A) ABSTRACT / HEADNOTE

In the case “Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma vs Union of India and Ors.,” decided on May 2, 2023, the Supreme Court of India addressed the constitutionality of Section 327(7) of the Companies Act, 2013. This provision excludes the applicability of Sections 326 and 327 of the Companies Act during liquidation under the Insolvency and Bankruptcy Code, 2016 (IBC). The petitioners argued that this exclusion was arbitrary and violated Articles 14 and 21 of the Constitution of India, as it disadvantaged workmen’s dues in liquidation proceedings. The Court examined the legislative history and rationale behind the IBC, noting its objective to create a uniform insolvency framework. It upheld Section 327(7) as constitutionally valid, emphasizing the IBC’s comprehensive approach and the balanced treatment of workmen’s dues within the liquidation process.

Keywords: Insolvency and Bankruptcy Code, Companies Act, workmen’s dues, liquidation, constitutionality, Supreme Court of India.

B) CASE DETAILS

i) Judgement Cause Title: Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma vs Union of India and Ors.
ii) Case Number: Writ Petition (C) No. 421 of 2019
iii) Judgement Date: May 2, 2023
iv) Court: Supreme Court of India
v) Quorum: Justice M.R. Shah
vi) Author: Justice M.R. Shah
vii) Citation: [2023] 1 SCC 421
viii) Legal Provisions Involved: Section 327(7) of the Companies Act, 2013; Section 53 of the Insolvency and Bankruptcy Code, 2016; Articles 14 and 21 of the Constitution of India.

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The Moser Baer Karamchari Union, representing the workmen of Moser Baer, filed a writ petition challenging the constitutionality of Section 327(7) of the Companies Act, 2013. This provision excludes the applicability of Sections 326 and 327 in the event of liquidation under the IBC. The petitioners contended that this exclusion unfairly disadvantaged the workmen by altering the priority of their dues in liquidation proceedings, thereby violating their fundamental rights under Articles 14 and 21 of the Constitution.

The IBC, enacted in 2016, introduced a new framework for insolvency resolution and liquidation of corporate entities. It replaced multiple earlier laws, aiming for a time-bound resolution process. The petitioners argued that the IBC’s provisions, particularly Section 53, which outlines the priority of claims, unjustly relegated workmen’s dues by ranking them pari passu with secured creditors who relinquished their security interests. They sought a declaration that Section 327(7) was unconstitutional and that workmen’s dues should be prioritized above all other claims in liquidation.

D) FACTS OF THE CASE

The Moser Baer Karamchari Union filed the writ petition under Article 32 of the Constitution, seeking to strike down Section 327(7) of the Companies Act, 2013, and to exclude workmen’s dues from the purview of the IBC’s waterfall mechanism. The petitioners emphasized that under the Companies Act, 2013, workmen’s dues had higher priority, which the IBC altered.

The Union of India, represented by the Additional Solicitor General, defended the legislative changes, arguing that the IBC was designed to create a uniform and efficient insolvency resolution framework. The respondent contended that the changes were made after extensive consultation and aimed at balancing the interests of all stakeholders, including workmen, creditors, and the economy at large.

The Court also considered the legislative history of the Companies Act and the IBC, the reports of various committees, and the objectives behind the insolvency reforms. The judgment required a detailed analysis of whether the exclusion of Sections 326 and 327 during IBC liquidation violated constitutional guarantees and whether the prioritization mechanism under the IBC was just and reasonable.

E) LEGAL ISSUES RAISED

i) Whether Section 327(7) of the Companies Act, 2013, which excludes the application of Sections 326 and 327 during liquidation under the IBC, is arbitrary and violative of Articles 14 and 21 of the Constitution of India.
ii) Whether the IBC’s provision of pari passu treatment of workmen’s dues with secured creditors in liquidation is unconstitutional.

F) PETITIONER/ APPELLANT’S ARGUMENTS

The counsels for Petitioner submitted that the exclusion of Sections 326 and 327 by Section 327(7) of the Companies Act, 2013, was arbitrary and unconstitutional. They argued that this exclusion violated Articles 14 and 21 by diminishing the priority of workmen’s dues, which previously had higher priority under the Companies Act. They contended that the IBC’s waterfall mechanism, particularly Section 53, unfairly ranked workmen’s dues on par with secured creditors who relinquished their security, undermining the workmen’s financial security and welfare.

G) RESPONDENT’S ARGUMENTS

The counsels for Respondent submitted that the IBC aimed to create a comprehensive and time-bound insolvency resolution framework, balancing the interests of all stakeholders. They argued that the exclusion of Sections 326 and 327 was necessary to avoid conflicting provisions and to ensure a uniform insolvency process. They emphasized that the IBC’s provisions were designed after extensive consultation and were intended to maximize asset value and revive distressed companies, which ultimately benefited workmen as well.

H) JUDGEMENT

a. RATIO DECIDENDI

The Supreme Court held that Section 327(7) of the Companies Act, 2013, was not arbitrary and did not violate Articles 14 and 21 of the Constitution of India. The Court emphasized that the IBC was a comprehensive code designed to address insolvency and bankruptcy in a time-bound and efficient manner. It noted that the legislative intent behind the IBC was to balance the interests of all stakeholders, including workmen, and that the exclusion of Sections 326 and 327 was to ensure a uniform insolvency process.

b. OBITER DICTA

The Court observed that while the workmen’s dues were ranked pari passu with secured creditors in the IBC, this did not undermine their rights but was part of a broader objective to maximize the value of assets and ensure fair distribution among all creditors. The Court also noted that the provident fund, pension fund, and gratuity fund were excluded from the liquidation estate, thus protecting the core financial interests of workmen.

I) CONCLUSION & COMMENTS

The Supreme Court’s decision upheld the constitutionality of Section 327(7) of the Companies Act, 2013, affirming that the IBC’s provisions did not violate constitutional rights. The judgment reinforced the IBC’s objective to create a uniform and balanced insolvency resolution framework. The decision highlighted the Court’s deference to legislative judgment in economic matters, recognizing the complex considerations involved in insolvency law. This ruling underscores the importance of a cohesive insolvency framework and the need to balance competing interests to achieve economic stability and growth.

J) REFERENCES

a. Important Cases Referred

i) Manish Kumar vs Union of India (2021) 5 SCC 1
ii) Swiss Ribbons Private Limited and Anr. vs Union of India and Ors. (2019) 4 SCC 17
iii) Committee of Creditors of Essar Steel India Limited vs Satish Kumar Gupta and Ors. (2020) 8 SCC 531
iv) Ghanashyam Mishra and Sons Private Limited vs Edelweiss Asset Reconstruction Company Limited (2021) 9 SCC 657
v) Allahabad Bank vs Canara Bank and Anr. (2000) 4 SCC 406
vi) Andhra Bank vs Official Liquidator and Anr. (2005) 5 SCC 75

b. Important Statutes Referred

i) Companies Act, 2013
ii) Insolvency and Bankruptcy Code, 2016
iii) Constitution of India