1. Dispute regarding payment of wages and salaries during and prior to Corporate Insolvency Resolution Process (CIRP) and dues for provident fund, gratuity, and pension under the IB Code. (Para 1 , 2 , 3 , 4 , 5 )
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2022 Supreme(SC) 348
SUPREME COURT OF INDIA
M.R. SHAH, ANIRUDDHA BOSE, JJ.
Sunil Kumar Jain and others - Appellants
Versus
Sundaresh Bhatt and others - Respondents
Civil Appeal No. 5910 of 2019
Decided on : 19-04-2022
Advocates appeared:
For the Appellant(s) : Ms. Shobha Ramamoorthy, AOR Shilp Vinod, Adv. Mr. Nawaz Sherif Adv. Mr. M.A. Karthik, Adv. Mr. Vincy George, Adv. Mr. Gokulakrisnan, Adv. Ms. Ritika Rao, Adv.
For the Respondent(s): Mr. Alok Tripathi, AOR Mr. Parminder Singh Bhullar, AOR Mr. Rajeev Kumar Gupta, Adv. Mr. Dinesh Tripathi, Adv. Mr. Sanjay Kumar, Adv. Mr. Sanjay Kumar Tyagi, AOR M/s. Cyril Amarchand Mangaldas, AOR
For the Appellant(s) : Ms. Shobha Ramamoorthy, AOR Shilp Vinod, Adv. Mr. Nawaz Sherif Adv. Mr. M.A. Karthik, Adv. Mr. Vincy George, Adv. Mr. Gokulakrisnan, Adv. Ms. Ritika Rao, Adv.
For the Respondent(s): Mr. Alok Tripathi, AOR Mr. Parminder Singh Bhullar, AOR Mr. Rajeev Kumar Gupta, Adv. Mr. Dinesh Tripathi, Adv. Mr. Sanjay Kumar, Adv. Mr. Sanjay Kumar Tyagi, AOR M/s. Cyril Amarchand Mangaldas, AOR
Headnote:- Wages/Salaries - Section 3(36), Section 5(13), Section 20, Section 25, Section 33(7), Section 36(4), and Section 53 of the Insolvency and Bankruptcy Code, 2016 SUMMARY
Fact of the Case:
The case involves a dispute over the payment of wages/salaries to workmen/employees during the Corporate Insolvency Resolution Process (CIRP) and the prior period.Finding of the Court:
The court held that wages/salaries of workmen/employees during CIRP can be included in CIRP costs if it is established that the resolution professional managed the operations as a going concern. Provident fund, gratuity fund, and pension fund are excluded from liquidation estate assets.Issues:
Disputed questions regarding whether the corporate debtor was a going concern during CIRP and whether workmen/employees actually worked during CIRP.Ratio Decidendi:
The court directed the submission of claims before the Liquidator to establish if the corporate debtor was a going concern during CIRP and if workmen/employees worked during CIRP. Adjudication by the Liquidator was mandated within twelve weeks.Final Decision:
The appeal was partly allowed, directing adjudication of claims for wages/salaries by the Liquidator based on evidence provided.
Judgement Key Points
Certainly. The statement that if the EPFO claim is crystallized, it is protected by law and cannot be excluded from the liquidation process under Section 36, as the funds are specifically kept outside the liquidation estate assets, is supported by the following references:
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The provision of Section 36(4) which explicitly states that sums due to workmen or employees from provident funds, pension funds, and gratuity funds are to be kept outside the liquidation estate assets and are not to be used for recovery in the liquidation process (!) .
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The legislative history and the provisions of the IB Code that reinforce the exclusion of these funds from the liquidation estate, ensuring that crystallized claims from EPFO are protected and cannot be disregarded under Section 36 (!) (!) (!) .
These references collectively support the principle that such claims are protected and cannot be excluded from the liquidation process once crystallized.
Legal Category Hierarchy
- insolvency and bankruptcy law
- employment and labour law
Table of Contents
2. Whether wages during CIRP constitute insolvency resolution process costs or operational debts under the waterfall mechanism, and the status of provident fund, gratuity, and pension dues. (Para 6 , 7 )
3. Analysis of Section 5(13) and Section 20, determining that wages during CIRP are costs only if the entity was a going concern and employees actually worked. (Para 8 , 9 , 10 , 11 , 12 )
4. Wages during CIRP are insolvency resolution process costs if the corporate debtor was a going concern and employees worked; PF, gratuity, and pension are excluded from liquidation estate. (Para 9 , 10 , 13 , 14 )
5. Appeal partly allowed; Liquidator directed to adjudicate claims for CIRP costs based on actual work and going-concern status; PF, gratuity, and pension dues to be paid. (Para 15 , 16 )
6. When are wages and salaries during the CIRP period treated as insolvency resolution process costs?
Wages and salaries during CIRP are included as insolvency resolution process costs only if it is established and proved that the resolution professional managed the operations of the corporate debtor as a going concern and the concerned workmen or employees actually worked during that period. (Para 9 , 10 , 11 , 14 )
7. Does the mandate under Section 20 to manage a corporate debtor as a going concern create a presumption that it was a going concern?
No. While Section 20 requires the resolution professional to make every endeavour to manage operations as a going concern, it cannot be presumed that the corporate debtor was a going concern; this depends on the specific facts of each case. (Para 12 )
8. How are dues related to provident funds, gratuity funds, and pension funds treated during the liquidation process?
Under Section 36(4)(iii) of the IB Code, all sums due to any workman or employee from the provident fund, pension fund, and gratuity fund are excluded from the liquidation estate assets and cannot be used for recovery in liquidation. (Para 13 , 14 )
JUDGMENT :
M.R. SHAH, J.
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.
2. That the Corporate Debtor was a private sector Ship Building Yard with its manufacturing activities at Dahej Yard and Surat Yard in Gujarat and having its corporate office at Mumbai. That prior to the initiation of CIRP, the Corporate Debtor had 562 workmen and 93 employees at Dahej; 291 workmen and 99 employees at Surat and 101 employees at its Mumbai Head Office. The appellants herein are the 272 employees and workmen employed at Mumbai Head Office and Dahej Yard of the Corporate Debtor. None of the 201 employees and workmen at Surat Yard are the appellants herein.
3. Vide its order dated 1.8.2017, the Adjudicating Authority admitted an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘IBC Code’) and the CIRP was initiated. The Adjudicating Authority also appointed the Interim Resolution Professional of the Corporate Debtor who was thereafter confirmed as the Resolution Professional (for short, ‘RP’) by the Committee of Creditors (for short, ‘COC’) of the Corporate Debtor on 7.9.2017. First meeting of the COC was held on 4.9.2017.
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 l
