'Will disrupt equilibrium': SC quashes plea by workers union on payment on liquidation

Every change in the waterfall mechanism will affect balance of rights and interests of secured creditors, operational creditors and central, state governments, the bench said

The Supreme Court on Tuesday rejected a plea to strike down a provision of the Companies Act, 2013 which stated that workers' dues will not get preferential payment in case a company underwent for liquidation as per the Insolvency and Bankruptcy Code 2016.

A bench of Justices M R Shah and Sanjiv Khanna dismissed 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 workers union, along with others, asked the court to leave statutory claims of the workmen’s dues out of the purview of waterfall mechanism under Section 53 of the IBC. They also sought other directions, including one enabling them to get their dues of 24 months released without any further delay.

Holding that the guiding principle for IBC in setting the priority of payments in liquidation was to bring the practices in India in line with global practices, the bench said the waterfall mechanism prescribed in the Code with reference to the workmen’s dues is a well-considered and thought-out decision.

“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, 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,” it said.

The bench pointed out that 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.

“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,” it said.

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 workmen, the bench said.