No priority for worker dues after liquidation under IBC

May 3, 2023

Synopsis
"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, 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," the bench said.

The Supreme Court on Tuesday endorsed a provision of the Companies Act, 2013, that says workers' dues will not get preferential payment in case of liquidation under the Insolvency and Bankruptcy Code, 2016.

A bench comprising Justices MR Shah and Sanjiv Khanna dismissed a batch of petitions led by Moser Baer Karamchari Union seeking to strike down Section 327(7) of the Companies Act, 2013 as arbitrary and violative of Article 21 of the Constitution of India.

Stating that the guiding principle in setting the priority of payments in liquidation was to bring the IBC practices in India in line with global practices.

"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, 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," the bench said.

Every change in the waterfall mechanism is bound to lead to cascading effects on the balance of rights and interests of the secured creditors, operational creditors and even the Central and state governments, it added.

In the waterfall 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 prescribed by Section 53," the court said.

"In fact, the secured creditors are taking significant haircut and workmen are being compensated on an equitable basis in a just and proper manner as per Section 53 of IBC."

[The Economic Times]