IBC - Wages/Salaries Of Only Those Workmen/Employees Who Actually Worked During CIRP Are To Be Included In CIRP Costs: Supreme Court

The Supreme Court held that the dues towards the wages/salaries of only those workmen/employees who actually worked during the Corporate Insolvency Resolution Process(CIRP) are to be included in the CIRP costs.

The court clarified that 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. Such dues will be governed by Section 53(1)(b) and Section 53(1) (c) of the Insolvency and Bankruptcy Code, the bench comprising Justices MR Shah and Aniruddha Bose observed.

The insolvency resolution proces costs have the first priority in the distribution of assets on the liquidation of the corporate debtor as per Section 53(1)(a) IBC.

Legal provisions

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. As per Section 20, 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.

Brief Background

In this case, National Company Law Appellate Tribunal dismissed the  appeal preferred by the workmen/employees of M/s ABG Shipyard Limited ('Corporate Debtor') against National Company Law Tribunal order denying any relief to them with regard to their claim relating to salary, which they claimed for the period involving 'Corporate Insolvency Resolution Process' ('CIRP') and the prior period. The workmen/employees therefore approached the Apex Court in appeal.

Rival Contentions

The appellants contended that the salaries/wages and the dues payable to the employees/workmen during the CIRP period will be qualified as CIRP costs under Section 5(13) of the IB Code and are liable to be disbursed even prior to the amount distributed under Section 53 of the IB Code. It was further submitted that the provident fund, gratuity and pension fund amounts remain outside the liquidation under Section 36(4) of the IB Code. On the other hand, the respondent contended that the wages and salaries claimed by the appellants who have done no work during the CIRP period and have not assisted the RP/Liquidator during the CIRP, would not fall within the parameters of CIRP costs within the definition of Section 5(13)(c) of the IB Code.

Issue

Thus the issue considered by the court was whether the 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?

Wages/salaries of only those workmen/employees who actually worked during the CIRP are to be included in the CIRP costs

The court, referring to the provisions of the Code, observed that 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.. 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 29 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".

It depends on the facts of each case.

Yet another contention raised by the appellant was that 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. The court said:

"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."

Outright protection to workmen's dues under provident fund, gratuity fund and pension fund  

The court noted that 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"

The bench therefore partly allowed the appeal by concluding as follows:

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.

Case details

Sunil Kumar Jain vs Sundaresh Bhatt | 2022 LiveLaw (SC) 382 | CA 5910 OF 2019 | 19 April 2022

Coram: Justices MR Shah and Aniruddha Bose

Counsel: Adv Shobha Ramamoorthy for appellant, Sr. Adv Nakul Dewan for respondent

Headnotes

Insolvency and Bankruptcy Code, 2016 ; Section 5(13), 53(1)(b), 53(1)(c)-  Insolvency resolution process costs - 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 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. Such dues will be governed by Section 53(1)(b) and Section 53(1) (c) of the Insolvency and Bankruptcy Code. (Para 9-10)

Insolvency and Bankruptcy Code, 2016 ; Section 36(4), 53(1) - Section 53(1) of the IB Code shall not be applicable to dues of the workmen/employees on account of provident fund, gratuity and pension - They are to be treated outside the liquidation process and liquidation estate assets under the IB Code. (Para 13)

Insolvency and Bankruptcy Code, 2016 ; Section 20 - 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. (Para 12)

Companies Act, 1956 - Insolvency and Bankruptcy Code, 2016 - 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 - discussed. (Para 8.2)

Summary: Appeal against NCLAT order which dismissed appeals against NCLT order denying relief to appellant workmen/employees with regard to their claim relating to salary, which they claimed for the period involving CIRP- Partly allowed - (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. 

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