Employees Who Worked During CIRP When Corporate Debtor Was Going Concern Shall Be Paid In Full First – SC

The Court also held that for the dues of the workmen towards Provident Fund, Gratuity Fund, and Pension Fund, Section 53(1) of the IB Code shall not be applicable as they are treated to be outside the liquidation process and liquidation estate assets under IBC.

The appeal was preferred before the Supreme Court assailing the judgment of the National Company Law Appellate Tribunal (NCLAT) which had dismissed the appeal of the workmen/employees of the Corporate Debtor. The appeal was filed against the order of the National Company Law Tribunal (NCLT) that had not granted any relief to them with regard to their claim for a salary that was claimed for the period involving CIRP.

The issue which was dealt with by the Apex Court was –

• Whether the employees/workmen were entitled to wages/salaries during the CIRP period and the amount due and payable to them towards Provident Fund, Gratuity Fund, and Pension Fund.

A) Workmen/Employees Dues during the CIRP period towards wages/salaries

The Supreme Court referred to the legislative history and the relevant provisions of the IB Code and noted that under the IB Code, the workmen dues have been duly protected and the provident fund, gratuity, and pension have been excluded from the liquidation estate assets (Section 36(4) of the IB Code).

The Bench also noted that as per Section 53 of the IB Code, the workmen dues are given top priority in the waterfall mechanism.

The Court referred to various Committee Reports where the issue of giving priority to the workmen dues have been considered time and again.

The Bench further observed that as per Section 5(13) of the IB Code, the 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.

Also, the Court referred to Section 20 of the IB Code and held that it mandates the RP 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.

Further, in this context, the Court held –

"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."

The Court also noted that while submitting the claims towards CIRP costs the RP did not submit the claim towards the wages/salaries of the Appellants, however, their claims have to be adjudicated upon and considered by the Liquidator and the Liquidator has to 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.

The Bench further rejected the contention of the Appellants that as the RP is under a mandate to manage the operations of the Corporate Debtor as a going concern under Section 20 of IB Code and hence they are entitled to wages/salaries during the CIRP and held that the wages and salaries of the workmen/employees of the pre-CIRP period will have to be governed as per Section 53(1) of the Code.

B) Dues of workmen/employees towards Provident Fund, Gratuity, and Pension

In this context, the Bench noted these will 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."

The Court held that Section 53(1) of the IB Code shall not be applicable to such dues, which are to be treated outside the liquidation process and liquidation estate assets under the IB Code.

Further, the Court held –

"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."

The Bench additionally noted that there are disputed questions whether 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.

The Court further directed the Appellants to submit their claims before the Liquidator and establish and prove that during the CIRP, the Corporate Debtor was a going concern and they actually worked during the CIRP.

The Court also directed the Liquidator to adjudicate the claims in accordance with law and on their merits as per the evidence produced.

In the light of these observations, the Court partly allowed the appeal.