Some sacrifices have to be made for greater good: Supreme Court upholds validity of Section 327(7) of Companies Act

The Supreme Court on Tuesday rejected a challenge to the constitutional validity of provisions of the Companies Act that exclude statutory claims of workers' dues when a firm is undergoing the insolvency process. [Moser Baer Karamchari Union v. Union of India and ors].A Bench of Justices MR Shah and Sanjiv Khanna opined that any unpaid dues of workers are 'adequately and significantly protected' in terms of the waterfall mechanism prescribed by Section 53 of the Insolvency and Bankruptcy Code (IBC).Pertinently, the Court said that in such matters, the government had to be given leeway, and some sacrificies will result."In economic matters, a wider latitude is given to the lawmaker and the Court allows for experimentation in such legislation based on practical experiences and other problems seen by the law-makers. In a challenge to such legislation, the Court does not adopt a doctrinaire approach. Some sacrifices have to be always made for the greater good, and unless such sacrifices are prima facie apparent and ex facie harsh and unequitable as to classify as manifestly arbitrary, these would be interfered with by the court," the judgment said..The Court upheld Section 327(7) of the 2013 Companies Act, which provides that Sections 326 and 327 of the Act shall not be applicable in the event of liquidation under the IBC.While Section 326 provides that workmen‘s dues and debts due to secured creditors shall be paid in priority to all other debts when a company faces winding up, Section 327(7) bars the application to Sections 326 and 327 when the insolvency process is initiated..The verdict came in a batch of petitions that had contended that the said provision was arbitrary and unconstitutional for leaving out the statutory claims of 'workmen’s dues' from the purview of Section 53 of the IBC.Amicus curiae in the case, Senior Advocate KV Viswanathan argued that workmen’s dues rank on an equal footing with the debts owed to secured creditors. Specifically, wages or salary due to workmen for a period of two years preceding the winding up order are to be paid in priority to all other debts, he added.In the context of Section 53 of the IBC, he submitted that is settled law that a vested right under a statute can be taken away by another statute in view of public interest and it being an economic measure.Additional Solicitor General Balbir Singh, appearing for the Central government, said that Section 36 of the IBC gives outright protection to workmen’s dues under the Provident, Pension and Gratuity Fund. These are not treated as liquidation assets and a liquidator has no claim over such funds, he added..The objective of the IBC is to improve the ease of doing business and facilitate investments, so as to increase employement and avoid economic woes, the Court emphasised at the outset."The Code 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...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. 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."For the revival and rehabilitation of companies, certain sacrifices are required from even workmen and governments, the judgment notes. "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.".The Court in conclusion stated that during insolvency processes,"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 Code.".Senior Advocate Gopal Sankaranarayanan represented the petitioners..[Read judgment]