2022 INSC 438 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5910 OF 2019

Sunil Kumar Jain and others …Appellants

Versus

Sundaresh Bhatt and others …Respondents

JUDGMENT

M.R. SHAH, J.

1. Feeling aggrieved and dissatisfied with the impugned order dated

31.05.2019 passed by the National Company Law Appellate Tribunal,

New Delhi (hereinafter referred to as the ‘Appellate Tribunal’) in

Company Appeal (AT) (Insolvency) No. 605 of 2019, by which the

Appellate Tribunal has dismissed the said appeal preferred by the

appellants herein – workmen/employees of M/s ABG Shipyard Limited

(hereinafter referred to as the ‘Corporate Debtor’), working at Dahej and

Mumbai, which was filed against the order passed by the National
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Company Law Tribunal, Ahmedabad Bench, Ahmedabad (hereinafter

referred to as the ‘Adjudicating Authority’) dated 25.04.2019 not granting

any relief to them with regard to their claim relating to salary, which they

claimed for the period involving ‘Corporate Insolvency Resolution

Process’ (hereinafter referred to as the ‘CIRP’) and the prior period,

original applicants – workers/employees have preferred the present

appeal.

2. That the Corporate Debtor was a private sector Ship Building Yard

with its manufacturing activities at Dahej Yard and Surat Yard in Gujarat

and having its corporate office at Mumbai. That prior to the initiation of

CIRP, the Corporate Debtor had 562 workmen and 93 employees at

Dahej; 291 workmen and 99 employees at Surat and 101 employees at

its Mumbai Head Office. The appellants herein are the 272 employees

and workmen employed at Mumbai Head Office and Dahej Yard of the

Corporate Debtor. None of the 201 employees and workmen at Surat

Yard are the appellants herein.

3. Vide its order dated 1.8.2017, the Adjudicating Authority admitted

an application under Section 7 of the Insolvency and Bankruptcy Code,

2016 (hereinafter referred to as the ‘IBC Code’) and the CIRP was

initiated. The Adjudicating Authority also appointed the Interim

Resolution Professional of the Corporate Debtor who was thereafter

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confirmed as the Resolution Professional (for short, ‘RP’) by the

Committee of Creditors (for short, ‘COC’) of the Corporate Debtor on

7.9.2017. First meeting of the COC was held on 4.9.2017.

3.1 On 23.10.2017, Company Application No. 348 of 2017 was filed

before the Adjudicating Authority, praying inter alia to direct the

Resolution Professional to make payment to the employees and the

workmen. On 9.3.2018, the appellants herein filed Company Application

No. 78 of 2018 in Company Application No. 348/2017 before the

Adjudicating Authority, praying inter alia to direct the RP to utilize the

amount of Rs.9,75,33,236/- to be received from the Indian Coast Guard

solely for employees/workmen.

3.2 Vide order dated 25.04.2018 passed in Company Application No.

78/2018, the Adjudicating Authority directed the RP to deposit

Rs.2,75,00,000/- in the Registry of the Adjudicating Authority, subject to

the outcome of Company Application No. 348/2017. In the meantime, in

the 4th meeting of the COC held on 08.12.2017, the issue with respect to

the payment of salaries/wages of the employees/workers respectively

was discussed in view of the directions passed by the Adjudicating

Authority vide its order dated 01.12.2017. However, the issue was not

resolved and thereafter the appellants herein filed the aforesaid IA No.

78/2018 in which the Adjudicating Authority directed to deposit Rs. 2.75

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crores out of the total amount of Rs.9,75,33,236/- with the Registry of the

NCLT towards disbursement of the outstanding salaries/wages to the

appellants, subject to the final outcome of IA No. 348/2017 and the

Adjudicating Authority accordingly disposed of Company Application No.

78/2018.

3.3 It appears that thereafter since no agreed resolution plan could be

adopted of the Corporate Debtor, the RP filed IA No. 113/2019 before

the Adjudicating Authority praying for an order of liquidation of Corporate

Debtor. The Adjudicating Authority by order dated 25.04.2019, after

deciding various other applications including the application of the

appellants being Company Application No. 348/2017 passed an order of

liquidation of the Corporate Debtor and appointed respondent no.1

herein as Liquidator of the Corporate Debtor. While passing the order of

liquidation, the Adjudicating Authority also disposed of Company

Application No. 348/2017 in view of the order passed in Company

Application No. 78/2018 by which the Adjudicating Authority earlier

directed to deposit Rs.2.75 crores towards the dues of the appellants

which as such was subject to the final outcome of Company Application

No. 348/2017. Therefore, as such, the Adjudicating Authority while

disposing of Company Application No. 348/2017 did not grant the relief

claimed by the appellants – 272 workers/employees working at Dahej

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Yard and Mumbai Head Office for their claim relating to salary for the

period involving CIRP and the prior period.

4. Feeling aggrieved and dissatisfied with the order passed by the

Adjudicating Authority, not granting the relief to the appellants herein with

regard to their claim relating to salary/wages, which they claimed for the

period involving CIRP and prior period, the appellants-

workmen/employees working at Dahej Yard and Mumbai Head Office

preferred Company Appeal No. 605/2019 before the Appellate Tribunal.

By the impugned order, the Appellate Tribunal has disposed of the said

appeal declining to interfere with the order passed by the Adjudicating

Authority, however, allowed the appellants – 272 workmen/employees to

file their individual claims before the Liquidator, who after going through

the record and taking into consideration the pleadings made by the

workmen/employees will determine the claim. The Appellate Tribunal

has also further observed that if claim of one or other

workmen/employee is rejected, it will be open to them to move before

the Adjudicating Authority, which may decide the same in accordance

with law. The Appellate Tribunal has also observed that so far as the

Gratuity and Provident Funds are concerned, the same cannot be

treated to be the asset of the Corporate Debtor and they are to be

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disbursed amongst the employees/workmen who are entitled for the

same.

5. Feeling aggrieved and dissatisfied with the impugned order passed

by the Appellate Tribunal, the appellants-workmen/employees of the

Corporate Debtor working at Dahej Yard and Mumbai Head Office have

preferred the present appeal.

6. Ms. Shobha Ramamoorthy, learned Advocate appearing on behalf

of the appellants has vehemently submitted that in the present case the

respective appellants are all the workmen and employees – 272 in

number and were employed at Dahej Yard and Mumbai Head Office of

the Corporate Debtor. It is submitted that in the present case, the CIRP

period commenced from 01.08.2017 and ended on 25.04.2019 –

commencement of liquidation. It is submitted that for this entire period of

20 months and 25 days, the respective employees and workmen were

on the payrolls of the Corporate Debtor. It is submitted that the RP did

not terminate the employment contracts or retrench or layoff the

workmen. It is submitted that on the other hand, RP issued instructions

dated 4.9.2017 to all the employees and workmen to report to him and

follow his instructions. It is submitted that on 15.11.2017, RP issued an

email to HR Department of Corporate Debtor instructing strictly not to

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relieve or permit resignation of any employee/workmen, without written

approval.

6.1 It is further submitted that in the present case, the Corporate

Debtor was managed as a going concern in accordance with Section 21

of the IB Code. It is submitted that even the proposal to suspend

operations at Dahej Yard and provide workmen with paid leave was

rejected by the COC for lack of majority. It is submitted that therefore

when the Corporate Debtor was managed as a going concern, which as

such is mandatory under Section 19 of the IB Code and when the

operations at Dahej Yard were not suspended, the workmen/employees

at Dahej Yard are entitled to at least the wages/salaries during the CIRP

period. It is submitted that irrespective of whether the wages/salaries for

the period during CIRP are to be qualified as CIRP cost or not, provident

fund, gratuity and pension fund are to be paid to the workmen and

employees at Dahej Yard under Section 36(4) of the IB Code in priority

over other dues, which are also not paid till date.

6.2 It is further submitted that in the present case, throughout the CIRP

period, the employees and workmen of Dahej Yard were asked to

assemble at ABG Enclave and sign the attendance register since

transportation to the yard was discontinued by the RP. It is submitted

that throughout the CIRP period, the employees of Mumbai office had

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regularly attended the office; recorded their attendance with the

Attendance Reader installed at the Mumbai office. Learned counsel

appearing on behalf of the appellants has relied upon some documents

from the paper book as well as rejoinder affidavit in respect of proof of

work done by the respective employees/workmen during the CIRP

period.

6.3 It is submitted that all claims filed by the employees/workmen in

Form-E with the Liquidator have been verified. It is submitted that the

verified and admitted claims of the employees and workmen of the

Corporate Debtor for CIRP period on the basis of the records available

including the attendance register have been uploaded by the

RP/Liquidator on 24.12.2020 on the official website of the Corporate

Debtor as per regulations. It is submitted that therefore further

verification in respect of the claims of the appellants based on their

actual attendance is vexatious.

6.4 Learned counsel appearing on behalf of the appellants has taken

us to the relevant provisions of the IB Code in support of her submission

that the workmen/employees of the Dahej Yard and Mumbai Head Office

are at least entitled to the wages/salaries during the period of CIRP and

are also entitled to the amount due and payable towards provident fund,

gratuity and pension. Learned counsel appearing on behalf of the

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appellants has taken us to Section 3(36); Section 5(13); Section 5(14);

Section 5(23); Section 17, Section 18; Section 19; Section 20; Section

25; Section 33(7); Section 36(4) and Section 53 of the IB Code.

6.5 It is further submitted that the objective of the IB Code is for

maximising of value of assets of the Corporate Debtor so that they are

efficiently run as a going concern. Reliance is placed on the decision of

this Court in the case of Swiss Ribbons Pvt. Ltd. v. Union of India,

reported in (2019) 4 SCC 17 (para 37); and in the case of Gujarat Urja

Vikas Nigam Limited v. Amit Gupta, Civil Appeal No. 9241 of 2019

decided on 8.3.2021 (para 57).

6.6 It is submitted that even under Section 20(1) of the IB Code, the

RP is mandated to manage the operations of the Corporate Debtor as a

going concern. It is submitted that for this purpose he is vested with the

authority to issue instructions to the personnel of the Corporate Debtor

as may be necessary for keeping the Corporate Debtor as a going

concern. It is submitted that the RP is under the mandate to take all

such actions as are necessary to keep the Corporate Debtor as a going

concern.

6.7 It is submitted that Section 5(13) of the IB Code defines

“Insolvency Resolution Process Cost”. It is submitted that as per Section

5(13) of the Code, “Insolvency Resolution Process Cost” means any

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costs incurred by the RP in running the business of the Corporate Debtor

as a going concern and any other costs as may be specified by the IBBI

– Liquidator. It is submitted that in the present case, vide Circular dated

12.06.2018, the Liquidator had clearly provided the costs on account of

employees and workmen under the head “other services in a running

business” in Forms I, II and III submitted by the RP with respect to CIRP

costs incurred by him. It is submitted that therefore 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.

6.8 It is further submitted that even otherwise the provident fund,

gratuity and pension fund amounts remain outside the liquidation under

Section 36(4) of the IB Code. It is submitted that the obligation to pay

the provident fund, gratuity fund amount would arise as soon as the

employees and workmen are deemed to have been discharged under

Section 33(7) of the IB Code. It is submitted that even the

workmen/employees are required to be paid the wages/salaries for the

pre-CIRP period as per the priorities mentioned in Section 53 of the IB

Code.

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6.9 It is further submitted by the learned counsel appearing on behalf

of the appellants that the salaries and wages payable to the

workmen/employees for the CIRP period are a component of the

resolution professional costs and therefore the CIRP period salaries and

wages payable to the respective workmen/employees are to be first paid

and are not to be paid “pari passu” in terms of Section 53(1)(b) and (c) of

the IB Code. It is submitted that even the ‘Workmen’s Dues’ is explained

in Explanation (ii) to Section 53 of the Code as the term having the same

meaning as assigned to it in Section 326 of the Companies Act, 2013. It

is submitted that Section 327 of the Companies Act provides for

preferential payments upon winding up of a company, enlists the

component of the wages or salary and dues payable to an employee

under clauses b, c, e & f under sub-clause 1.

6.10. It is submitted that thus on a combined reading of the provisions of

Sections 326 & 327 of the Companies Act, it is clear that the workmen’s

dues and the employee’s dues are comprised of several components

including wages or salary, holiday remuneration, sums due from the

provident fund, pension fund and the gratuity fund amongst other items.

It is submitted that as observed by this Court in the case of Swiss

Ribbons Pvt. Ltd. (supra), the costs and expenses of the RP/Liquidator

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are to be given preferential treatment by excepting them from the pari

passu principle.

6.11 It is submitted that Rs. 2.75 crores are earmarked and kept apart

towards the dues of the workmen/employees. It is submitted that

therefore the said sum of Rs.2.75 crores which is deposited for the

benefit of the workmen/employees is liable to be disbursed in terms of

Section 53(1)(a) r/w Section 5(13)(c) of the IB Code. It is submitted that

the amount in the sum of Rs.16.8 crores (approximately) payable

towards the provident fund, gratuity and pension in terms of Section

36(4) to all the employees and workmen of the Corporate Debtor

including the appellants and therefore is required to be paid in priority

over the disbursement to be made under Section 53(1)(b) & (c).

6.12 Making the above submissions and relying upon the aforesaid

decisions, it is prayed to allow the present appeal.

7. The present appeal is vehemently opposed by Shri Nakul Dewan,

learned Senior Advocate appearing on behalf of respondent no.1 –

Liquidator of Corporate Debtor.

7.1 Shri Nakul Dewan, learned senior counsel appearing on behalf of

the Liquidator of Corporate Debtor has vehemently submitted 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

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the CIRP, would not fall within the parameters of CIRP costs within the

definition of Section 5(13)(c) of the IB Code.

7.2 It is submitted that only 8 employees at the Mumbai location for

eight months during the CIRP and workmen/employees from Surat (from

August 2017 to October 2017) assisted the RP in providing services

required under the CIRP process. It is submitted that the remaining

employees and workmen including the appellants herein were not

required to and did not perform any services to run the Corporate Debtor

during the CIRP period. It is submitted that therefore the COC of the

Corporate Debtor rightly did not approve any payments to the appellants

as part of the CIRP costs. It is submitted that the wages and salaries of

the appellants – workmen/employees of the Corporate Debtor would fall

under Sections 53(1)(b) and 53(1)(c) of the IB Code.

7.3 It is submitted that as per Section 5(13)(c) of the IB Code r/w

Regulations 31 and 33 of the CIRP Regulations, cost incurred by the RP

in running the business of the Corporate Debtor is required to be ratified

by the COC for it to be classified as CIRP costs. It is submitted that only

the costs for those employees who have assisted the RP during the

CIRP period, have been approved by the COC in the first COC meeting,

held on 4.9.2017. It is submitted that therefore no other costs can be

classified as CIRP costs, except unless it is ratified by the COC. It is

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submitted that the remaining dues of the workmen will form part of the

dues falling under Section 53(1)(b) of the IB Code.

7.4 It is submitted that in the meetings of the COC held periodically

right from first meeting to fourth meeting, it was specifically recorded that

the Dahej Shipyard is not operational and that the Corporate Debtor is

not in a position to pay the salaries of the workmen and employees due

to paucity of funds since the Corporate Debtor was not a going concern

and did not have a running business.

7.5 It is further submitted that the main business of the Corporate

Debtor was shipbuilding and ship repairing which was carried out at its

Yards at Surat and Dahej. It is submitted that the Yard at Dahej was not

in operation since 2015 and the Yard at Surat was closed in October

2017 and therefore it cannot be said that the Corporate Debtor was a

going concern during the CIRP and therefore all its employees would be

required to be treated as those who assisted the RP to run the Corporate

Debtor as a going concern.

7.6 It is further submitted that as such there is no evidence to suggest

that the respective workmen/employees deployed at Dahej Yard and

Mumbai Head Office have actually worked during the CIRP period. It is

therefore submitted that the Appellate Tribunal has rightly observed that

the respective workmen/employees can at least have to prove their

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claims before the RP/Liquidator by submitting their respective claims and

the same are required to be adjudicated upon and/or verified by the

Liquidator. It is submitted that therefore the Appellate Tribunal has

rightly not interfered with the order passed by the Adjudicating Authority

in not passing any order in favour of the workmen/employees.

7.7 It is further submitted that Section 53 of the IB Code sets out the

waterfall mechanism in terms of which the dues of the creditors are paid.

It is submitted that even the operational creditors fall sixth in line after

payment of CIRP dues, dues of Secured Creditors etc. It is submitted

that even after the Corporate Debtor goes into liquidation in terms of

Section 33 of the IB Code, the dues of the employees and workmen

being operational creditors would be paid in last in terms of the waterfall

mechanism of Section 53(1)(f) of the IB Code. It is therefore submitted

that the respective appellants – workmen/employees are not entitled to

any wages/salaries for the period during CIRP as CIRP costs, as

claimed by them.

7.8 Shri Nakul Dewan, learned Senior Advocate appearing on behalf

of respondent no.1 – RP/Liquidator has further submitted that the costs

incurred during the CIRP period by the Corporate Debtor/RP will qualify

as CIRP costs only with respect to costs incurred by the RP running the

company as a going concern under Section 5(13) (c) of the IB Code and

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in a case where the same has been approved by the COC under

Regulations 31 and 33 of the CIRP Regulations.

It is submitted that in the present case the Corporate Debtor is

neither a going concern nor the RP has incurred any costs. It is

submitted that therefore the wages/salaries of the workmen/employees

at the Dahej Yard cannot be included in the CIRP costs.

7.9 It is further submitted that after the commencement of the CIRP,

workmen and employee’s dues which are outstanding as on the date of

CIRP, are treated as operational creditors in terms of Section 5(20) and

5(21) of the IB Code. It is submitted that in terms of Section 30(2)(b) of

the IB Code, the amount payable to operational creditors by a

prospective resolution applicant shall not be less than the amount to be

paid to such creditors in the event of a liquidation of the corporate debtor

under Section 53; OR the amount that would have been paid to such

creditors, if the amount to be distributed under the resolution plan had

been distributed in accordance with the order of priority in sub-section

(1) of section 53, whichever is higher.

7.10 It is submitted that Section 53 of the IB Code sets out the waterfall

mechanism in terms of which the dues of the creditors are paid. It is

submitted that operational creditors fall sixth in line after payment of

CIRP dues, dues of secured creditors etc.

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7.11 It is submitted that in the present case, it is only few of the Surat

workmen/employees and 8 Mumbai employees who have rendered

services during the CIRP period to assist the RP to complete the CIRP

process whose dues would be treated as CIRP costs. Otherwise, all

dues of employees and workmen which have accrued prior to CIRP

would be paid in terms of Section 53(1)(f) of the IB Code, both during

CIRP and during liquidation. It is submitted that in the present case, the

Liquidator has accepted the claim filed by the workmen and employees.

However, the said claims filed by the workmen/employees cannot be

considered as CIRP costs and cannot be paid in priority to all other

claims. The treatment of the said claims of the workmen and employees

have to be treated in accordance with the provisions of Section 53(1)(b)

(i) and 53(1)(c) of the IB Code respectively, as applicable and not as

CIRP costs.

7.12 It is submitted that in the present case the appellants who are the

workmen at Dahej Yard and employees at Mumbai Head Office, did not

help to maintain the Corporate Debtor as a going concern, since (i) the

Corporate Debtor was never a going concern and (ii) the Dahej Yard was

not in operation since June, 2015 and (iii) Operations at the Surat

Shipyard were completely shut from October, 2017. It is submitted that

therefore the appellants who are the workmen of the Dahej Yard and

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employees of the Mumbai Head Office, cannot claim any amounts

towards wages/salaries for the CIRP period, since no work/services

were rendered by them, except for the critical Mumbai employees whose

salaries were ratified by the COC during the first COC meeting.

7.13 Making the above submissions, it is submitted that the wages and

salaries of the workmen/employees at Dahej Yard and the employees at

Mumbai Head Office, except those who worked during the CIRP period,

cannot be included and/or considered as CIRP costs and therefore they

have to be paid as per the waterfall mechanism mentioned in Section

53(1)(b) & (c) of the IB Code.

7.14 It is submitted that therefore the respective workmen employed at

Dahej Yard and some of the employees employed at Mumbai Head

Office were required to submit their individual claims and they have to

establish before the RP/Liquidator that in fact they actually worked

during the CIRP period, the Appellate Tribunal has rightly observed that

the respective workmen/employees have to submit their claims before

the RP/Liquidator, who is required to verify whether the Corporate

Debtor was a going concern during the CIRP period and whether in fact

the concerned workmen/employees actually worked during the CIRP

period or not. It is submitted that therefore no interference of this Court

is called for.

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8. We have heard the learned counsel for the respective parties at

length.

The issue before this Court is with respect to wages/salaries of the

workmen/employees during the CIRP period and the amount due and

payable to the respective workmen/employees towards Pension Fund,

Gratuity Fund and Provident Fund.

8.1 While considering the aforesaid claims, the legislative history and

the relevant provisions of the IB Code are required to be referred to.

Relevant Provisions of the IB Code:

“Section 3(36)
Section 3(36) "workman" shall have the same meaning as assigned to it in
clause (s) of section 2 of the Industrial Disputes Act, 1947 (14 of 1947);
Section 5(13)
(13) "insolvency resolution process costs" means—
(a) the amount of any interim finance and the costs incurred in raising
such finance;
(b) the fees payable to any person acting as a resolution professional;
(c) any costs incurred by the resolution professional in running the
business of the corporate debtor as a going concern;
(d) any costs incurred at the expense of the Government to facilitate the
insolvency resolution process; and
(e) any other costs as may be specified by the Board;
Section 5(14)
5(14) "insolvency resolution process period" means the period of one
hundred and eighty days beginning from the insolvency commencement
date and ending on one hundred and eightieth day;
Section 17

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17. Management of affairs of corporate debtor by interim resolution
professional. (1) From the date of appointment of the interim resolution
professional, —
(a) the management of the affairs of the corporate debtor shall vest in the
interim resolution professional;
(b) the powers of the board of directors or the partners of the corporate
debtor, as the case may be, shall stand suspended and be exercised by
the interim resolution professional;
(c) the officers and managers of the corporate debtor shall report to the
interim resolution professional and provide access to such documents and
records of the corporate debtor as may be required by the interim
resolution professional;
(d) the financial institutions maintaining accounts of the corporate debtor
shall act on the instructions of the interim resolution professional in relation
to such accounts and furnish all information relating to the corporate
debtor available with them to the interim resolution professional.
(2) The interim resolution professional vested with the management of the
corporate debtor shall—
(a) act and execute in the name and on behalf of the corporate debtor all
deeds, receipts, and other documents, if any;
(b) take such actions, in the manner and subject to such restrictions, as
may be specified by the Board;
(c) have the authority to access the electronic records of corporate debtor
from information utility having financial information of the corporate debtor;
(d) have the authority to access the books of account, records and other
relevant documents of corporate debtor available with government
authorities, statutory auditors, accountants and such other persons as
[may be specified; and]
[(e) be responsible for complying with the requirements under any law for
the time being in force on behalf of the corporate debtor.]
Section 20
20. Management of operations of corporate debtor as going concern.
- (1) The interim resolution professional shall make every endeavour to
protect and preserve the value of the property of the corporate debtor and
manage the operations of the corporate debtor as a going concern.
(2) For the purposes of sub-section (1), the interim resolution professional
shall have the authority—
(a) to appoint accountants, legal or other professionals as may be
necessary;

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(b) to enter into contracts on behalf of the corporate debtor or to amend or
modify the contracts or transactions which were entered into before the
commencement of corporate insolvency resolution process;
(c) to raise interim finance provided that no security interest shall be
created over any encumbered property of the corporate debtor without the
prior consent of the creditors whose debt is secured over such
encumbered property:
Provided that no prior consent of the creditor shall be required where the
value of such property is not less than the amount equivalent to twice the
amount of the debt.
(d) to issue instructions to personnel of the corporate debtor as may be
necessary for keeping the corporate debtor as a going concern; and
(e) to take all such actions as are necessary to keep the corporate debtor
as a going concern.
Section 25
25. Duties of resolution professional - (1) It shall be the duty of the
resolution professional to preserve and protect the assets of the corporate
debtor, including the continued business operations of the corporate
debtor.
(2) For the purposes of sub-section (1), the resolution professional shall
undertake the following actions, namely: —
(a) take immediate custody and control of all the assets of the corporate
debtor, including the business records of the corporate debtor;
(b) represent and act on behalf of the corporate debtor with third parties,
exercise rights for the benefit of the corporate debtor in judicial, quasi-
judicial or arbitration proceedings;
(c) raise interim finances subject to the approval of the committee of
creditors under section 28;
(d) appoint accountants, legal or other professionals in the manner as
specified by Board;
(e) maintain an updated list of claims;
(f) convene and attend all meetings of the committee of creditors;
(g) prepare the information memorandum in accordance with section 29;
(h) invite prospective resolution applicants, who fulfil such criteria as may
be laid down by him with the approval of committee of the creditors,
having regard to the complexity and scale of operations of the business of
the corporate debtor and such other conditions as may be specified by the
Board, to submit a resolution plan or plans.

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(i) present all resolution plans at the meetings of the committee of
creditors;
(j) file application for avoidance of transactions in accordance with Chapter
III, if any; and
(k) such other actions as may be specified by the Board.
Section 33(7)
33(7). The order for liquidation under this section shall be deemed to be a
notice of discharge to the officers, employees and workmen of the
corporate debtor, except when the business of the corporate debtor is
continued during the liquidation process by the liquidator.
Section 36(4)
Section 36 (4) Liquidation Estate –
(4) The following shall not be included in the liquidation estate assets and
shall not be used for recovery in the liquidation: —
(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 workman 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 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.
Section 53

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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 the following order of priority and within such
period and in such manner 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 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-section
(1), and the proceeds to the relevant recipient shall be distributed after
such deduction.
Explanation. —For the purpose of this section—

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 (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).”

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:

8.2 Under the Companies Act, 1956 (hereinafter referred to as “1956

Act”), Section 59A provided that workmen’s dues and debts due to

secured creditors in terms of Section 529A(1)(c) of the 1956 Act shall be

paid in priority to other debts. Further, it provided that in case of insolvent

company, winding up should be undertaken in terms of laws of

insolvency with respect to the status of persons adjudged insolvent.

8.2.1 The proviso to Section 59(1) of 1956 Act provided that

workmen shall deem to have pari passu charge in his favour to the

extent of workmen’s portion. It further stated that where the secured

creditor (instead of relinquishing) is enforcing his security, the debt due

to the extent of workmen’s share/ portion in the security shall rank pari

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passu with workmen’s dues for the purposes of Section 529A. The said

section was brought in by way of Companies (Amendment) Bill, 1985

with the objective to introduce necessary legislation for the legitimate

dues of workers rank pari pasu with the secured creditors in the event of

the closure of the Company. The laudable objective was that in the

unfortunate event of liquidation, workers whose labour and effort

constitute an invisible but easily perceivable part of the capital of the

company, are not deprived of their legitimate right to participate in the

product of their labour and effort.

8.2.2 Section 530 of 1956 Act provided the waterfall mechanism as

per which priority is to be given to different kinds of debts. Subsequently,

the Companies Bill, 2009 and 2011 were introduced wherein

wages/salaries payable to workmen for a period of 2 years were

protected in case of winding up of the Company. Thereafter, under the

Companies Act, 2013 (hereinafter referred to as “2013 Act”), Section 326

and Section 327 i.e. “Overriding Preferential Payment” and “Preferential

Payments” were introduced wherein a proviso to Section 326 of the 2013

Act was inserted. Initially the insolvency process in case of winding up of

insolvent companies were provided under Section 325 of 2013 Act.

However, Section 325 of the 2013 Act was omitted w.e.f. 15.11.2016 on

the coming into force the IB Code. On enactment of the IB Code, the

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winding up proceedings in case of insolvency are to be governed by the

provisions of the IB Code and the provisions of the IB code only shall be

applicable to deal with the winding up proceedings as the IB Code is a

complete Code in itself. That thereafter, an amendment w.e.f.

15.11.2016 has been brought in under Section 327 (7) of 2013 Act

wherein it has been clarified that the provisions of Section 326 and

Section 327 of the 2013 Act will not be applicable in the event of

liquidation under the IB Code.

8.2.3 In case of any insolvency, in a winding up of a company

under Section 326 and 327 of the Companies Act, the workmen dues

are to be paid as under: -

• workmen’s portion in the security shall be paid in priority to all other

debts.
• however, workmen’s dues (given in (b)(i) and (ii) payable for the period of
24 months, shall be paid in priority to all other debts (including debts due
to secured creditors). This means that wages/salary for the period of 24
months is over and above every other claim/debts (including debts due to
secured creditors).
• workmen’s dues include Provident Fund, Pension Fund and Gratuity
Fund or any other Fund for the welfare of the workmen maintained by the
Company.

8.2.4 Under the IB Code, the workmen dues have been duly

protected and the provident fund, gratuity and pension fund have been

excluded from the liquidation estate assets (Section 36(4) of the IB

26
Code). Furthermore, as per Section 53 of the IB Code, the workmen

dues are given the top priority in the waterfall mechanism.

8.2.5 The issue of giving priority to the workmen dues have been

considered time and again in the various Committee’s Reports:

In the Bankruptcy Law Reforms Committee (Volume 1) (November, 2015),

it was agreed that the assets held in by the entity in trust (such as
employee pensions), assets held as collateral to certain financial market
institutions and assets held as part of operational transactions where the
entity has right over the asset but is not the owner of the same shall be
excluded from the liquidation estate. Furthermore, it was also debated with
respect to the waterfall mechanism under the Code and was agreed that
the workmen dues capped up to 3 months will be given the second priority
with the secured creditor after the costs of the corporate insolvency and
resolution process and liquidation.
Subsequently, a report of the Joint Committee on the Insolvency and
Bankruptcy Code, 2015 was prepared and presented in Lok Sabha on
28.04.2016 wherein the issue of exclusion of provident fund, pension fund
and gratuity fund from the liquidation estate assets and estate of bankrupt
was debated. The Committee, after in dept examination, was of the view
that provident fund, pension fund and gratuity fund provide the social
safety net to the workmen and employees and hence, need to be secured
in the event of liquidation of a company or bankruptcy of partnership firm.
The Committee observed that the workers are the nerve center of any
company and in the event of any company becoming insolvent or
bankrupt, the workmen get affected adversely and therefore, priority must
be given to their outstanding dues. Therefore, all sums due to any
workman or employee from the provident fund, gratuity fund or pension
fund should not be included in the liquidation estate assets. Thus, to
protect the interest of the workmen, the Committee decided that that the
workmen dues for a period of 12 months as provided under Section 53 of
the Code be increased to 24 months preceding liquidation commencement
date. 6
In light of the same, the Section 36 of the Code has clearly given outright
protection to workmen’s dues under Provident Fund, Pension Fund and
Gratuity Fund which is not treated as liquidation assets and liquidator has
no claim over such funds. Therefore, this share of workmen’s dues has
consciously been taken outside the liquidation process.

27
8.2.6 In light of the above statutory provisions under the IB Code

and the legislative history, the claims of the workmen/employees towards

wages/salaries prior to CIRP and during the CIRP are required to be

considered.

9. It cannot be disputed that 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. It is also true that Section 20 of the IB Code

mandates that 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. Therefore, 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

28
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.

10. 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.

11. In the present case, the RP/Liquidator has seriously disputed that

during the CIRP, the Corporate Debtor was a going concern. It is

seriously disputed that the respective appellants – workmen/employees

employed at Dahej Yard and Mumbai Head Office actually worked during

the CIRP. It is true that while submitting the claims towards CIRP costs,

the RP has not submitted the claims towards the wages/salaries of the

appellants, however, still the claims submitted/to be submitted by the

appellants will have to be adjudicated upon and considered by the

Liquidator and the Liquidator has to adjudicate and consider, (i) whether

the Corporate Debtor was a going concern during the CIRP; (ii) how

many workmen/employees actually worked during the CIRP while the

Corporate Debtor was a going concern.

If on adjudication of the claims made by the respective

workmen/employees, if it is established and proved that during CIRP, the

Corporate Debtor was a going concern and the concerned

workmen/employees actually worked during the CIRP when the

30
Corporate Debtor was a going concern, the wages and salaries of such

workmen/employees to be included in the CIRP costs as defined under

Section 5(13) of the IB Code and they will have to be paid such

wages/salaries as per Section 53(1)(a) of the IB Code as part of the

CIRP costs in full before making any payment as per priorities

mentioned in Section 53(1) of the IB code.

12. Now so far as the submission on behalf of the appellants that as

per Section 20 of the IB Code and even as per the decisions of this

Court in the cases of Swiss Ribbons Pvt. Ltd. (supra) and Gujarat Urja

Vikas Nigam Ltd. v. Amit Gupta (supra), 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 cannot

be accepted. It is true that under Section 20 of the IB Code, it is the duty

of the RP to manage and run the operations of the Corporate Debtor as

a going concern. However, the words used in Section 20 are “the interim

resolution professional shall make every endeavour to …. manage the

operations of the corporate debtor as a going concern”. Therefore, 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

31
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. Therefore, submission

on behalf of the appellants that as the RP is under mandate to manage

the operations of the corporate debtor as a going concern under Section

20 of the IB code and therefore it is to be presumed that the RP

managed the operations of the Corporate Debtor as a going concern

and therefore the workmen/employees are entitled to their wages and

salaries during the CIRP, as their wages/salaries to be included in the

CIRP costs cannot be accepted. However, the wages and salaries of

the workmen/employees of pre-CIRP period will have to be governed as

per the priorities mentioned in Section 53(1) of the IB Code.

Dues of the workmen/employees towards Provident Fund, Gratuity

Fund and Pension Fund”

13. Now so far as the dues of the workmen/employees on account of

provident fund, gratuity and pension are concerned, they shall be

governed by Section 36(4) of the IB Code. 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

32
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.

14. In view of the above and for the reasons stated above, it is held as

under:

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

33
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.

15. As observed hereinabove, there are disputed questions, whether

in fact the IRP/RP managed the operations of the corporate debtor as a

going concern during the CIRP and there is a serious dispute whether

Dahej Yard was operational during the CIRP or not and there is a serious

dispute that the concerned workmen/employees of the Dahej Yard and

the concerned employees of the Mumbai Head Office actually worked

during the CIRP or not and therefore it is directed that let the appellants

submit their claims before the Liquidator and establish and prove that

during CIRP, IRP/RP managed the operations of the corporate debtor as

a going concern and that they actually worked during the CIRP and the

Liquidator is directed to adjudicate such claims in accordance with law

and on its own merits and on the basis of the evidence which may be

34
laid/produced, irrespective of the fact whether the RP who himself is now

the Liquidator included the claims of the appellants being wages/salaries

during CIRP as CIRP costs or not. The Liquidator is directed to

adjudicate such claims independently. If it is found that in fact the

IRP/RP managed the operations of the corporate debtor as a going

concern during the CIRP and the concerned workmen/employees

actually worked during CIRP, their wages and salaries be considered

and included in CIRP costs and they will have to be paid as per Section

53(1)(a) of the IB Code in full before distributing the amount in the

priorities as mentioned in Section 53 of the IB Code. The aforesaid

exercise shall be completed within a period of twelve weeks from today

and such amount shall be paid out of the amount which is directed to be

kept aside earlier by the Adjudicating Authority/Appellate Tribunal and

thereafter by this Court. Till such claims are adjudicated upon, the

Liquidator is directed to keep aside the said amount exclusively to be

used for the workmen/employee’s dues which is to be paid on

adjudication as above.

16. The present appeal is partly allowed to the aforesaid extent and

disposed of accordingly. No costs.

……………………………….J.
[M.R. SHAH]
NEW DELHI; ………………………………...J.
APRIL 19, 2022. [ANIRUDDHA BOSE]

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