In CIVIL APPEAL NO.5910 OF 2019-SC-Wages/salaries of workmen/employees, who actually worked during CIRP, are to be included in CIRP costs and such employees have to be paid in full as per Sec.53(1)(a) of IBC: SC Justices M.R.Shah & Aniruddha Bose [19-04-2022]

Read Judgment:  Sunil Kumar Jain and others v. Sundaresh Bhatt and others 

Tulip Kanth

New Delhi, April 20, 2022: While partly allowing the appeals preferred by the workmen/employees of a private sector Ship Building Yard, the Supreme Court has held that if on adjudication of the claims made by such workmen it is established that the concerned workmen actually worked during the CIRP when the Corporate Debtor was a going concern then the wages and salaries of such workmen/employees will have to be included in the CIRP costs as defined under Section 5(13) of the Insolvency and Bankruptcy Code, 2016.

The Division Bench of Justice M.R.Shah and Justice Aniruddha Bose opined that Section 36(4)(iii) 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)  shall not be applicable to such dues, which are to be treated outside the liquidation process and liquidation estate assets under the IB Code. 

The present appeal was filed by the appellants-workmen/employees of M/s ABG Shipyard Limited (Corporate Debtor) against the impugned order dated May 31,2019 passed by the National Company Law Appellate Tribunal, New Delhi (Appellate Tribunal) in a Company Appeal by which the Appellate Tribunal had dismissed the said appeal preferred by the workmen working at Dahej and Mumbai. This appeal before the Appellate Tribunal was filed against the order passed by the National Company Law Tribunal, Ahmedabad Bench (Adjudicating Authority) dated April 25,2019 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’ (CIRP) and the prior period. Therefore, the original applicants – workers/employees had preferred the present appeal.

The factual background of the case was such 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. The Adjudicating Authority admitted an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 and the CIRP was initiated. The main Company Application No.348 of 2017 was filed before the Adjudicating Authority, praying to direct the Resolution Professional to make payment to the employees and the workmen. 

In the meantime, in the fourth meeting of the COC held on 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 but the issue was not resolved and thereafter the appellants herein filed the aforesaid Company Application in which the Adjudicating Authority directed to deposit Rs. 2.75 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 main company application.

The Adjudicating Authority passed an order of liquidation of the Corporate Debtor and appointed first respondent as Liquidator of the Corporate Debtor.The Adjudicating Authority while disposing of the main Company Application did not grant the relief claimed by the appellants – 272 workers/employees working at Dahej Yard and Mumbai Head Office for their claim relating to salary for the period involving CIRP and the prior period.

The issue before this Court was 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.

The Bench observed that It as per Section 5(13), “insolvency resolution process costs” includes any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern and Section 20 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).

Referring to Section 5(13) which defines “insolvency resolution process costs”, the Court  held that the 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 rest of the claims towards the wages/salaries of the workmen/employees, as observed hereinabove, shall be governed by Sections 53(1)(b) & (c).

The Bench held 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 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. 

Considering Section 36(4), it was held that 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.

Asserting that there were disputed questions, therefore it was directed that the appellants would 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. The Liquidator has also been directed to adjudicate such claims in accordance with law and on its own merits and on the basis of the evidence which may be 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.

Moreover, the Top Court also directed the Liquidator to adjudicate such claims independently. If it would be 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 would be considered and included in CIRP costs and they will have to be paid as per Section 53(1)(a) in full before distributing the amount in the priorities as mentioned in Section 53 of the IB Code. 

The aforesaid exercise has been ordered to be completed within a period of twelve weeks 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 has also been directed to keep aside the said amount exclusively to be used for the workmen/employee’s dues which would be paid on adjudication as above.