Supreme Court (19.04.2022) in Sunil Kumar Jain and others Vs. Sundaresh Bhatt and others. [Civil Appeal No. 5910 Of 2019 ] held that;
The wages/salaries of the workmen/employees of the Corporate Debtor for the period during CIRP can be included in the CIRP costs provided it is established and proved that the Interim Resolution Professional/Resolution Professional managed the operations of the corporate debtor as a going concern during the CIRP and that the concerned workmen/employees of the corporate debtor actually worked during the CIRP.
In such an eventuality, the wages/salaries of those workmen/employees who actually worked during the CIRP period when the resolution professional managed the operations of the corporate debtor as a going concern, shall be paid treating it and/or considering it as part of CIRP costs and the same shall be payable in full first as per Section 53(1)(a) of the IB Code;
Considering Section 36(4) of the IB code and when the provident fund, gratuity fund and pension fund are kept out of the liquidation estate assets, the share of the workmen dues shall be kept outside the liquidation process and the concerned workmen/employees shall have to be paid the same out of such provident fund, gratuity fund and pension fund, if any, available and the Liquidator shall not have any claim over such funds.
Excerpts of the order;
# 1. Feeling aggrieved and dissatisfied with the impugned order dated 31.05.2019 passed by the National Company Law Appellate Tribunal, New Delhi (hereinafter referred to as the ‘Appellate Tribunal’) in Company Appeal (AT) (Insolvency) No. 605 of 2019, by which the Appellate Tribunal has dismissed the said appeal preferred by the appellants herein – workmen/employees of M/s ABG Shipyard Limited (hereinafter referred to as the ‘Corporate Debtor’), working at Dahej and Mumbai, which was filed against the order passed by the National Company Law Tribunal, Ahmedabad Bench, Ahmedabad (hereinafter referred to as the ‘Adjudicating Authority’) dated 25.04.2019 not granting any relief to them with regard to their claim relating to salary, which they claimed for the period involving ‘Corporate Insolvency Resolution Process’ (hereinafter referred to as the ‘CIRP’) and the prior period, original applicants – workers/employees have preferred the present appeal.
# 3.1 On 23.10.2017, Company Application No. 348 of 2017 was filed before the Adjudicating Authority, praying inter alia to direct the Resolution Professional to make payment to the employees and the workmen. On 9.3.2018, the appellants herein filed Company Application No. 78 of 2018 in Company Application No. 348/2017 before the Adjudicating Authority, praying inter alia to direct the RP to utilize the amount of Rs.9,75,33,236/- to be received from the Indian Coast Guard solely for employees/workmen.
# 3.2 Vide order dated 25.04.2018 passed in Company Application No. 78/2018, the Adjudicating Authority directed the RP to deposit Rs.2,75,00,000/- in the Registry of the Adjudicating Authority, subject to the outcome of Company Application No. 348/2017. In the meantime, in the 4th meeting of the COC held on 08.12.2017, the issue with respect to the payment of salaries/wages of the employees/workers respectively was discussed in view of the directions passed by the Adjudicating Authority vide its order dated 01.12.2017. However, the issue was not resolved and thereafter the appellants herein filed the aforesaid IA No. 78/2018 in which the Adjudicating Authority directed to deposit Rs. 2.75 crores out of the total amount of Rs.9,75,33,236/- with the Registry of the NCLT towards disbursement of the outstanding salaries/wages to the appellants, subject to the final outcome of IA No. 348/2017 and the Adjudicating Authority accordingly disposed of Company Application No. 78/2018.
# 3.3 It appears that thereafter since no agreed resolution plan could be adopted of the Corporate Debtor, the RP filed IA No. 113/2019 before the Adjudicating Authority praying for an order of liquidation of Corporate Debtor. The Adjudicating Authority by order dated 25.04.2019, after deciding various other applications including the application of the appellants being Company Application No. 348/2017 passed an order of liquidation of the Corporate Debtor and appointed respondent no.1 herein as Liquidator of the Corporate Debtor. While passing the order of liquidation, the Adjudicating Authority also disposed of Company Application No. 348/2017 in view of the order passed in Company Application No. 78/2018 by which the Adjudicating Authority earlier directed to deposit Rs.2.75 crores towards the dues of the appellants which as such was subject to the final outcome of Company Application No. 348/2017. Therefore, as such, the Adjudicating Authority while disposing of Company Application No. 348/2017 did not grant the relief claimed by the appellants – 272 workers/employees working at Dahej Yard and Mumbai Head Office for their claim relating to salary for the period involving CIRP and the prior period.
# 4. Feeling aggrieved and dissatisfied with the order passed by the Adjudicating Authority, not granting the relief to the appellants herein with regard to their claim relating to salary/wages, which they claimed for the period involving CIRP and prior period, the appellants workmen / employees working at Dahej Yard and Mumbai Head Office preferred Company Appeal No. 605/2019 before the Appellate Tribunal. By the impugned order, the Appellate Tribunal has disposed of the said appeal declining to interfere with the order passed by the Adjudicating Authority, however, allowed the appellants – 272 workmen/employees to file their individual claims before the Liquidator, who after going through the record and taking into consideration the pleadings made by the workmen/employees will determine the claim. The Appellate Tribunal has also further observed that if claim of one or other workmen/employee is rejected, it will be open to them to move before the Adjudicating Authority, which may decide the same in accordance with law. The Appellate Tribunal has also observed that so far as the Gratuity and Provident Funds are concerned, the same cannot be treated to be the asset of the Corporate Debtor and they are to be disbursed amongst the employees/workmen who are entitled for the same.
# 5. Feeling aggrieved and dissatisfied with the impugned order passed by the Appellate Tribunal, the appellants-workmen/employees of the Corporate Debtor working at Dahej Yard and Mumbai Head Office have preferred the present appeal.
# 8. We have heard the learned counsel for the respective parties at length. The issue before this Court is with respect to wages/salaries of the workmen/employees during the CIRP period and the amount due and payable to the respective workmen/employees towards Pension Fund, Gratuity Fund and Provident Fund.
# 8.1 While considering the aforesaid claims, the legislative history and the relevant provisions of the IB Code are required to be referred to. Relevant Provisions of the IB Code:
Legislative History with respect to workmen/employee’s dues towards the wages/salaries including the amount due and payable towards provident fund, gratuity and pension fund:
# 8.2 Under the Companies Act, 1956 (hereinafter referred to as “1956 Act”), Section 59A provided that workmen’s dues and debts due to secured creditors in terms of Section 529A(1)(c) of the 1956 Act shall be paid in priority to other debts. Further, it provided that in case of insolvent company, winding up should be undertaken in terms of laws of insolvency with respect to the status of persons adjudged insolvent.
# 8.2.1 The proviso to Section 59(1) of 1956 Act provided that workmen shall deem to have pari passu charge in his favour to the extent of workmen’s portion. It further stated that where the secured creditor (instead of relinquishing) is enforcing his security, the debt due to the extent of workmen’s share/ portion in the security shall rank pari passu with workmen’s dues for the purposes of Section 529A. The said section was brought in by way of Companies (Amendment) Bill, 1985 with the objective to introduce necessary legislation for the legitimate dues of workers rank pari pasu with the secured creditors in the event of the closure of the Company. The laudable objective was that in the unfortunate event of liquidation, workers whose labour and effort constitute an invisible but easily perceivable part of the capital of the company, are not deprived of their legitimate right to participate in the product of their labour and effort.
# 8.2.2 Section 530 of 1956 Act provided the waterfall mechanism as per which priority is to be given to different kinds of debts. Subsequently, the Companies Bill, 2009 and 2011 were introduced wherein wages/salaries payable to workmen for a period of 2 years were protected in case of winding up of the Company. Thereafter, under the Companies Act, 2013 (hereinafter referred to as “2013 Act”), Section 326 and Section 327 i.e. “Overriding Preferential Payment” and “Preferential Payments” were introduced wherein a proviso to Section 326 of the 2013 Act was inserted. Initially the insolvency process in case of winding up of insolvent companies were provided under Section 325 of 2013 Act. However, Section 325 of the 2013 Act was omitted w.e.f. 15.11.2016 on the coming into force the IB Code. On enactment of the IB Code, the winding up proceedings in case of insolvency are to be governed by the provisions of the IB Code and the provisions of the IB code only shall be applicable to deal with the winding up proceedings as the IB Code is a complete Code in itself. That thereafter, an amendment w.e.f. 15.11.2016 has been brought in under Section 327 (7) of 2013 Act wherein it has been clarified that the provisions of Section 326 and Section 327 of the 2013 Act will not be applicable in the event of liquidation under the IB Code.
# 8.2.3 In case of any insolvency, in a winding up of a company under Section 326 and 327 of the Companies Act, the workmen dues are to be paid as under: -
• 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 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).
• 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.
# 8.2.4 Under the IB Code, the workmen dues have been duly protected and the provident fund, gratuity and pension fund have been excluded from the liquidation estate assets (Section 36(4) of the IB Code). Furthermore, as per Section 53 of the IB Code, the workmen dues are given the top priority in the waterfall mechanism.
# 8.2.5 The issue of giving priority to the workmen dues have been considered time and again in the various Committee’s Reports:
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 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. Furthermore, it was also debated with respect to the waterfall mechanism under the Code 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 liquidation. 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 estate assets and estate of bankrupt was debated. The Committee, after in dept 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. The Committee observed that the workers are the nerve centre of any company and in the event of any company becoming 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. Thus, to protect the interest of the workmen, the Committee decided that that the workmen dues for a period of 12 months as provided under Section 53 of the Code be increased to 24 months preceding liquidation commencement date In light of the same, the Section 36 of the Code has clearly given outright protection to workmen’s dues under Provident Fund, Pension Fund and Gratuity Fund which is not treated as liquidation assets and liquidator has no claim over such funds. Therefore, this share of workmen’s dues has consciously been taken outside the liquidation process.
# 8.2.6 In light of the above statutory provisions under the IB Code and the legislative history, the claims of the workmen/employees towards wages/salaries prior to CIRP and during the CIRP are required to be considered.
# 9. It cannot be disputed that as per Section 5(13) of the IB Code, “insolvency resolution process costs” shall include any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern. It is also true that Section 20 of the IB Code mandates that the interim resolution professional/resolution professional is to manage the operations of the corporate debtor as a going concern and in case during the CIRP the corporate debtor was a going concern, the wages/salaries of such workmen/employees who actually worked, shall be included in the CIRP costs and in case of liquidation of the corporate debtor, dues towards the wages and salaries of such workmen/employees who actually worked when the corporate debtor was a going concern during the CIRP, being a part of the CIRP costs are entitled to have the first priority and they have to be paid in full first as per Section 53(1)(a) of the IB Code. Therefore, while considering the claims of the concerned workmen/employees towards the wages/salaries payable during CIRP, first of all it has to be established and proved that during CIRP, the corporate debtor was a going concern and that the concerned workmen/employees actually worked while the corporate debtor was a going concern during the CIRP. The wages and salaries of all other workmen/employees of the Corporate Debtor during the CIRP who actually have not worked and/or performed their duties when the Corporate Debtor was a going concern, shall not be included automatically in the CIRP costs. Only with respect to those workmen/employees who actually worked during CIRP when the Corporate Debtor was a going concern, their wages/salaries are to be included in the CIRP costs and they shall have the first priority over all other dues as per Section 53(1)(a) of the IB Code. Any other dues towards wages and salaries of the employees/workmen of the corporate debtor shall have to be governed by Section 53(1)(b) and Section 53(1) (c) of the IB Code. Any other interpretation would lead to absurd consequences and violate the scheme of Section 53 r/w Section 5(13) of the IB Code. If any other interpretation, more particularly, the interpretation canvassed on behalf of the appellants is accepted, in that case, the wages/salaries of those workmen/employees who had not worked at all during CIRP shall have to be treated and/or included in the CIRP costs, which cannot be the intention of the legislature.
# 10. On a fair reading of Section 5(13) of the IB code which defines “insolvency resolution process costs”, it is observed and held that the dues towards the wages/salaries of only those workmen/employees who actually worked during the CIRP are to be included in the CIRP costs. The rests of the claims towards the wages/salaries of the workmen/employees, as observed hereinabove, shall be governed by Sections 53(1)(b) & (c) of the IB Code.
# 11. In the present case, the RP/Liquidator has seriously disputed that during the CIRP, the Corporate Debtor was a going concern. It is seriously disputed that the respective appellants – workmen/employees employed at Dahej Yard and Mumbai Head Office actually worked during the CIRP. It is true that while submitting the claims towards CIRP costs, the RP has not submitted the claims towards the wages/salaries of the appellants, however, still the claims submitted/to be submitted by the appellants will have to be adjudicated upon and considered by the Liquidator and the Liquidator has to adjudicate and consider,
(i) whether the Corporate Debtor was a going concern during the CIRP;
(ii) how many workmen/employees actually worked during the CIRP while the Corporate Debtor was a going concern.
If on adjudication of the claims made by the respective workmen/employees, if it is established and proved that during CIRP, the Corporate Debtor was a going concern and the concerned workmen/employees actually worked during the CIRP when the Corporate Debtor was a going concern, the wages and salaries of such workmen/employees to be included in the CIRP costs as defined under Section 5(13) of the IB Code and they will have to be paid such wages/salaries as per Section 53(1)(a) of the IB Code as part of the CIRP costs in full before making any payment as per priorities mentioned in Section 53(1) of the IB code.
# 12. Now so far as the submission on behalf of the appellants that as per Section 20 of the IB Code and even as per the decisions of this Court in the cases of Swiss Ribbons Pvt. Ltd. (supra) and Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (supra), the RP is under mandate to manage the operations of the Corporate Debtor as a going concern and therefore it is to be believed that during CIRP, the Corporate Debtor was a going concern, managed and/or operated as a going concern cannot be accepted. It is true that under Section 20 of the IB Code, it is the duty of the RP to manage and run the operations of the Corporate Debtor as a going concern. However, the words used in Section 20 are “the interim resolution professional shall make every endeavour to …. manage the operations of the corporate debtor as a going concern”. Therefore, even if it is found that the Corporate Debtor was not a going concern during the CIRP despite best efforts by the resolution professional, it cannot be presumed that still the Corporate Debtor was a going concern during the CIRP period. It depends on the facts of each case. In a given case, the Corporate Debtor may be a going concern and in a given case, the corporate debtor might not be a going concern. Therefore, submission on behalf of the appellants that as the RP is under mandate to manage the operations of the corporate debtor as a going concern under Section 20 of the IB code and therefore it is to be presumed that the RP managed the operations of the Corporate Debtor as a going concern and therefore the workmen/employees are entitled to their wages and salaries during the CIRP, as their wages/salaries to be included in the CIRP costs cannot be accepted. However, the wages and salaries of the workmen/employees of pre-CIRP period will have to be governed as per the priorities mentioned in Section 53(1) of the IB Code.
Dues of the workmen/employees towards Provident Fund, Gratuity Fund and Pension Fund”
# 13. Now so far as the dues of the workmen/employees on account of provident fund, gratuity and pension are concerned, they shall be governed by Section 36(4) of the IB Code. Section 36(4)(iii) of the IB Code specifically excludes “all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund”, from the ambit of “liquidation estate assets”. Therefore, Section 53(1) of the IB Code shall not be applicable to such dues, which are to be treated outside the liquidation process and liquidation estate assets under the IB Code. Thus, Section 36(4) of the IB Code has clearly given outright protection to workmen’s dues under provident fund, gratuity fund and pension fund which are not to be treated as liquidation estate assets and the Liquidator shall have no claim over such dues. Therefore, the concerned workmen/employees shall be entitled to provident fund, gratuity fund and pension fund from such funds which are specifically kept out of liquidation estate assets and as per Section 36(4) of the IB Code, they are not to be used for recovery in the liquidation.
# 14. In view of the above and for the reasons stated above, it is held a under:
i) that the wages/salaries of the workmen/employees of the Corporate Debtor for the period during CIRP can be included in the CIRP costs provided it is established and proved that the Interim Resolution Professional/Resolution Professional managed the operations of the corporate debtor as a going concern during the CIRP and that the concerned workmen/employees of the corporate debtor actually worked during the CIRP and in such an eventuality, the wages/salaries of those workmen/employees who actually worked during the CIRP period when the resolution professional managed the operations of the corporate debtor as a going concern, shall be paid treating it and/or considering it as part of CIRP costs and the same shall be payable in full first as per Section 53(1)(a) of the IB Code;
ii) considering Section 36(4) of the IB code and when the provident fund, gratuity fund and pension fund are kept out of the liquidation estate assets, the share of the workmen dues shall be kept outside the liquidation process and the concerned workmen/employees shall have to be paid the same out of such provident fund, gratuity fund and pension fund, if any, available and the Liquidator shall not have any claim over such funds.
# 15. As observed hereinabove, there are disputed questions, whether in fact the IRP/RP managed the operations of the corporate debtor as a going concern during the CIRP and there is a serious dispute whether Dahej Yard was operational during the CIRP or not and there is a serious dispute that the concerned workmen/employees of the Dahej Yard and the concerned employees of the Mumbai Head Office actually worked during the CIRP or not and therefore it is directed that let the appellants submit their claims before the Liquidator and establish and prove that during CIRP, IRP/RP managed the operations of the corporate debtor as a going concern and that they actually worked during the CIRP and the Liquidator is directed to adjudicate such claims in accordance with law and on its own merits and on the basis of the evidence which may be laid/produced, irrespective of the fact whether the RP who himself is now the Liquidator included the claims of the appellants being wages/salaries during CIRP as CIRP costs or not. The Liquidator is directed to adjudicate such claims independently. If it is found that in fact the IRP/RP managed the operations of the corporate debtor as a going concern during the CIRP and the concerned workmen/employees actually worked during CIRP, their wages and salaries be considered and included in CIRP costs and they will have to be paid as per Section 53(1)(a) of the IB Code in full before distributing the amount in the priorities as mentioned in Section 53 of the IB Code. The aforesaid exercise shall be completed within a period of twelve weeks from today and such amount shall be paid out of the amount which is directed to be kept aside earlier by the Adjudicating Authority/Appellate Tribunal and thereafter by this Court. Till such claims are adjudicated upon, the Liquidator is directed to keep aside the said amount exclusively to be used for the workmen/employee’s dues which is to be paid on adjudication as above.
# 16. The present appeal is partly allowed to the aforesaid extent and disposed of accordingly. No costs.
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Blogger’s comments; Hon'ble Supreme Court in the above judgement clarified the position of provident fund, gratuity fund and pension fund under section 36(4) as under;
considering Section 36(4) of the IB code and when the provident fund, gratuity fund and pension fund are kept out of the liquidation estate assets, the share of the workmen dues shall be kept outside the liquidation process and the concerned workmen/employees shall have to be paid the same out of such provident fund, gratuity fund and pension fund, if any, available and the Liquidator shall not have any claim over such funds.
This judgement clarifies & quantifies the provident fund, gratuity fund and pension fund, with the words if any, available. This is in confirmation to the stand taken by the Appellate Authority (NCLAT) earlier in Savan Godiwala Vs Apalla Siva Kumar [ CA (AT) (Insolvency) No.1229 of 2019];
# 25 …………….Thus it is the settled position of law, that the provident fund, the pension fund and the gratuity fund, do not come within the purview of liquidation estate‘ for the purpose of distribution of assets under Section 53 of the Code. Based on this, the only inference which can be drawn is that Pension Fund, Gratuity Fund and Provident Fund can‘t be utilized, attached or distributed by the liquidator, to satisfy the claim of other creditors. Sec 36(2) of the I B Code 2016 provides that the Liquidator shall hold the Liquidation Estate in fiduciary for the benefit of all the Creditors. The Liquidator has no domain to deal with any other property of the corporate debtor, which is not the part of the Liquidation Estate. In a case, where no fund is created by a company, in violation of the Statutory provision of the Sec 4 of the Payment of Gratuity Act, 1972, then in that situation also, the Liquidator cannot be directed to make the payment of gratuity to the employees because the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the liquidation estate……….
- ………….In this case, we are not concerned with determination about the entitlement of Gratuity by the employees of the Corporate Debtor‘. Payment of Gratuity to employees depends on their entitlement of Gratuity, subject to the fulfilment of the conditions laid down under the Payment of Gratuity Act, 1972 and also on the availability of the fund in this regard………
- …………..The annual cash flow statement for the ending 31st March, 2017 shows that Gratuity Fund was proposed. However, it is noticed that no such fund was created. In the circumstances, the Liquidator should not have been directed to make provision for the payment of gratuity to the workmen as per their entitlement.
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