Rearranging the hierarchy in the waterfall mechanism may trip equilibrium resulting in instability: Supreme Court
On Tuesday (02.05.2023), the Supreme Court bench consisting of two judges, Justices Sanjiv Khanna and MR Shah, was hearing the matter related to the liquidation. The bench dismissed the writ petition seeking to strike down a provision (Section 327(7)) of the Companies Act, 2013 as arbitrary and violative of Article 21 of the Indian Constitution. The petition was filed by the Moser Baer Karamchari Union. The workers union asked the top Court to leave statutory claims of the workmen’s dues out of the purview of waterfall mechanism under Section 53 of the IBC. During the proceedings, the top Court illustrated that “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.”
The bench said that “In 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 Supreme Court further highlighted that sub-section (7) of Section 327 of the Act, 2013 provides that Sections 326 and 327 of the Act, 2013 should not be applicable in the event of liquidation under the IBC, which has been necessitated in view of the enactment of IBC. Also, it applies with respect to the liquidation of a company under the IBC, Section 327(7) of the Act, 2013 cannot be said to be arbitrary and/or violative of Article 21 of the Constitution of India. Due to this, the Supreme Court dismissed the writ petitions.
In this case, the petition prayed that sub-section (7) of Section 327 of the Companies Act, 2013, be declared as unreasonable and violative of Article 14 of the Constitution of India. Sub-section (7) of Section 327 of the Companies Act, 2013, was inserted in Section 327 of the Companies Act, 2013 pursuant to Section 255 and the Eleventh Schedule of the Insolvency and Bankruptcy Code, 2016, Act 31 of 2016, creates unreasonable classification for the distribution of legitimate dues of workmen in the event of liquidation of the Company under the IBC and liquidation of Company under the provisions of the Companies Act, 2013.
To issue an appropriate writ in the nature of Mandamus by giving a purposive interpretation to Section 53 of the IBC and pass necessary directions which will enable the petitioners to get their dues of 24 months released without any further delay. Writ petitioners have prayed that Clause 19(a) of the Eleventh Schedule of the IBC pursuant Section 255 of the IBC, be declared as unreasonable and violative of Article 14 of the Constitution of India as Clause 19(a) of the Eleventh Schedule of the IBC inserts sub-section (7) in Section 327 of the Companies Act, 2013, which puts statutory bar on the application of Sections 326 and 327 of the Companies Act, 2013, to the liquidation proceedings under the IBC. The case was mentioned before the Supreme Court and the writ petitions was dismissed.
