State Bank Of India vs Moser Baer Karamchari Union & Anr

(Arising out of Order dated 19th March, 2019 passed by the Adjudicating Authority (National Company Law Tribunal), Principal Bench in C.A. No. 19 (PB) of 2019 in C.P. No. (IB) 378(PB)/ 2017))

IN THE MATTER OF:

State Bank of India ...Appellant

Vs.

Moser Baer Karamchari Union & Anr. ...Respondents

Present: For Appellant: - Mr. Ramji Srinivasan, Senior Advocate with Mr. Ankur Mittal, Mr. Abhay Gupta, Ms. Sylona Mohapatra, Mr. Nikhil Ramdev, Advocates.

For Respondents:- Mr. Swarnendu Chatterjee and Ms. Shriya Maini, Advocates for R-1.

Mr. Abhishek Anand and Mr. Tushar Tyagi, Advocates for R-2.

J U D G M E N T

SUDHANSU JYOTI MUKHOPADHAYA, J.

On 14th November, 2017, pursuant to an application under

Section 7 of the Insolvency and Bankruptcy Code, 2016 ("I&B Code" for

short), the 'Corporate Insolvency Resolution Process' was initiated

against the 'Corporate Debtor', wherein finally on 20th September, 2018,

the order of liquidation was passed by the Adjudicating Authority 2

(National Company Law Tribunal), Principal Bench, New Delhi, and the

workmen stood discharged under Section 33(7) of the 'I&B Code'.

2. According to the Liquidator, by e-mail dated 5th December, 2018,

he categorically denied the payment of the gratuity fund, the provident

fund and the pension fund preferentially and included the same for the

payments under the waterfall mechanism under Section 53 of the 'I&B

Code'.

3. In January 2019, the 'Moser Baer Karamchari Union' filed CA No.

19(PB)/ 2019 with prayer that the directions be issued to the Liquidator

to exclude the amount due to them towards 'Provident Fund', 'Pension

Fund' and Gratuity Trust Fund' from the waterfall mechanism envisaged

under Section 53 of the 'I&B Code' and pay them the 'Provident Fund

Dues', 'Pension Fund Dues' and 'Gratuity Fund Dues' as these will not

constitute part of the liquidation estate.

4. The Adjudicating Authority (National Company Law Tribunal),

Principal Bench, New Delhi, by impugned order dated 19th March, 2019,

allowed the CA No. 19(PB)/ 2019 and held that the 'Provident Fund

Dues', 'Pension Fund Dues' and 'Gratuity Fund Dues' cannot be part of

Section 53 of the 'I&B Code'. The 'State Bank of India', a 'Secured

Creditor', has challenged the order in this appeal.

Company Appeal (AT) (Insolvency) No. 396 of 2019 3

5. Learned counsel appearing on behalf of the Appellant- 'State Bank

of India' submitted that for the purpose of distribution of assets of the

'Corporate Debtor' under Section 53 of the 'I&B Code', dues of employees

as mentioned in sub-clause (c) of sub-section (1) therein includes the

contribution of 'Provident Fund'.

6. It placed reliance on Explanation below Section 53 to suggest that

the 'workmen's dues' shall have the same meaning as assigned to it in

Section 326 of the Companies Act, 2013.

7. Reliance has been placed on Explanation (iv) below Section 326 of

the Companies Act, 2013, which relates to 'Overriding Preferential

Payments' and Explanation (iv) below Section 326, it is mentioned that all

sums due to any workman from the provident fund, the pension fund,

the gratuity fund or any other fund for the welfare of the workmen,

maintained by the Company is covered by term "workmen's dues".

8. Learned counsel for the Appellant- 'State Bank of India' also relied

on Section 327 of the Companies Act, 2013 which related to 'Preferential

Payments' and submitted that the sums due to the workman from the

provident fund or any other fund for the welfare of the workmen,

maintained by the Company, be treated as 'workmen dues'.

9. Learned counsel appearing on behalf of the 'Resolution

Professional' submitted that Section 36 (3) of the 'I&B Code' defines the

Company Appeal (AT) (Insolvency) No. 396 of 2019 4

components of the liquidation estate and also lays down what forms the

liquidation estate. Sub-section (3) therein is subject to sub-section (4).

Sub-section (4) (a) (iii) specifically excludes from the liquidation estate or

all sums due to any workman or employee from the provident fund, the

pension fund and the gratuity fund.

10. Therefore, it is submitted that the workmen have the first charge

on the aforesaid funds.

11. The question arises for consideration in this appeal is whether the

provident fund, pension fund and gratuity fund come within the meaning

of assets of the 'Corporate Debtor' for distribution under Section 53 of the

'I&B Code'.

12. Section 36 of the 'I&B Code' deals with 'Liquidation Estate' for the

purpose of liquidation. As per sub-section (1) of Section 36, for the

purpose of liquidation, the liquidator shall form an estate of the assets

mentioned in sub-section (3), which will be called the liquidation estate

in relation to the 'Corporate Debtor' and reads as follows:

"36. Liquidation estate.─ (1) For the purposes

of liquidation, the liquidator shall form an estate

of the assets mentioned in sub-section (3), which

will be called the liquidation estate in relation to

the corporate debtor.

Company Appeal (AT) (Insolvency) No. 396 of 2019 5

(2) The liquidator shall hold the liquidation estate

as a fiduciary for the benefit of all the creditors.

(3) Subject to sub-section (4), the liquidation estate

shall comprise all liquidation estate assets which

shall include the following: -

(a) any assets over which the corporate

debtor has ownership rights, including all

rights and interests therein as evidenced in

the balance sheet of the corporate debtor or

an information utility or records in the

registry or any depository recording

securities of the corporate debtor or by any

other means as may be specified by the

Board, including shares held in any

subsidiary of the corporate debtor;

(b) assets that may or may not be in

possession of the corporate debtor

including but not limited to encumbered

assets;

(c) tangible assets, whether movable or

immovable;

(d) intangible assets including but not

limited to intellectual property, securities

Company Appeal (AT) (Insolvency) No. 396 of 2019 6

(including shares held in a subsidiary of

the corporate debtor) and financial

instruments, insurance policies,

contractual rights;

(e) assets subject to the determination of

ownership by the court or authority;

(f) any assets or their value recovered

through proceedings for avoidance of

transactions in accordance with this

Chapter;

(g) any asset of the corporate debtor in

respect of which a secured creditor has

relinquished security interest;

(h) any other property belonging to or

vested in the corporate debtor at the

insolvency commencement date; and

(i) all proceeds of liquidation as and when

they are realised.

(4) The following shall not be included in the

liquidation estate assets and shall not be used for

recovery in the liquidation: -

Company Appeal (AT) (Insolvency) No. 396 of 2019 7

(a) assets owned by a third party which are

in possession of the corporate debtor,

including -

(i) assets held in trust for any third

party;

(ii) bailment contracts;

(iii) all sums due to any workmen or

employee from the provident fund,

the pension fund and the gratuity

fund;

(iv) other contractual arrangements

which do not stipulate transfer of title

but only use of the assets; and

(v) such other assets as may be

notified by the Central Government in

consultation with any financial sector

regulator;

(b) assets in security collateral held by

financial services providers and are subject

to netting and set-off in multi-lateral trading

or clearing transactions;

(c) personal assets of any shareholder or

partner of a corporate debtor as the case

Company Appeal (AT) (Insolvency) No. 396 of 2019 8

may be provided such assets are not held

on account of avoidance transactions that

may be avoided under this Chapter;

(d) assets of any Indian or foreign

subsidiary of the corporate debtor; or

(e) any other assets as may be specified by

the Board, including assets which could be

subject to set-off on account of mutual

dealings between the corporate debtor and

any creditor."

13. From sub-section (4) (a) (iii) of Section 36, it is clear that all sums

due to any workman or employee from the provident fund, the pension

fund and the gratuity fund, shall not be included in the liquidation estate

assets and cannot be used for recovery in the liquidation.

14. Section 53 relates to 'Distribution of assets', as mentioned

hereunder:

"53. Distribution of assets.─(1) Notwithstanding

anything to the contrary contained in any law

enacted by the Parliament or any State Legislature

for the time being in force, the proceeds from the

sale of the liquidation assets shall be distributed in

Company Appeal (AT) (Insolvency) No. 396 of 2019 9

the following order of priority and within such

period as may be specified, namely: -

(a) the insolvency resolution process costs

and the liquidation costs paid in full;

(b) the following debts which shall rank

equally between and among the following:

(i) workmen's dues for the period of

twenty-four months preceding the

liquidation commencement date; and

(ii) debts owed to a secured creditor in

the event such secured creditor has

relinquished security in the manner

set out in section 52;

(c) wages and any unpaid dues owed to

employees other than workmen for the

period of twelve months preceding the

liquidation commencement date;

(d) financial debts owed to unsecured

creditors;

(e) the following dues shall rank equally

between and among the following: -

(i) any amount due to the Central

Government and the State

Company Appeal (AT) (Insolvency) No. 396 of 2019 10

Government including the amount to

be received on account of the

Consolidated Fund of India and the

Consolidated Fund of a State, if any,

in respect of the whole or any part of

the period of two years preceding the

liquidation commencement date;

(ii) debts owed to a secured creditor for

any amount unpaid following the

enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the

case may be.

(2) Any contractual arrangements between

recipients under sub-section (1) with equal

ranking, if disrupting the order of priority under

that sub-section shall be disregarded by the

liquidator.

(3) The fees payable to the liquidator shall be

deducted proportionately from the proceeds

payable to each class of recipients under sub-

Company Appeal (AT) (Insolvency) No. 396 of 2019 11

section (1), and the proceeds to the relevant

recipient shall be distributed after such deduction.

Explanation. - For the purpose of this section-

(i) it is hereby clarified that at each stage

of the distribution of proceeds in

respect of a class of recipients that

rank equally, each of the debts will

either be paid in full, or will be paid in

equal proportion within the same

class of recipients, if the proceeds are

insufficient to meet the debts in full;

and

(ii) the term "workmen's dues" shall

have the same meaning as assigned

to it in section 326 of the Companies

Act, 2013 (18 of 2013)."

15. From sub-section (1) of Section 53, it is clear that the proceeds

from the sale of the liquidation assets of the 'Corporate Debtor', the

distribution is to be made in order of priority and within such period and

in such manner as provided thereunder.

16. In terms of sub-section (4) (a) (iii) of Section 36, as all sums due to

any workman or employees from the provident fund, the pension fund

Company Appeal (AT) (Insolvency) No. 396 of 2019 12

and the gratuity fund, do not form part of the liquidation estate/

liquidation assets of the 'Corporate Debtor', the question of distribution

of the provident fund or the pension fund or the gratuity fund in order of

priority and within such period as prescribed under Section 53(1), does

not arise.

17. The 'workmen's dues' is mentioned in clause (b) (i) of Section 53(1),

which are the dues for the period of twenty-four months preceding the

liquidation commencement date.

18. In view of the aforesaid specific provisions, the Explanation (iii)

below Section 53, for the purpose of meaning of 'workmen's dues', the

Appellant cannot derive the meaning as assigned to it in Section 326 of

the Companies Act, 2013, including the Explanation below it.

19. Section 326 of the Companies Act, 2013, since its amendment

w.e.f. 1st December, 2016 provides 'overriding preferential payments',

relevant of which reads as follows:

"326. Overriding Preferential Payments. (1) In

the winding up of a company under this Act, the

following debts shall be paid in priority to all other

debts:--

(a) workmen's dues; and

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(b) where a secured creditor has realised a

secured asset, so much of the debts due to

such secured creditor as could not be

realised by him or the amount of the

workmen's portion in his security (if payable

under the law), whichever is less, pari

passu with the workmen's dues:

Provided that in case of the winding up of a

company, the sums referred to in sub-clauses (i)

and (ii) of clause (b) of the Explanation, which are

payable for a period of two years preceding the

winding up order or such other period as may be

prescribed, shall be paid in priority to all other

debts (including debts due to secured

creditors), within a period of thirty days of sale of

assets and shall be subject to such charge

over the security of secured creditors as may be

prescribed.

(2) The debts payable under the proviso to sub-

section (1) shall be paid in full before any

payment is made to secured creditors and

thereafter debts payable under that

subsection shall be paid in full, unless the assets

Company Appeal (AT) (Insolvency) No. 396 of 2019 14

are insufficient to meet them, in which case they

shall abate in equal proportions.

Explanation.--For the purposes of this

section, and section 327--

(a) "workmen'', in relation to a company,

means the employees of the

company, being workmen within the

meaning of clause (s) of section 2 of the

Industrial Disputes Act, 1947 (14 of 1947);

(b) "workmen's dues'', in relation to a

company, means the aggregate of

the following sums due from the company

to its workmen, namely:--

(i) all wages or salary including

wages payable for time or piece work

and salary earned wholly or in part

by way of commission of any

workman in respect of services

rendered to the company and any

compensation payable to any

workman under any of the

Company Appeal (AT) (Insolvency) No. 396 of 2019 15

provisions of the Industrial Disputes

Act, 1947 (14 of 1947);

(ii) all accrued holiday remuneration

becoming payable to any

workman or, in the case of his death,

to any other person in his right on the

termination of his employment

before or by the effect of the winding

up order or resolution;

(iii) unless the company is being

wound up voluntarily merely for

the purposes of reconstruction or

amalgamation with another

company or unless the company

has, at the commencement of the

winding up, under such a contract

with insurers as is mentioned in

section 14 of the Workmen's

Compensation Act, 1923 (19 of

1923), rights capable of being

transferred to and vested in

the workmen, all amount due in

respect of any compensation or

Company Appeal (AT) (Insolvency) No. 396 of 2019 16

liability for compensation under the

said Act in respect of the death or

disablement of any workman of the

company;

(iv) all sums due to any workman

from the provident fund, the

pension fund, the gratuity fund or

any other fund for the welfare of the

workmen, maintained by the

company;

(c) "workmen's portion'', in relation to the

security of any secured creditor of

a company, means the amount which

bears to the value of the security the same

proportion as the amount of the workmen's

dues bears to the aggregate of the amount

of workmen's dues and the amount of the

debts due to the secured creditors."

20. There is a difference between the distribution of assets and

preference/ priority of workmen's dues as mentioned under Section 53(1)

(b) of the 'I&B Code' and Section 326(1) (a) of the Companies Act, 2013.

It has also been noticed that Section 53(1) (b) (i) which relates to

Company Appeal (AT) (Insolvency) No. 396 of 2019 17

distribution of assets, workmen's dues is confined to a period of twenty-

four months preceding the liquidation commencement date.

21. While applying Section 53 of the 'I&B Code', Section 326 of the

Companies Act, 2013 is relevant for the limited purpose of understanding

'workmen's dues" which can be more than provident fund, pension fund

and the gratuity fund kept aside and protected under Section 36(4) (iii).

22. On the other hand, the workmen's dues as mentioned in Section

326(1) (a) is not confined to a period like twenty-four months preceding

the liquidation commencement date and, therefore, the Appellant for the

purpose of determining the workmen's dues as mentioned in Section

53(1) (b), cannot derive any advantage of Explanation (iv) of Section 326

of the Companies Act, 2013.

23. This apart, as the provisions of the 'I&B Code' have overriding effect

in case of consistency in any other law for the time being enforced, we

hold that Section 53(1) (b) read with Section 36(4) will have overriding

effect on Section 326(1) (a), including the Explanation (iv) mentioned

below Section 326 of the Companies Act, 2013.

24. Once the liquidation estate/ assets of the 'Corporate Debtor' under

Section 36(1) read with Section 36 (3), do not include all sum due to any

workman and employees from the provident fund, the pension fund and

the gratuity fund, for the purpose of distribution of assets under Section

Company Appeal (AT) (Insolvency) No. 396 of 2019 18

53, the provident fund, the pension fund and the gratuity fund cannot be

included.

25. The Adjudicating Authority having come to such finding that the

aforesaid funds i.e., the provident fund, the pension fund and the gratuity

fund do not come within the meaning of 'liquidation estate' for the

purpose of distribution of assets under Section 53, we find no ground to

interfere with the impugned order dated 19th March, 2019.

The appeal is accordingly, dismissed. No costs.

(Justice S.J. Mukhopadhaya) Chairperson

(Justice A.I.S. Cheema) Member(Judicial)

(Kanthi Narahari) Member(Technical) NEW DELHI 19th August, 2019

AR

Company Appeal (AT) (Insolvency) No. 396 of 2019