.
iii. The Committee also categorically notes that liquidation under
the new regime will have an irreversible, time-bound process
with defined payout prioritisation. In the waterfall, secured
E creditors shall share highest priority along with a defined
period of workmen dues.
iv. Thereafter, the Committee, in order to bring the law in India
in line with global practice, established the priority of payout
in liquidation and drafting instructions were accordingly
F given. As proposed, the costs of IRP and Liquidation would
rank first. After that, secured creditors and workmen dues
capped up to 3 months from the start of IRP will be given
pari passu priority. This was to be followed by dues to
employees capped up-to 3 months. As the next tier,
workmen dues for 9 month period beginning 12 months
G before liquidation commencement date and ending 3 months
before liquidation commencement date were to rank along
with dues to unsecured financial creditors.
v. The Committee also notes that there was some debate on
whether priority given to workmen in Companies Act, 2013
H should be retained in the new Code.
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 99
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

3.10 It is submitted that thus, the BLRC Report recommended a A
waterfall mechanism that was different from the Companies Act, 1956
and the Companies Act, 2013, with due cognizance of the position of
law as it existed then. It is submitted that having reviewed the position of
law and in view of the objects sought to be achieved through the IBC,
the BLRC Report recommended that workmen’s dues will be capped at
B
3 months and will have pari passu priority with secured creditors and
thereafter, 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 for
formation of the liquidation estate. Section 36(4)(a)(iii), as introduced in
the Bill, stated that the contributions in respect of employee pensions C
alone would be excluded from the liquidation estate assets and would
not be used for recovery in liquidation. Section 53, as introduced in the
Bill, provided for the waterfall mechanism for payout in case of liquidation.
Section 53(1)(b)(i) and (ii) ranked debts owed to secured creditors in
the event of them relinquishing security and workmen’s dues for a period D
of 12 months preceding liquidation commencement date, pari passu. It
is submitted that in terms of the waterfall mechanism, this was therefore
a step further than the path suggested by the BLRC Report since the
workmen’s dues were to rank pari passu for a defined period of 12
months. It is submitted that however, thereafter, the IBC, when introduced
as a Bill, was then referred to a Joint Committee. The Joint Committee E
on Insolvency and Bankruptcy Code, 2015 of the 16 th Lok Sabha
submitted its report in April, 2016. It is submitted that the Joint Committee
Report made two important recommendations in regard to the provisions
contained in the Bill. Firstly, after noting representations from the
workmen and employees, it was recommended that the Provident Fund, F
Pension Fund and Gratuity Fund are to be excluded from the liquidation
estate assets under Section 36, since they provide the social safety net
to the workmen and employees. Secondly, after consideration of the
representations that workmen dues are to be paid as per the scheme
contained in the Companies Act, 2013, the Joint Committee
recommended that since the dues owed to Governments are being paid G
in respect of two years preceding liquidation commencement date, the
workmen’s dues must also be paid for a period of two years, instead of
the existing period of 12 months, preceding liquidation commencement
date. It is submitted that this was recommended keeping in mind that the
workers are the “nerve centre of any company” and that their interests H
100 SUPREME COURT REPORTS [2023] 6 S.C.R.

A were to be protected. It is submitted that keeping in view the Joint
Committee Recommendations, the IBC was brought into force. It is
submitted that Section 36(4)(a)(iii) of the IBC now excludes all sums
due to any workman or employee from the Provident Fund, Pension
Fund and Gratuity Fund from being included in the liquidation estate
assets. It is further submitted that Section 53(1)(b)(i) and (ii) of the IBC
B
now ranks workmen’s dues for a period of 2 years preceding the
liquidation commencement date and the debts owed to secured creditors
in event of them relinquishing their security pari passu. It is submitted
that dues owed to the employees are placed in Section 53(1)(c), confined
to a period of 12 months, and the dues to Central Government and State
C Government are placed in Section 53(1)(e)(i), confined to a period of 2
years and below that of the unsecured creditors. It is submitted that the
result, therefore, is that the position and waterfall mechanism as provided
for in the Companies Act, 1956 and the Companies Act, 2013 has now
been altered after application of mind and resultantly, the workmen’s
dues have been capped at 24 months preceding the liquidation
D
commencement date. The changes introduced from the erstwhile regime
have been so done on the basis of an organic evolution of law and
consultative process, after due consideration of the requirements of a
new Code governing liquidation.
3.12 It is submitted that Section 53 Explanation (ii) of IBC states
E that the term “workmen’s dues” shall have the same meaning as assigned
to it in Section 326 of the Companies Act, 2013. It is submitted that
thereafter, the Eleventh Schedule to the IBC proposes Amendments to
be made to Companies Act, 2013. It is submitted that importantly, Clause
18 of the Schedule omits erstwhile Section 325 of the Companies Act,
F 2013. It is submitted that Clause 19 of the Schedule amends Section 326
of Companies Act, 2013. Thereafter, Clause 20 of the Schedule inserts
Section 327(7) to the Companies Act, 2013 which states that Section
326 and Section 327 shall not be applicable in the event of liquidation
under the IBC. A conjoint reading of Section 53 Explanation (ii) of IBC
and Section 327(7) of Companies Act, 2013 would indicate that only the
G meaning of “workmen’s dues” is incorporated by reference into the IBC.
However, the waterfall mechanism, as has been fully altered by the IBC
will apply to these “workmen’s dues” and not the waterfall mechanism
contained in Section 326 of Companies Act, 2013. It is submitted that
the reason for introduction of Section 327(7) of Companies Act, 2013 is
H only to exclude the application of waterfall mechanism and the modalities
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 101
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

contained in the Companies Act, 2013 which has now been changed A
through the IBC. It is submitted that therefore, the argument that the
waterfall mechanism from the Companies Act, 2013 must apply even
under the IBC, would be wholly untenable and unworkable.
3.13 It is submitted that subsequently, the Insolvency Law
Committee submitted its report in 2018 under the chairmanship of Mr. B
Injeti Srinivas. The Report contained summary responses of the
Committee to the comments and issues raised with respect to the IBC.
It is submitted that importantly, all questions that raised the issue of
workmen’s dues either being unfairly ranked with secured creditors or
that workmen’s dues were not protected under the IBC, the Committee
noted that the interests of workmen were protected in line with the Objects C
sought to be achieved by the IBC.
3.14 It is further submitted that therefore, the legislature through
the IBC has attempted to overhaul the existing system of law and provide
for a different modality through which liquidation would function. It is
submitted that under the Companies Act, 2013, the waterfall mechanism D
and preferential payments were being made, keeping in mind the scheme
of winding up of a Company. It is submitted that admittedly, workmen’s
dues were given pari passu priority with secured creditors of a defined
kind and the wages and salaries owed for two years preceding the Order
of winding up was to get absolute priority. It is further submitted that on E
the contrary, the scheme of the IBC is different from that of the Companies
Act, 2013. It is submitted that the focus, in the IBC, is to revive the
Company and it is only as a matter of last resort that liquidation
envisaged. In liquidation, from the time of the BLRC Report, the focus
has been on defined payout prioritisation and organically, the workmen’s
dues have increased from 3 months to 12 months and now to 24 months F
to 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 a
consultative process, the position of workmen’s dues has been reviewed
at multiple occasions and the legislature, in its wisdom, has opted to cap
it to a period of 24 months prior to liquidation commencement date. It is G
further submitted that the Pension Fund, Gratuity Fund and Provident
Fund are left out of the liquidation estate, in a bid to protect the social
safety net of the workmen. Therefore, the changes made through the
IBC, to the existing scheme under the Companies Act, 2013 would not
be unconstitutional.
H
102 SUPREME COURT REPORTS [2023] 6 S.C.R.

A 3.15 Shri K.V. Viswanathan, learned Senior Advocate and Amicus
Curiae has further submitted that this Hon’ble Court in a catena of
judgments has considered the principle of “judicial hands-off” when it
comes to economic legislations. It is submitted that in economic matters,
a wider latitude is given to the law-maker and the Court allows for
experimentation in such legislations based on practical experiences and
B
other problems seen by the law-makers. It is submitted that in a challenge
to such a legislation, the Court does not adopt a doctrinaire approach.
Reliance is placed on the decisions of Manish Kumar Vs. Union of
India and Anr., (2021) 5 SCC 1 (Paras 169, 249-251); Swiss Ribbons
Private Limited and Anr. Vs. Union of India and Ors., (2019) 4
C SCC 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 is
further submitted that as observed in a catena of decisions, a vested
right under a statute can be taken away by another statute, in view of
public 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 the
case of Swiss Ribbons Private Limited and Anr. (supra), this Court
was concerned with a challenge to Constitutional Validity of several
provisions of the IBC including the waterfall mechanism under Section
E 53 of the IBC, even though it was at the instance of the Operational
Creditors. It is submitted that after noting the objects and reasons for
enactment of the IBC, this Hon’ble Court held that there existed an
intelligible differentia for classification of financial creditors and
operational creditors under the IBC. It is further submitted that Section
F 53 of the IBC was also upheld from the perspective of this reasonable
classification by placing reliance on the object sought to be achieved by
the IBC
3.17 It is further submitted that in the case of Committee of
Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta
G and Ors., (2020) 8 SCC 531, this Court was concerned with whether
a resolution plan was to treat operational creditors on par with financial
creditors and further with amendments made to the IBC that provided
operational creditors with a minimum of liquidation value under the CIRP
Process. It is submitted that this Court in the said decision held that the
principle of “equality for all” cannot be stretched to treat financial and
H
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 103
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

operational creditors on par as this would defeat the entire objective of A
the IBC. This Court also held that amendments made to the IBC that
guaranteed a minimum of liquidation value to operational creditors was
not ultra vires Article 14.
3.18 He has also further submitted that in the case of
Ghanashyam Mishra and Sons Private Limited Vs. Edelweiss B
Asset Reconstruction Company Limited, (2021) 9 SCC 657, this
Court was concerned with whether the approved resolution plan was
binding on the Government, whether before or after the Amendment
made to Section 31 of IBC by Amendment Act, 2019. It is submitted
that this Court categorically held that the amendment was clarificatory
in nature and that the approved resolution plan would be binding on the C
Government. While holding so, this Court noted the legislative intent in
making the plan binding on all stake holders, to create a clean slate and
to ensure that no surprise claims come up after the resolution process
has begun.
3.19 On interpretation of “workmen’s portion” under Section 529 D
and 529-A of the Companies Act, reliance is placed on the decision of
this Court in the case of Allahabad Bank Vs. Canara Bank and Anr.,
(2000) 4 SCC 406 as well as Andhra Bank Vs. Official Liquidator
and Anr., (2005) 5 SCC 75.
3.20 Making above submissions, it is prayed to allow the present E
writ petitions and grant the reliefs as prayed.
4. We have heard Shri Balbir Singh, learned ASG appearing on
behalf of the respondent – Union of India.
4.1 Shri Balbir Singh, learned ASG has taken us to the relevant F
provisions under the Companies Act, 1956, more particularly, Sections
59A, 529A, 530 and the relevant provisions of the Companies Act, 2013.
4.2 It is submitted that initially the insolvency process in case of
winding up of insolvent companies were provided under Section 325 of
Act, 2013. However, Section 325 of the Act, 2013 has been omitted
G
w.e.f. 15.11.2016 on advent of the IBC. It is submitted that therefore, as
on today, the winding up proceeding in case of insolvency are not governed
by Companies Act, 2013 and the provisions of the IBC is the only
applicable law to deal with such a situation as it is a complete Code in
itself. It is submitted that furthermore, an amendment w.e.f. 15.11.2016
was brought in under Section 327(7) of the Act, 2013 wherein it has H
104 SUPREME COURT REPORTS [2023] 6 S.C.R.

A been clarified that the provisions of Section 326 and Section 327 of the
Act, 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 under
Companies Act, 2013, Sections 326 and 327 of the Companies Act, 2013
are relevant. He has submitted that following are the relevant features
B in case of winding up proceedings under Sections 326 and 327 of the
Act, 2013:-
• workmen’s portion in the security shall be paid in priority to all
other debts;
• however, workmen’s dues (given in (b)(i) and (ii) payable for
C the 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 other claim/debts (including debts due to secured
creditors).
D • workmen’s dues include Provident Fund, Pension Fund and
Gratuity Fund or any other Fund for the welfare of the workmen
maintained by the Company.
4.4 It is submitted that the waterfall mechanism is given in Section
327, which is similar to Section 530 of the Companies Act, 1956. It is
E submitted that thereafter the IBC has been introduced in the year 2016
wherein 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 are
given the top priority in the waterfall mechanism.
F 4.5 It is submitted that the liquidation process is covered under
Chapter III of the IBC, which comprises from Sections 33 to 54. Section
36 of the IBC provides for liquidation estate and Section 36(4) of the
IBC specifies certain payouts not to be included in the liquidation estate
assets. Therefore, as per the said provision, all these debts due are not
to be included in the liquidation estate assets. It is submitted that as per
G
the said provision, all payments due to any workmen or employee from
Provident Fund, Pension Fund and The Gratuity Fund shall not be included
in the list of assets under liquidation estate.
4.6 It is submitted that with respect to Section 53 of the IBC, sale
of liquidation assets shall be distributed in certain order of priority. It is
H
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 105
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

submitted that as per Section 53, the payment of insolvency resolution A
process costs and liquidation costs is paramount and the same shall be
paid in full. The liquidation cost includes the salary and wages paid to
workmen during the period of liquidation process to maintain the Company
as going concern. Thereafter, the payment of workmen dues for a period
of 24 months are to be paid alongwith secured creditors dues in the
B
event of relinquishment of security. The workmen dues and debts of
secured creditors in the case of relinquishment of security are ranked
equally between them. However, in the case of enforcement of security
any 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 ground C
of Article 14 of the Constitution of India by comparing Section 53 of the
IBC with the provisions of erstwhile Companies Act, 1956 and existing
Companies Act, 2013 to state that workmen are at a disadvantageous
position on the basis: (i) workmen’s portion in the security held by secured
creditor has been done away with; (ii) preference/superiority given to D
24 months over any other debt has been done away with; (iii) workmen
and secured creditors have been placed in same pool.
4.8 To the aforesaid, it is submitted by Shri Balbir Singh, learned
ASG that as such the IBC is a new insolvency mechanism in line with
the international practices and with overarching objective of unlocking E
sick and insolvent companies primarily to revive such companies in event
of failure, for transparent and equitable liquidation of assets. It is submitted
that the IBC was introduced as a water-shed moment for insolvency
law in India that consolidated process under several disparate statutes
such as Act, 2013, SICA, SARFAESI, Recovery of Debts Act etc., into
a single Code. It is submitted that the objective of the IBC was to F
introduce comprehensive and time bound insolvency framework and to
maximize the value of assets of all persons and balance the interest of
all stakeholders.
4.9 It is submitted that the UNICITRAL Legislative Guide on
Insolvency Law was instructive for the Indian experience on drafting G
the IBC which provided critical guidance on what an insolvency law
represents. It is submitted that a reading together of the UNICITRAL
Legislative Guide on Insolvency Law and Bankruptcy Law Report
clarifies in no uncertain terms, that the procedure designed for the
insolvency process under the IBC is critical for allocating economic H
106 SUPREME COURT REPORTS [2023] 6 S.C.R.

A coordination between the parties who partake in or are bound by the
process. It is submitted that this Hon’ble Court has looked at overarching
object and economic balance achieved by IBC and as such has
appreciated the working and operation of IBC in unlocking value for all
its stakeholders including financial institutions in the case of Innoventive
Industries Limited Vs. ICICI Bank and Anr., (2018) 1 SCC 407,
B
followed in Arcelormittal India Private Limited Vs. Satish Kumar
Gupta and Ors., (2019) 2 SCC 1; Arun Kumar Jagatramka Vs.
Jindal Steel and Power Limited and Anr., (2021) 7 SCC 474 and
Sesh Nath Singh and Anr. Vs. Baidyabati Sheoraphuli Co-operative
Bank Limited and Anr., (2021) 7 SCC 313.
C 4.10 It is submitted that as per the objectives of the IBC, it is
clear that corporate death of a Corporate Debtor is inevitable. However,
every effort should be made to resuscitate the Corporate debtor in the
larger public interest, which includes not only the workmen of the
corporate debtor, but also its creditors and the goods it produces in the
D larger interest of the economy of the country.
4.11 It is submitted that in the Bankruptcy Law Reforms
Committee (Volume 1) (November, 2015), it was agreed that the assets
held in by the entity in trust (such as employee pensions), assets held as
collateral to certain financial market institutions and assets held as part
E of operational transactions where the entity has right over the asset but
is 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 waterfall
mechanism under the IBC and was agreed that the workmen dues capped
up to 3 months will be given the second priority with the secured creditor
after the costs of the corporate insolvency and resolution process and
F liquidation.
4.12 It is submitted that subsequently, a report of the Joint
Committee on the Insolvency and Bankruptcy Code, 2015 was prepared
and presented in Lok Sabha on 28.04.2016 wherein the issue of exclusion
of Provident Fund, Pension Fund and Gratuity Fund from the liquidation
G estate assets and estate of bankrupt was debated. It is submitted that
the Committee, after an in-depth examination, was of the view that
Provident Fund, Pension Fund and Gratuity Fund provide the social safety
net to the workmen and employees and hence, need to be secured in the
event of liquidation of a company or bankruptcy of partnership firm. It is
H submitted that the Committee further observed that the workers are the
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 107
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

nerve center of any company and in the event of any company becoming A
insolvent or bankrupt, the workmen get affected adversely and therefore,
priority must be given to their outstanding dues. Therefore, all sums due
to any workman or employee from the Provident Fund, Gratuity Fund or
Pension Fund should not be included in the liquidation estate assets. It is
submitted that thus, to protect the interest of the workmen, the Committee
B
decided that the workmen dues for a period of 12 months as provided
under Section 53 of the IBC be increased to 24 months preceding
liquidation commencement date.
4.13 It is submitted that in light of the same, Section 36 of the
IBC has clearly given outright protection to workmen’s dues under
Provident Fund, Pension Fund and Gratuity Fund which is not treated as C
liquidation assets and liquidator has no claim over such funds. That
therefore, this share of workmen’s dues has consciously been taken
outside the liquidation process.
4.14 It is submitted that liquidation costs cover the wages and
salary of the workmen during the liquidation process. It is submitted that D
the liquidation cost is defined in Section 5(16) of the IBC which includes
the cost incurred by the liquidator during the period of liquidation subject
to such regulations as specified by the Board. It is submitted that with
respect to the liquidation process, the Board has notified the Insolvency
and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. E
It is submitted that Regulation 2(ea) talks about liquidation cost which
under Section 5(16) of the IBC includes the costs incurred by the liquidator
in carrying on the business of the Corporate Debtor as a going concern.
That, therefore, the salary and wages of the workmen in case of going
concern liquidation are protected under the liquidation costs. It is further
submitted that under the Liquidation Regulations 2016, a mechanism is F
created wherein Regulation 19 provides for claim by workmen and
employee and Regulation 31A has been inserted to bring in stakeholders
Consultation Committee, where participation to workmen/ employees is
given.
4.15 It is submitted that the issue with respect to the workmen G
and secured creditor being kept at equal footing under Section 53 of the
IBC is only in the case wherein the secured creditor has relinquished its
security and the same is the part of the liquidation pool. It is submitted
that Section 52 of the IBC specifically states about the secured creditor
in the liquidation proceedings and Regulation 21A talks about the H
108 SUPREME COURT REPORTS [2023] 6 S.C.R.

A presumption of security interest in the case of secured creditors. It is
submitted 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 of
B February, 2020 duly agreed that the priority for recovery to secured
creditors under Section 53(1)(b)(ii) should be applicable only to the extent
of the value of the security interest that is relinquished by the secured
creditor. It is submitted that the Committee noted that the Code aims to
promote a collective liquidation process and towards this end, it
encourages secured creditors to relinquish their security interest by
C providing them second highest priority in the recovery of their dues under
Section 53(1)(b) of the IBC and are not treated as ordinary unsecured
creditors under the IBC as they would have been under the Companies
Act, 1956. That the said provision intends to promote the overall value
maximization.
D 4.17 It is submitted that furthermore, the Committee in its report
of February, 2020 also decided whether the secured creditors who
realized their security interest should contribute towards the payment of
dues of workmen. Regulation 21(A) of Liquidation Process requires
that secured creditors who realise their security interest contribute
E towards the payment of dues of workmen as they would have if they
had relinquished their security interest to the liquidation estate. It is
submitted that thus, the requirement to contribute to workmen dues as
provided under Regulation 21A, recognizes that workmen are key
stakeholders and form the backbone of the efforts to preserve the
business of the Corporate Debtor not just prior to commencement of
F insolvency but also during the insolvency proceedings.
4.18 It is submitted that thus, visualizing the objects and working
of the IBC, it is clear that the rights and interest of the workers have
been protected from the date of enactment of the IBC. It is submitted
that in either case that is of relinquishment or non-relinquishment of the
G security by the secured creditor, the interest of the workmen is protected.
It is submitted that in fact, the secured creditors are taking significant
hair-cut and workmen are being compensated on equitable basis in a
just and proper manner as per Section 53 of the IBC. It is submitted that
therefore, it is unfair to say that ranking them with workmen is arbitrary,
H lest manifestly arbitrary to declare Section 53 as unconstitutional.
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 109
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

4.19 It is submitted that from examination of waterfall mechanism A
as provided under Section 53 of the IBC, it is clear that other stakeholders
including the Central Government have seriously compromises their
position in connection with the recovery of statutory dues so as to enable
value maximization and reviving unhealthy companies on going concern
basis. It is submitted that therefore, to say that workmen are in any way
B
adversely affected to the tune of arbitrariness or inequity contemplated
under Article 14 is erroneous.
4.20 It is further submitted by Shri Balbir Singh, learned ASG
appearing on behalf of the respondent – Union of India that the IBC
being a law relating to economic activities as observed and held by this
Court in the case of R.K. Garg Vs. Union of India and Ors., (1981) C
4 SCC 675, the laws relating to economy should be viewed with greater
latitude than the laws touching civil rights.
4.21 Making above submissions and relying upon the decisions of
this Court in the case of R.K. Garg (supra) (paras 8 and 16); Rustom
Cavasjee Cooper Vs. Union of India, (1970) 1 SCC 248 (paras 63 D
and 179); Delhi Science Forum and Ors. Vs. Union of India and
Anr., (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 of
the IBC, 2016 is neither arbitrary nor violative of Articles 14 and 21 of E
the Constitution of India.
5. We have heard learned counsel appearing on behalf of the
respective parties at length.
6. By way of this writ petition under Article 32 of the Constitution
of India, the petitioner - union has sought for an appropriate writ, direction F
or order striking down Section 327(7) of the Companies Act, 2013 as
arbitrary and violative of Article 21 of the Constitution of India. The
petitioner has also sought for an appropriate direction so as to leave the
statutory claims of the “workmen’s dues” out of the purview of waterfall
mechanism under Section 53 of the Insolvency and Bankruptcy Code, G
2016. As per Section 327(7), Sections 326 and 327 of the Act, 2013 shall
not be applicable in the event of liquidation under the IBC. Sections 326
and 327 of the Act, 2013 provide for preferential payments in a winding
up under the provisions of the Act, 2013. However, in view of the
introduction of new regime under the IBC, in case of liquidation under
IBC, distribution is to be made as per Section 53 of IBC. At this stage, it H
110 SUPREME COURT REPORTS [2023] 6 S.C.R.

A is required to be noted that IBC has been enacted w.e.f. 28.05.2016 and
as per Section 53 of the IBC, the distribution of assets in case of liquidation
under the IBC is required to be made. Section 53 of the IBC reads as
under: -
“53. Distribution of assets.—(1) Notwithstanding anything to
B the contrary contained in any law enacted by the Parliament or
any State Legislature for the time being in force, the proceeds
from the sale of the liquidation assets shall be distributed in the
following order of priority and within such period and in such
manner as may be specified, namely—
C (a) the insolvency resolution process costs and the liquidation costs
paid in full;
(b) the following debts which shall rank equally between and among
the following—
(i) workmen’s dues for the period of twenty-four months preceding
D the liquidation commencement date; and
(ii) debts owed to a secured creditor in the event such secured
creditor has relinquished security in the manner set out in Section
52;
(c) wages and any unpaid dues owed to employees other than
E
workmen for the period of twelve months preceding the liquidation
commencement date;
(d) financial debts owed to unsecured creditors;
(e) the following dues shall rank equally between and among the
F following:—
(i) any amount due to the Central Government and the State
Government including the amount to be received on account of
the Consolidated Fund of India and the Consolidated Fund of a
State, if any, in respect of the whole or any part of the period of
G two years preceding the liquidation commencement date;
(ii) debts owed to a secured creditor for any amount unpaid
following the enforcement of security interest;
(f) any remaining debts and dues;
(g) preference shareholders, if any; and
H
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 111
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

(h) equity shareholders or partners, as the case may be. A
(2) Any contractual arrangements between recipients under sub-
section (1) with equal ranking, if disrupting the order of priority
under that sub-section shall be disregarded by the liquidator.
(3) The fees payable to the liquidator shall be deducted
proportionately from the proceeds payable to each class of B
recipients under sub-section (1), and the proceeds to the relevant
recipient 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 of C
proceeds in respect of a class of recipients that rank equally, each
of the debts will either be paid in full, or will be paid in equal
proportion within the same class of recipients, if the proceeds are
insufficient to meet the debts in full; and
(ii) the term “workmen’s dues” shall have the same meaning as D
assigned to it in Section 326 of the Companies Act, 2013 (18 of
2013).”
In view of the enactment of IBC 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
E
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 F
as contended on behalf of the petitioner.
6.1 At this stage, it is required to be noted that Sub-Section (7) of
Section 327 of which the vires are under challenge, shall be applicable in
case of liquidation of a company under the IBC. Meaning thereby, in
case of liquidation of a company under IBC, the provisions of Section 53 G
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 Act, 1956/2013, the dues of the
workmen may have pari passu with that of the secured creditor, the H
112 SUPREME COURT REPORTS [2023] 6 S.C.R.

A 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.

6.2 Now so far as Section 53 of the IBC is concerned, it provides
B 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 manner set out in
C 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 this stage, it is required to be
noted that as per Section 36(4) of IBC, all sums due to any workman or
employee from the provident fund, the pension fund and the gratuity
fund shall not be included in the liquidation estate assets and shall not be
D used for the recovery in the liquidation. Therefore, a conscious decision
has been taken by the Parliament/Legislature in its wisdom to keep out
of all sums due to any workman/employee from the provident fund, the
pension fund and the gratuity fund from the liquidation estate assets [as
per Section 36(4)] and that the workmen’s dues for the period of twenty-
E four months preceding the liquidation commencement date shall rank
equally between the workmen’s dues to the said extent and the dues to
the secured creditor. Therefore, the same cannot be said to be arbitrary
and violative of Article 21 of the Constitution of India as contended on
behalf of the petitioner. As per the settled position of law, IBC is a complete
Code and the object and purpose of IBC is altogether different than that
F of the Act, 1956/2013. The IBC is a new insolvency mechanism,
therefore, the provisions under the IBC cannot be compared with that of
the earlier regime, namely, the Companies Act, 1956/2013.

6.3 At this stage, it is required to be noted that the issue with
G respect to the workman and the secured creditor being kept at equal
footing under Section 53 of the IBC is only in a case wherein the secured
creditor has relinquished its security and the same is the part of the
stage of the liquidation pool.

H
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 113
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

7. Section 2711 of the Companies Act 2013, as originally enacted, A
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 the
company is unable to pay its debts. The other grounds were, when the
company, by special resolution, has decided to be wound up; when the
company has acted against the interests of sovereignty and integrity of
B
India, the security of the State, friendly relations with foreign State, public
order, decency or morality; if the Tribunal has ordered winding up of the
company under Chapter XIX of the Companies Act, 2013, a chapter
relating to revival and rehabilitation of sick companies; if on an application
made by the Registrar or any other person authorised by the Central
Government by notification, the Tribunal is of the opinion that the affairs C
of the company have been conducted in a fraudulent manner or the
company has been formed for fraudulent and unlawful purpose, or persons
concerned in formation or management of its affairs have been guilty of
fraud, misfeasance, misconduct in connection therewith, which makes it
proper that the company be wound up; or if the company has made
D
default in filing its financial statements or annual returns with the
Registrar for immediately preceding five consecutive financial years;
lastly, if the Tribunal is of the opinion that it is just and equitable to wind
up the company.

E
1
271. Circumstances in which company may be wound up by Tribunal. – (1) A
company 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 up
by the Tribunal;
(c) if the company has acted against the interests of the sovereignty and integrity of
India, the security of the State, friendly relations with foreign States, public order, F
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 the
Central Government by notification under this Act, the Tribunal is of the opinion that
the affairs of the company have been conducted in a fraudulent manner or the company
was formed for fraudulent and unlawful purpose or the persons concerned in the
formation or management of its affairs have been guilty of fraud, misfeasance or
G
misconduct 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 statements
or 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 should
be wound up.
*** H
114 SUPREME COURT REPORTS [2023] 6 S.C.R.

A 7.1 The provision as enacted was never enforced till it was
substituted by Act No. 31 of 2016 and the Eleventh Schedule in paragraph
10 of the Insolvency and Bankruptcy Code, 20162, with effect from
15th November 2016. This coincided with the enactment and enforcement
of the Code, also applicable with effect from 15th November 2016.
Consequent to the substitution, Section 271 3 of the Companies Act 2013
B
now envisages only five grounds for winding up of the company under
the Companies Act 2013. The first ground is where the company, by
special resolution, has resolved to be wound up by the Tribunal. The
other grounds are when the company has acted against the sovereignty
and integrity of India, security of the State, friendly relations with foreign
C States, public order, decency or morality; if the Tribunal on an application
made by the Registrar or any other person authorised by the Central
Government by a notification is satisfied that the affairs of the company
have been conducted in a fraudulent manner, or the company was formed
for a fraudulent or unlawful purpose, or the persons concerned in the
formation or management of its affairs have been found to be guilty of
D
fraud, misfeasance or misconduct in connection therewith, which makes
it proper for the company to be wound up; if the company has defaulted
in filing financial statements and annual returns with the Registrar for
immediately preceding five consecutive financial years; and lastly if the
Tribunal is of the opinion that it is just and equitable that the company
E should be wound up.

2
For short, “Code”.
3
271. Circumstances in which company may be wound up by Tribunal. – A
company 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 up
F by the Tribunal;
(b) if the company has acted against the interests of the sovereignty and integrity of
India, 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 the
Central Government by notification under this Act, the Tribunal is of the opinion that
the affairs of the company have been conducted in a fraudulent manner or the company
G was formed for fraudulent and unlawful purpose or the persons concerned in the
formation or management of its affairs have been guilty of fraud, misfeasance or
misconduct 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 statements
or 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 should
H be wound up.
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 115
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

7.2 Clearly, the legislature has now removed clause (a) to Section A
271 of the Companies Act, 2013, when a company is unable to pay the
debts, and clause (d) to Section 271 of the Companies Act, 2013, when
a company is directed to be wound up under the Chapter XIX of the
Companies Act, 2013. In fact, Chapter XIX of the Companies Act 2013
was deleted/omitted in terms of Act No. 31 of 2016 and the Eleventh
B
Schedule in paragraph 8 of the Code, with effect from 15th November
2016. The Code, as enacted, is a separate and consolidated enactment
specifically relating to and dealing with companies which are insolvent
and unable to pay dues, and envisages a procedure with a mandate to
first explore possibility of rehabilitation and revival of the company, and
the dissolution/winding up as the last call. C
7.3 This is significant and must be highlighted when we examine
the question of the Constitutional challenge made by the petitioners, so
as to not frustrate the objective and purpose of the Code, which completely
replaces the then existing framework for insolvency and bankruptcy
resolution that was inadequate, ineffective and guilty of causing undue D
delays. The enactment of the Code and the amendments thereafter are
a consequence of detailed consultation and deliberations by several
committees, commissions and experts4, in a matter which deals with the
economy of the country as a whole. Earlier position was far from
satisfactory in spite of enactment of the Sick Industrial Companies
(Special Provisions) Act, 1985, the Recovery of Debts Due to Banks E
and Financial Institutions Act, 1993, and the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002. The Code has been enacted with the objective of reorganisation
and insolvency resolution of corporate persons, partnership firms and
individuals in a time-bound manner for maximisation of the value of assets, F
promote entrepreneurship, enhance availability of credit and balance the
interests of all stakeholders, including by alteration in the priority of
payment of government dues, to establish an Insolvency and Bankruptcy
Fund, and matters connected therewith or incidental thereto. The

4
See – The Report of High Level Committee on Law Relating to Insolvency and
G
Winding Up of Companies, 2000, The Report of the Expert Committee on Company
Law dated 31.05.2005, 57 th Report of the Standing Committee of 15th Lok Sabha on
Finance on The Companies Bill, 2011, The Report of the Bankruptcy Law Reforms
Committee dated 04.11.2015, The Report of Joint Committee on Insolvency and
Bankruptcy Code, 2015 of the 16th Lok Sabha and The report of the Insolvency Law
Committee dated 26.03.2018.0 H
116 SUPREME COURT REPORTS [2023] 6 S.C.R.

A objective is to improve the ease of doing business and facilitate more
investments, leading to higher economic growth and development.
8. We have earlier referred to, in detail, the divergent opinions
expressed while enacting the Code on the status of the workmen’s dues
and the hierarchy in which they should be placed. The waterfall
B mechanism now prescribed in the Code with reference to the workmen’s
dues is a well-considered and thought-out decision. The waterfall
mechanism and the hierarchy prescribed to the workmen’s dues should
be seen in the overall objective of the Code, which is to explore whether
the corporate debtor can be revived so that jobs are not lost, the use of
economic assets is maximised, and there is an effective legal framework
C which enhances the viability of credit in the hands of banks and financial
institutions. The Code recognises the financial impact on secured
creditors or financial institutions dealing with public money, as their
economic health is equally important for the general public as well as the
national economy. Unless there is economic growth and fresh investments
D in the industry, employment opportunities will not be available, which
would in turn lead to economic woes, insolvencies and bankruptcies.
These are all complex economic matters wherein various conflicting
interests 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 can
hardly substitute its own wisdom or view for that of the legislature,
E especially when the enactment is the outcome of a thought-out and
ruminated review on complex fiscal and commercial challenges facing
the economy. It is in this context, this Court, while upholding the
Constitutional validity of the Code on the challenge of discrimination
made by the operational creditors in Swiss Ribbons Private Limited
F and 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 to
economic activities should be viewed with greater latitude than
laws touching civil rights such as freedom of speech, religion, etc.
It has been said by no less a person than Holmes, J., that the
5
H (2019) 4 SCC 17.
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 117
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

legislature should be allowed some play in the joints, because it A
has to deal with complex problems which do not admit of solution
through any doctrinaire or straitjacket formula and this is
particularly true in case of legislation dealing with economic
matters, where, having regard to the nature of the problems
required to be dealt with, greater play in the joints has to be allowed
B
to the legislature. The court should feel more inclined to give judicial
deference to legislative judgment in the field of economic regulation
than in other areas where fundamental human rights are involved.
Nowhere has this admonition been more felicitously expressed
than in Morey v. Doud where Frankfurter, J., said in his inimitable
style: C
‘In the utilities, tax and economic regulation cases, there
are good reasons for judicial self-restraint if not judicial
deference to legislative judgment. The legislature after all
has the affirmative responsibility. The courts have only the
power to destroy, not to reconstruct. When these are added D
to 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 overruled
by events — self-limitation can be seen to be the path to
judicial wisdom and institutional prestige and stability.’
E
The Court must always remember that “legislation is
directed to practical problems, that the economic mechanism
is highly sensitive and complex, that many problems are
singular and contingent, that laws are not abstract
propositions and do not relate to abstract units and are not to
be measured by abstract symmetry”; ‘that exact wisdom and F
nice adaption of remedy are not always possible’ and that ‘judgment
is largely a prophecy based on meagre and uninterpreted
experience’. Every legislation, particularly in economic matters
is essentially empiric and it is based on experimentation or
what one may call trial and error method and therefore it G
cannot provide for all possible situations or anticipate all
possible abuses. There may be crudities and inequities in
complicated experimental economic legislation but on that
account alone it cannot be struck down as invalid. The courts
cannot, as pointed out by the United States Supreme Court in Secy.
H
118 SUPREME COURT REPORTS [2023] 6 S.C.R.

A of Agriculture v. Central Roig Refining Co. be converted into
tribunals for relief from such crudities and inequities. There may
even be possibilities of abuse, but that too cannot of itself be a
ground for invalidating the legislation, because it is not possible
for any legislature to anticipate as if by some divine prescience,
distortions and abuses of its legislation which may be made by
B
those subject to its provisions and to provide against such distortions
and abuses. Indeed, howsoever great may be the care bestowed
on its framing, it is difficult to conceive of a legislation which is
not capable of being abused by perverted human ingenuity. The
Court must therefore adjudge the constitutionality of such
C legislation by the generality of its provisions and not by its
crudities or inequities or by the possibilities of abuse of any
of its provisions. If any crudities, inequities or possibilities of
abuse come to light, the legislature can always step in and enact
suitable amendatory legislation. That is the essence of pragmatic
approach which must guide and inspire the legislature in dealing
D
with complex economic issues.
***
19. …. It would be outside the province of the Court to
consider if any particular immunity or exemption is necessary or
E not for the purpose of inducing disclosure of black money. That
would depend upon diverse fiscal and economic considerations
based on practical necessity and ‘administrative expediency and
would also involve a certain amount of experimentation on which
the Court would be least fitted to pronounce. The Court would
not have the necessary competence and expertise to adjudicate
F upon such an economic issue. The Court cannot possibly assess
or evaluate what would be the impact of a particular immunity or
exemption and whether it would serve the purpose in view or not.
There are so many imponderables that would enter into the
determination that it would be wise for the Court not to hazard an
G opinion where even economists may differ. The Court must while
examining 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 constitutional
proposition enunciated by the Supreme Court of the United States
in Munn v. Illinois, namely, ‘that courts do not substitute their
H
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 119
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

social and economic beliefs for the judgment of legislative A
bodies’. The Court must defer to legislative judgment in matters
relating to social and economic policies and must not interfere,
unless the exercise of legislative judgment appears to be
palpably arbitrary. The Court should constantly remind itself of
what the Supreme Court of the United States said in Metropolis
B
Theater Co. v. City of Chicago:
“12. … The problems of government are practical ones
and may justify, if they do not require, rough
accommodations, illogical it may be, and unscientific. But
even such criticism should not be hastily expressed. What
is best is not always discernible, the wisdom of any choice C
may be disputed or condemned. Mere error of Government
are not subject to our judicial review.”
It is true that one or the other of the immunities or
exemptions granted under the provisions of the Act may be taken
advantage of by resourceful persons by adopting ingenious D
methods and devices with a view to avoiding or saving tax. But
that cannot be helped because human ingenuity is so great when
it comes to tax avoidance that it would be almost impossible to
frame tax legislation which cannot be abused. Moreover, as already
pointed out above, the trial and error method is inherent in every E
legislative effort to deal with an obstinate social or economic issue
and if it is found that any immunity or exemption granted under
the Act is being utilised for tax evasion or avoidance not intended
by the legislature, the Act can always be amended and the abuse
terminated. We are accordingly of the view that none of the
provisions of the Act is violative of Article 14 and its constitutional F
validity must be upheld.”
(emphasis supplied)
22. Likewise, in Bhavesh D. Parish v. Union of India
(2000) 5 SCC 471, this Court held : G
“26. The services rendered by certain informal sectors
of the Indian economy could not be belittled. However, in the
path of economic progress, if the informal system was sought
to be replaced by a more organised system, capable of better
regulation and discipline, then this was an economic philosophy
H
120 SUPREME COURT REPORTS [2023] 6 S.C.R.

A reflected by the legislation in question. Such a philosophy might
have its merits and demerits. But these were matters of
economic policy. They are best left to the wisdom of the
legislature and in policy matters the accepted principle is that
the courts should not interfere. Moreover in the context of the
changed economic scenario the expertise of people dealing
B
with the subject should not be lightly interfered with. The
consequences of such interdiction can have large-scale
ramifications and can put the clock back for a number of years.
The process of rationalisation of the infirmities in the economy
can be put in serious jeopardy and, therefore, it is necessary
C that while dealing with economic legislations, this Court, while
not jettisoning its jurisdiction to curb arbitrary action or
unconstitutional legislation, should interfere only in those few
cases where the view reflected in the legislation is not possible
to be taken at all.
D ***
30. Before we conclude there is another matter which we
must advert to. It has been brought to our notice that Section 45-
S of the Act has been challenged in various High Courts and a
few of them have granted the stay of provisions of Section 45-S.
E When considering an application for staying the operation of a
piece of legislation, and that too pertaining to economic reform or
change, then the courts must bear in mind that unless the provision
is manifestly unjust or glaringly unconstitutional, the courts must
show judicial restraint in staying the applicability of the same.
Merely because a statute comes up for examination and some
F arguable point is raised, which persuades the courts to consider
the controversy, the legislative will should not normally be put
under suspension pending such consideration. It is now well settled
that there is always a presumption in favour of the constitutional
validity of any legislation, unless the same is set aside after final
G hearing and, therefore, the tendency to grant stay of legislation
relating to economic reform, at the interim stage, cannot be
understood. The system of checks and balances has to be
utilised in a balanced manner with the primary objective of
accelerating economic growth rather than suspending its
growth by doubting its constitutional efficacy at the threshold
H itself.”
(emphasis supplied)
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 121
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

23. In Directorate General of Foreign Trade v. Kanak A
Exports, (2016) 2 SCC 226, this Court has held :
“109. Therefore, it cannot be denied that the Government
has a right to amend, modify or even rescind a particular scheme.
It is well settled that in complex economic matters every decision
is necessarily empiric and it is based on experimentation or what B
one may call trial and error method and therefore, its validity cannot
be tested on any rigid prior considerations or on the application of
any straitjacket formula. In BALCO Employees’ Union v. Union
of India, (2002) 2 SCC 333] , the Supreme Court held that laws,
including executive action relating to economic activities should
be viewed with greater latitude than laws touching civil rights C
such as freedom of speech, religion, etc. that the legislature should
be allowed some play in the joints because it has to deal with
complex problems which do not admit of solution through any
doctrine or straitjacket formula and this is particularly true in case
of legislation dealing with economic matters, where having regard D
to the nature of the problems greater latitude require to be allowed
to the legislature.”
****
The raison d’être for the Insolvency and Bankruptcy Code
E
****
27. As is discernible, the Preamble gives an insight into
what is sought to be achieved by the Code. The Code is first and
foremost, a Code for reorganisation and insolvency resolution of
corporate debtors. Unless such reorganisation is effected in a F
time-bound manner, the value of the assets of such persons will
deplete. Therefore, maximisation of value of the assets of such
persons so that they are efficiently run as going concerns is another
very important objective of the Code. This, in turn, will promote
entrepreneurship as the persons in management of the corporate
debtor are removed and replaced by entrepreneurs. When, G
therefore, a resolution plan takes off and the corporate debtor is
brought back into the economic mainstream, it is able to repay its
debts, which, in turn, enhances the viability of credit in the hands
of banks and financial institutions. Above all, ultimately, the
interests of all stakeholders are looked after as the corporate debtor
H
122 SUPREME COURT REPORTS [2023] 6 S.C.R.

A itself becomes a beneficiary of the resolution scheme—workers
are paid, the creditors in the long run will be repaid in full, and
shareholders/investors are able to maximise their investment.
Timely resolution of a corporate debtor who is in the red, by an
effective legal framework, would go a long way to support the
development of credit markets. Since more investment can be
B
made with funds that have come back into the economy, business
then eases up, which leads, overall, to higher economic growth
and development of the Indian economy. What is interesting to
note is that the Preamble does not, in any manner, refer to
liquidation, which is only availed of as a last resort if there is
C either no resolution plan or the resolution plans submitted are not
up to the mark. Even in liquidation, the liquidator can sell the
business 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).
D ****
Epilogue
120. The Insolvency Code is a legislation which deals with
economic matters and, in the larger sense, deals with the economy
of the country as a whole. Earlier experiments, as we have seen,
E in terms of legislations having failed, “trial” having led to repeated
“errors”, ultimately led to the enactment of the Code. The
experiment contained in the Code, judged by the generality of its
provisions and not by so-called crudities and inequities that have
been pointed out by the petitioners, passes constitutional muster.
F To stay experimentation in things economic is a grave responsibility,
and denial of the right to experiment is fraught with serious
consequences to the nation. We have also seen that the working
of the Code is being monitored by the Central Government by
Expert Committees that have been set up in this behalf.
Amendments have been made in the short period in which the
G Code has operated, both to the Code itself as well as to subordinate
legislation made under it. This process is an ongoing process which
involves all stakeholders, including the petitioners.
****”

H
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 123
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

9. As elucidated above, the Companies Act, 2013 does not deal A
with insolvency and bankruptcy when the companies are unable to pay
their debts or the aspects relating to the revival and rehabilitation of the
companies and their winding up if revival and rehabilitation is not possible.
In principle, it cannot be doubted that the cases of revival or winding up
of the company on the ground of insolvency and inability to pay debts
B
are different from cases where companies are wound up under Section
271 of the Companies Act 2013. The two situations are not identical.
Under Section 271 of the Companies Act, 2013, even a running and
financially sound company can also be wound up for the reasons in
clauses (a) to (e). The reasons and grounds for winding up under Section
271 of the Companies Act, 2013 are vastly different from the reasons C
and grounds for the revival and rehabilitation scheme as envisaged under
the Code. The two enactments deal with two distinct situations and in
our opinion, they cannot be equated when we examine whether there is
discrimination or violation of Article 14 of the Constitution of India. For
the revival and rehabilitation of the companies, certain sacrifices are
D
required from all quarters, including the workmen. In case of insolvent
companies, for the sake of survival and regeneration, everyone, including
the secured creditors and the Central and State Government, are required
to make sacrifices. The workmen also have a stake and benefit from
the revival of the company, and therefore unless it is found that the
sacrifices envisaged for the workmen, which certainly form a separate E
class, are onerous and burdensome so as to be manifestly unjust and
arbitrary, we will not set aside the legislation, solely on the ground that
some or marginal sacrifice is to be made by the workers. 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
F
Article 21 Constitution of India was infringed, we must word by word
examine the waterfall mechanism envisaged under the Companies Act,
2013, where the company is wound up in terms of grounds (a) to (e) of
Section 271 of the Companies Act, 2013; 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 G
the objective and purpose of the two enactments are entirely different.
10. We now turn to the difference in the waterfall mechanism
provided in the Companies Act, 2013 and the Code. As per Section 3246
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 H
124 SUPREME COURT REPORTS [2023] 6 S.C.R.

A of the Companies Act, 2013, all debts payable on a contingency, or all
claims against the company, present or future, certain or contingent,
ascertained or sounding only in damages, are admissible to proof against
the company. A just estimate can be made so far as possible in respect
of value of such debts or claims as may be subject to any contingency,
damages, etc. and do not bear a certain value. Section 3267 of the
B
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, ascertained
or sounding only in damages, shall be admissible to proof against the company, a just
estimate being made, so far as possible, of the value of such debts or claims as may be
subject to any contingency, or may sound only in damages, or for some other reason
C may not bear a certain value.
7
326. Overriding preferential payments.—(1) In the winding up of a company
under 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 to
such secured creditor as could not be realised by him or the amount of the workmen’s
portion in his security (if payable under the law), whichever is less, pari passu with the
D workmen’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 of
two 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 over
the 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 before
any 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 which
case 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, being
workmen within the meaning of clause(s) of Section 2 of the Industrial Disputes Act,
F 1947;
(b) “workmen’s dues”, in relation to a company, means the aggregate of the following
sums due from the company to its workmen, namely—
(i) all wages or salary including wages payable for time or piece work and salary earned
wholly or in part by way of commission of any workman in respect of services
rendered to the company and any compensation payable to any workman under any of
G the provisions of the Industrial Disputes Act, 1947;
(ii) all accrued holiday remuneration becoming payable to any workman or, in the case
of his death, to any other person in his right on the termination of his employment
before or by the effect of the winding up order or resolution;
(iii) unless the company is being wound up voluntarily merely for the purposes of
reconstruction or amalgamation with another company or unless the company has, at
the commencement of the winding up, under such a contract with insurers as is mentioned
H in Section 14 of the Workmen’s Compensation Act, 1923, rights capable of being
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 125
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

Companies Act, 2013 deals with overriding preferential payments which A
have to be paid in priority to all other debts. These include the workmen
debts, and dues of the secured creditor where the secured creditor has
realised the secured asset but could not realise the entire amount, or the
amount of workmen’s portion in his security payable under the law,
whichever is less, pari passu with the workmen’s dues. Thus, this
B
balances and equates the rights of the secured creditor to realise the
secured asset, but in case the secured creditor is not able to realise the
full amount or has paid an amount to the workmen if payable under the
law, whichever is less, these dues rank pari passu with the workmen’s
dues. Explanation to Section 326 of the Companies Act, 2013 defines
‘workmen’, which means employees within the meaning of Section 2(s) C
of the Industrial Disputes Act, 1947; and the expressions “workmen’s
dues”; and “workmen’s portion”, which expressions are terms of the
Companies Act, 2013 specially used in clause (b) of sub-section (1) to
Section 326 of the Companies Act, 2013. The workmen’s portion in
relation to the security of any secured creditor of a company means the
D
amount which bears to the value of security, the same proportion as the
amount of workmen’s dues bears to the aggregate of the amount of
workmen’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 creditors E
is hypothetically taken as Rs. 3 lakhs. Accordingly, the aggregate amount

transferred to and vested in the workmen, all amount due in respect of any compensation
or liability for compensation under the said Act in respect of the death or disablement
of any workman of the company;
(iv) all sums due to any workman from the provident fund, the pension fund, the F
gratuity fund or any other fund for the welfare of the workmen, maintained by the
company;
(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 the
amount of the workmen’s dues bears to the aggregate of the amount of workmen’s dues
and the amount of the debts due to the secured creditors.
G
Illustration
The value of the security of a secured creditor of a company is Rs. 1,00,000. The total
amount of the workmen’s dues is Rs. 1,00,000. The amount of the debts due from the
company to its secured creditors is Rs. 3,00,000. The aggregate of the amount of
workmen’s dues and the amount of debts due to secured creditors is Rs. 4,00,000. The
workmen’s portion of the security is, therefore, one-fourth of the value of the security,
that is Rs. 25,000. H
126 SUPREME COURT REPORTS [2023] 6 S.C.R.

A due towards workmen’s dues and the amount of debts due to the secured
creditors is Rs. 4 lakhs. In this background, when the value of the security
of the secured creditors is Rs. 1 lakh, one-fourth of the value of the
security, 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 any
difference in the said hierarchy and the waterfall mechanism under the
B
Code.
11. However, the proviso to sub-section (1) to Section 326 of the
Companies 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 the
Explanation to Section 326 of the Companies Act, 2013, which are
C payable for a period of two 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. This payment is to
be made within a period of thirty days from the sale of assets and shall
be subject to such charge over the security of the secured creditors.
D Sub-clause (i) to clause (b) of the Explanation to Section 326 of the
Companies Act, 2013 refers to all wages or salary, including wages
payable 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
E or, in the case of his death, to any other person in his right on termination
of his employment, etc. Sub-clauses (iii) and (iv) of clause (b) of the
Explanation to Section 326 of the Companies Act, 2013 are excluded
from the proviso. These sub-clauses deal with liability of compensation
under the Workmen’s Compensation Act, 1923 in respect of death or
F disablement of the workmen or all sums due to any workman from the
provident fund, the pension fund, the gratuity fund or any other fund of
the welfare of the workmen8. What is clear from the provision is that
the proviso applies in case of winding up of a company to the sums
referred 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 period
G
8
For the purpose of the present decision, we are not required to comment on the
provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act,
1952 and the payment of workmen’s dues under the Companies Act,1956 or even
Section 36 (4)(a)(iii) of the Code. However, see - Employees Provident Fund
Commissioner v. Official Liquidator of Esskay Pharmaceuticals Limited, (2011) 10
H SCC 727 and Bhupinder Singh v. Unitech Limited, (2022) 8 SCC 749.
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 127
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

of two years preceding the winding up order or such other period as A
may be prescribed. We are not informed that a different period has been
prescribed 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 up
B
order, 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 which
payment under sub-clauses (i) and (ii) to clause (b) of the Explanation to
Section 326 of the Companies Act, 2013 would apply. Entire unpaid
dues are not covered by the proviso to sub-section (1) to Section 326 of
the Companies Act, 2013. C
12. When we turn our attention to the Code, it is to be first noted
that in terms of Section 36(4)(a)(iii) of the Code, all sums due to any
workman or employee from the provident fund, the pension fund and the
gratuity fund, do not form part and are not to be included in the liquidation
proceedings.9 Sub-section (1) to Section 52 of the Code gives two options D
to a secured creditor. First, the secured creditor in a liquidation proceeding
may relinquish its security interest and receive the proceeds from the
sale of assets by the liquidator in the manner specified in Section 53 of
the Code. The second option is to realise the security interest, but in the
manner specified in Section 52 of the Code. Sub-section (2) to Section
52 of the Code states that where the secured creditor realises the security E
interest, he shall inform the liquidator of such security interest and identify
the asset subject to such security interest to be realised. The liquidator is
to verify the security interest and shall permit the secured creditor to
realise such security interest, which is proved either by records of such
security interest maintained by an information utility, or by such other F
means as may be specified by the Board. Sub-section (4) to Section 52
of the Code states that the secured creditor may enforce, realise, settle,
compromise or deal with the secured asset in accordance with such law
as 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) to
G
clause (a) of sub-section (4) to Section 36 of the Code as this is an issue of some debate
and pending consideration in other matters. The legal effect of exclusion is that, the
amount of sums due to any workmen or employee from the provident fund, the pension
fund or the gratuity fund cannot be made subject matter of reduction or dilution even in
a rehabilitation or revival plan. They are excluded from the waterfall mechanism and
would not be used in recovery on liquidation, and they cannot be shared. H
128 SUPREME COURT REPORTS [2023] 6 S.C.R.

A recover the debts due to him. We need not refer to sub-section (5) to
Section 52 of the Code as it relates to the action which the secured
creditor may take if he faces resistance from the corporate debtor or
any other person connected therewith in taking possession of, selling or
otherwise disposing off the security. Sub-section (6) to Section 52 of the
Code applies when an adjudicating authority is in receipt of an application
B
under sub-section (5) to Section 52 of the Code. Sub-section (7) to Section
52 of the Code, however, is important as it states that where on
enforcement of the security interest, an amount by way of proceeds is in
excess of the debts due to the secured creditor, the secured creditor
shall account for and pay the excess/surplus amount to the liquidator
C from enforcement of such secured assets. The amount of insolvency
resolution process costs, due from secured creditors who realise their
security interests in the manner provided in the section, are to be deducted
from the proceeds of any realisation by such secured creditors. They
are to be transferred and included in the liquidation estate. Sub-section
(9) to Section 52 of the Code states that where proceeds for realisation
D
of the secured assets are not adequate to repay the debts owed to the
secured creditor, the unpaid debts of such secured creditor shall be paid
by 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 secured
E creditor does not relinquish its security interest to fall under Section 53
of the Code, Regulation 21A10 of the Insolvency and Bankruptcy Board
10
21A. Presumption of security interest.-— (1) A secured creditor shall inform the
liquidator of its decision to relinquish its security interest to the liquidation estate or
realise its security interest, as the case may be, in Form C or Form D of Schedule II:
F Provided that, where a secured creditor does not intimate its decision within
thirty days from the liquidation commencement date, the assets covered under the
security 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 the
security interest, to the liquidator within ninety days from the liquidation commencement
G date; 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 eighty
days from the liquidation commencement date:
Provided that where the amount payable under this sub-regulation is not
certain by the date the amount is payable under this sub-regulation, the secured creditor
shall pay the amount, as estimated by the liquidator:
H
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 129
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

of India (Liquidation Process) Regulations, 2016 has been enacted, and A
it requires that the secured creditor, who opts to realise its security interest
as per section 52 of the Code, has to pay as much towards the amount
payable 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 and
the manner stipulated therein. The workmen’s dues, even when the
B
secured creditor opts to proceed under Section 52 of the Code, are
therefore protected in terms of sub-clause (b) of sub-section (1) to Section
53 of the Code.
14. Before we refer to Section 53 of the Code, we would like to
take note of Section 30 of the Code, which relates to the submission of
resolution plan, which is required to be examined by the resolution C
professional in the manner stipulated in sub-section (2) to Section 3011

Provided further that any difference between the amount payable under this
sub-regulation and the amount paid under the first proviso shall be made good by the
secured creditor or the liquidator, as the case may be, as soon as the amount payable
under this sub-regulation is certain and so informed by the liquidator.
D
(3) Where a secured creditor fails to comply with sub-regulation (2), the asset, which is
subject to security interest, shall become part of the liquidation estate.
11
30. Submission of resolution plan.—(1) A resolution applicant may submit a
resolution plan along with an affidavit stating that he is eligible under Section 29-A to
the resolution professional prepared on the basis of the information memorandum.
(2) The resolution professional shall examine each resolution plan received by him to E
confirm that each resolution plan—
(a) provides for the payment of insolvency resolution process costs in a manner specified
by 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 may
be 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 corporate
debtor under Section 53; or F
(ii) the amount that would have been paid to such creditors, if the amount to be
distributed under the resolution plan had been distributed in accordance with the order
of priority in sub-section (1) of Section 53, whichever is higher, and provides for the
payment of debts of financial creditors, who do not vote in favour of the resolution
plan, in such manner as may be specified by the Board, which shall not be less than the
amount to be paid to such creditors in accordance with sub-section (1) of Section 53 in
the event of a liquidation of the corporate debtor. G
Explanation 1.—For the removal of doubts, it is hereby clarified that a distribution in
accordance 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 from
the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act,
2019, the provisions of this clause shall also apply to the corporate insolvency resolution
process of a corporate debtor—
H
130 SUPREME COURT REPORTS [2023] 6 S.C.R.

A of the Code. Substantial part of clause (b) of sub-section (2) to Section
30 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) of
sub-section (2) to Section 30 of the Code provides for the payment of
debts of financial creditors who do not vote in favour of the resolution
plan. The amount payable to them, it stipulates, shall not be less than the
B
amount 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 corporate
debtor. Sub-section (4) to Section 30 of the Code states when and how
a Committee of Creditors is to approve the resolution plan. Sub-section
(6) states that the resolution professional shall submit the resolution plan
C as approved by the Committee of Creditors to the adjudicating authority.
Section 3112 of the Code relates to approval of the resolution plan. The

(i) where a resolution plan has not been approved or rejected by the Adjudicating
Authority;
(ii) where an appeal has been preferred under Section 61 or Section 62 or such an appeal
D is 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 the
Adjudicating Authority in respect of a resolution plan;
(c) provides for the management of the affairs of the corporate debtor after approval of
the 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 required
under the Companies Act, 2013 (18 of 2013) or any other law for the time being in force
for the implementation of actions under the resolution plan, such approval shall be
deemed to have been given and it shall not be a contravention of that Act or law.
****
12
31. Approval of resolution plan.—(1) If the Adjudicating Authority is satisfied that
F the resolution plan as approved by the committee of creditors under sub-section (4) of
Section 30 meets the requirements as referred to in sub-section (2) of Section 30, it shall
by order approve the resolution plan which shall be binding on the corporate debtor
and its employees, members, creditors, including the Central Government, any State
Government or any local authority to whom a debt in respect of the payment of dues
arising under any law for the time being in force, such as authorities to whom statutory
dues are owed, guarantors and other stakeholders involved in the resolution plan:
G Provided that the Adjudicating Authority shall, before passing an order for approval of
resolution plan under this sub-section, satisfy that the resolution plan has provisions
for its effective implementation.
(2) Where the Adjudicating Authority is satisfied that the resolution plan does not
confirm to the requirements referred to in sub-section (1), it may, by an order, reject the
resolution plan.
H ****
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 131
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

adjudicating authority is to satisfy that the resolution plan as approved by A
the Committee of Creditors under sub-section (4) of Section 30 of the
Code, meets the requirements as referred to in sub-section (2) to Section
30 of the Code. Further, the resolution plan has provisions for its effective
implementation. Sub-section (2) to Section 31 of the Code states that
where the adjudicating authority is satisfied that the resolution plan does
B
not confirm to the requirements referred to in sub-section (1) to Section
31 of the Code, it may by an order reject the resolution plan. We need
not refer to other sub-sections of Section 31 of the Code.
15. We now turn our attention to Section 53 of the Code which
begins with a non-obstante clause and states that notwithstanding
anything to the contrary contained in any law enacted by the Parliament C
or any State Legislature for the time being in force, the proceeds from
the sale of liquidation assets shall be distributed in the order of priority,
which is stipulated, and within such period and such manner as may be
specified. The consequence of sub-section (1) to Section 53 of the Code
is that it will override the rights of parties, including the secured creditor, D
when the said provision applies. Section 53 of the Code is the complete
and comprehensive code which ensures collection of assets and then
provides the manner in which the creditors are to be paid. Even the
rights of the secured creditor falling under Section 53 of the Code to
enforce, realise, settle, compromise or deal with the secured assets as
applicable to the security interest are diluted and compromised. E

15.1 Clause (a) to sub-section (1) to Section 53 deals with
insolvency resolution process costs and the liquidation costs which are
to be paid in full. No grievance or issue can be raised in respect of the
said clause. Clause (b) to sub-section (1) to Section 53 states that the
debts due in the form of workmen’s dues for a period of twenty four F
months preceding the liquidation commencement date and the debts owed
to the secured creditor in the event such secured creditor has relinquished
security in the manner set out in Section 52 of the Code shall rank equally
between and amongst the workmen and the secured creditors. The
Explanation to Section 53 of the Code states that ‘workmen’s dues’ G
shall have the same meaning as assigned to it in Section 326 of the
Companies Act, 2013. In other words, Explanation to Section 326 of the
Companies Act, 2013 has been incorporated and applies to the waterfall
mechanism as prescribed in clause (b) to sub-section (1) to Section 53
of the Code. What is significant here is that under clause (b) to sub-
H
132 SUPREME COURT REPORTS [2023] 6 S.C.R.

A section (1) to Section 53 of the Code, the workmen’s dues are for the
period of twenty four months preceding the liquidation commencement
date. 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 and
need not coincide with the date of winding up. This is in the interest of
the workmen. Clause (i) of Explanation to Section 53 of the Code states
B
that where the distribution of proceeds in respect of class of recipients
that rank equally, each of the debts would be paid either in full or would
be paid in equal proportion within the same class of recipients, if the
proceeds are insufficient to meet the debts in full. Ex facie, the clause is
very just and fair. It is to be noted that the wages and unpaid dues owed
C to employees other than the workmen fall in clause (c), which is below
clause (b) to sub-section (1) to Section 53 of the Code. They are to be
paid wages and unpaid dues only for a period of twelve months preceding
the liquidation commencement date, and that too only if surplus funds
are available after making payment in terms of clause (a) and (b) of
sub-section (1) to Section 53 of the Code. Clause (d) of sub-section (1)
D
to Section 53 of the Code relates to financial debts owed to unsecured
creditors. The amounts due to the Central Government and the State
Government, etc., and the debts owed to a secured creditor for any
amount that remains unpaid following the enforcement of security interest,
have been clubbed together in clause (e) of sub-section (1) to Section 53
E of the Code, and have to be ranked equally between and among both of
them. 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 or
partners fall under clause (h) of sub-section (1) to Section 53 of the
Code. Sub-section (2) to Section 53 of the Code states that any
F
contractual arrangements between recipients under sub-section (1) with
equal ranking, if disrupting the order of priority under the said sub-section
will be disregarded by the liquidator.
16. The waterfall mechanism is based on a structured
mathematical formula, and the hierarchy is created in terms of payment
G 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
H balance of rights and interests of the secured creditors, operational
MOSER BAER KARAMCHARI UNION THR. PRESIDENT MAHESH 133
CHAND SHARMA v. UNION OF INDIA [M. R. SHAH, J.]

creditors and even the Central and State Governments. Depending upon A
the facts, in some cases, the waterfall mechanism in the Code may be
more beneficial than the hierarchy provided under Section 326 of the
Companies Act, 2013 and vice-versa. Therefore, we hesitate and do
not accept the arguments of the petitioners.
17. The Code is based on the organic evolution of law and is a B
product of an extensive consultative process to meet the requirements
of the Code governing liquidation. It introduced a comprehensive and
time-bound framework to maximise the value of assets of all persons
and balance the interest of the stakeholders. The guiding principle for
the Code in setting the priority of payments in liquidation was to bring
the practices in India in line with global practices. In the waterfall C
mechanism, after the costs of the insolvency resolution process and
liquidation, secured creditors share the highest priority along with a defined
period of dues of the workmen. The 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 D
prescribed by Section 53 of the Code. In either case of relinquishment
or non-relinquishment of the security by the secured creditor, the interests
of workmen are protected under the Code. In fact, the secured creditors
are taking significant hair-cut and workmen are being compensated on
an equitable basis in a just and proper manner as per Section 53 of the
Code. The Code balances the rights of the secured creditors, who are E
financial institutions in which the general public has invested money, and
also ensures that the economic activity and revival of a viable company
is not hindered because it has suffered or fallen into a financial crisis.
The Code focuses on bringing additional gains to both the economy and
the exchequer through efficiency enhancement and consequent greater F
value capture. In economic matters, a wider latitude is given to the law-
maker and the Court allows for experimentation in such legislations based
on practical experiences and other problems seen by the law-makers. In
a challenge to such legislation, the Court does not adopt a doctrinaire
approach. Some sacrifices have to be always made for the greater good,
and unless such sacrifices are prima facie apparent and ex facie harsh G
and unequitable as to classify as manifestly arbitrary, these would be
interfered with by the court.
18. In view of the above and for the reasons stated above and as
sub-section (7) of Section 327 of the Act, 2013 provides that Sections
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134 SUPREME COURT REPORTS [2023] 6 S.C.R.

A 326 and 327 of the Act, 2013 shall not be applicable in the event of
liquidation under the IBC, which has been necessitated in view of the
enactment of IBC and it applies with respect to the liquidation of a
company under the IBC, Section 327(7) of the Act, 2013 cannot be said
to 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 of
B
the assets shall have to be made as per Section 53 of the IBC subject to
Section 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, the
writ petition(s) lack merits and the same deserve to be dismissed and
are accordingly dismissed. However, in the facts and circumstances of
C the case, there shall be no order as to costs.
Pending applications, if any, also stand disposed of.

Nidhi Jain Writ petitions dismissed.
(Assisted by : Mayank Batra, LCRA)
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