'Rearranging Hierarchy In Waterfall Mechanism Will Disrupt Equilibrium', SC On Workers' Union Plea On Payment On Liquidation

(MENAFN- IANS) New Delhi, May 2 (IANS) The Supreme Court on Tuesday dismissed a plea to strike down a provision of the Companies Act, 2013, according to which workers' dues will not get preferential payment when a company undergoes liquidation as per the Insolvency and Bankruptcy Code (IBC) 2016.
The top court said for the revival and rehabilitation of the companies, certain sacrifices are required from all quarters, including the workers.
A bench of Justices M.R. Shah and Sanjiv Khanna said the guiding principle for the IBC in setting the priority of payments in liquidation is to bring the practices in India in line with global practices.
The bench said that 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 workers.
"The unpaid dues of the workmen are adequately and significantly protected in line with the objectives sought to be achieved by the code (IBC) and in terms of the waterfall mechanism prescribed by Section 53 of the code. In either case of relinquishment or non-relinquishment of the security by the secured creditor, the interests of workmen are protected under the code," it said.
The bench said the secured creditors are taking significant hair-cut and workmen are being compensated on an equitable basis in a just and proper manner as per Section 53 of the IBC.
"The code balances the rights of the secured creditors, who are financial institutions in which the general public has invested money, and also ensures that the economic activity and revival of a viable company is not hindered because it has suffered or fallen into a financial crisis. The code focuses on bringing additional gains to both the economy and the exchequer through efficiency enhancement and consequent greater value capture," the bench noted.
The top court made these observations while dismissing a batch of petitions filed by Moser Baer Karamchari Union and others to quash Section 327(7) of the Companies Act, 2013 as arbitrary and violative of Article 21 of the Constitution.
The bench said 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, and 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.
"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," said the bench.
The workers' union, along with others, asked the court to leave statutory claims of the workmen's dues out of the purview of the waterfall mechanism under Section 53 of the IBC. The petitioners also sought other directions, which included enabling them to get their dues of 24 months released without any further delay.
The bench stressed that IBC recognises the financial impact on secured creditors or financial institutions dealing with public money, as their economic health is equally important for the general public as well as the national economy.
Justice Shah, who authored the 74-page judgment on behalf of the bench, said: "These are all complex economic matters wherein various conflicting interests have to be balanced, and a holistic rather than a one-sided approach is to be taken."
Justice Shah said, "Each opinion may have merit, but the court can hardly substitute its own wisdom or view for that of the legislature, especially when the enactment is the outcome of a thought-out and ruminated review on complex fiscal and commercial challenges facing the economy."
The bench said for the revival and rehabilitation of the companies, certain sacrifices are required from all quarters, including the workmen and in case of insolvent companies, for the sake of survival and regeneration, everyone, including the secured creditors and the Central and state governments, are required to make sacrifices.
"The workmen also have a stake and benefit from the revival of the company, and therefore unless it is found that the sacrifices envisaged for the workmen, which certainly form a separate class, are onerous and burdensome so as to be manifestly unjust and arbitrary, we will not set aside the legislation, solely on the ground that some or marginal sacrifice is to be made by the workers," said the bench.
The bench added: "We would also reject the argument that to find out whether there was a violation of Article 14 of the Constitution of India or whether the right to life under Article 21 of the Constitution of India was infringed, we must word by word examine the waterfall mechanism envisaged under the Companies Act, 2013, where the company is wound up in terms of grounds (a) to (e) of Section 271 of the Companies Act, 2013."



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