Supreme Court Clarifies CIRP Costs and Workmen’s Dues in Insolvency: Sunil Kumar Jain vs. Sundaresh Bhatt (2022)

Date of the Judgment: 19 April 2022
Citation: (2022) INSC 379
Judges: M.R. Shah, J. and Aniruddha Bose, J. (authored by M.R. Shah, J.)
Can employees claim wages as part of CIRP costs even if they did not actively work during the insolvency period? The Supreme Court of India addressed this crucial question, clarifying the scope of CIRP costs and the priority of employee dues in insolvency proceedings. This judgment provides clarity on the rights of workmen and employees during the Corporate Insolvency Resolution Process (CIRP), particularly regarding their wages and other dues.

Case Background

The case involves an appeal by 272 employees and workmen of M/s ABG Shipyard Limited (“Corporate Debtor”) who were working at the Dahej and Mumbai locations. The Corporate Debtor, a shipbuilding company, faced insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC Code”). The appellants sought payment of their salaries for the period of the CIRP and prior periods. The Corporate Debtor had manufacturing units at Dahej and Surat, and a corporate office in Mumbai. 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 CIRP was initiated on 1st August 2017. The appellants were employees at the Mumbai Head Office and Dahej Yard. The Adjudicating Authority (National Company Law Tribunal, Ahmedabad Bench) did not grant them relief regarding their salary claims, leading to an appeal to the National Company Law Appellate Tribunal, which also dismissed their appeal. The appellants then approached the Supreme Court.

Timeline:

Course of Proceedings

The Adjudicating Authority initiated the CIRP on 1st August 2017. The appellants filed applications seeking payment of their dues. The Adjudicating Authority directed the RP to deposit Rs. 2.75 crores towards the dues of the appellants. However, the issue of payment of salaries/wages was not resolved. Subsequently, the Adjudicating Authority ordered the liquidation of the Corporate Debtor on 25th April 2019 and appointed a Liquidator. The National Company Law Appellate Tribunal (NCLAT) upheld the order of the Adjudicating Authority, directing the workmen/employees to file their claims with the Liquidator, who would then determine the same. The NCLAT also clarified that gratuity and provident funds cannot be treated as assets of the Corporate Debtor and must be disbursed to the entitled employees/workmen. The appellants then filed an appeal before the Supreme Court.

Legal Framework

The Supreme Court considered several provisions of the IBC Code:

• Section 3(36) of the IBC Code defines “workman” as having the same meaning as in clause (s) of Section 2 of the Industrial Disputes Act, 1947.
• Section 5(13) of the IBC Code defines “insolvency resolution process costs” (CIRP costs), which includes costs incurred by the resolution professional in running the business of the corporate debtor as a going concern. “insolvency resolution process costs” means— (c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern.
• Section 5(14) defines “insolvency resolution process period” as 180 days from the insolvency commencement date.
• Section 17 outlines the management of the corporate debtor by the interim resolution professional.
• Section 20 mandates the interim resolution professional to manage the operations of the corporate debtor as a going concern. “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.”
• Section 25 specifies the duties of the resolution professional, including preserving the assets and business operations of the corporate debtor.
• Section 33(7) states that a liquidation order is deemed a notice of discharge to the officers, employees, and workmen, unless the business continues during liquidation. “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) excludes certain assets from the liquidation estate, including sums due to workmen from provident fund, pension fund, and gratuity fund. “The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: (iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund”.
• Section 53 outlines the priority for distribution of assets during liquidation, with CIRP costs at the top, followed by workmen’s dues and employee wages.

Arguments

Appellants’ Submissions:

• The appellants argued that they were on the payroll of the Corporate Debtor during the entire CIRP period, and their employment contracts were not terminated. The RP had instructed them to report for duty.
• They contended that the Corporate Debtor was managed as a going concern, and therefore, they were entitled to their wages/salaries during the CIRP period as CIRP costs.
• They asserted that provident fund, gratuity, and pension funds should be paid to the workmen/employees under Section 36(4) of the IBC Code, in priority over other dues.
• They claimed that the wages/salaries for the CIRP period qualify as CIRP costs under Section 5(13) of the IBC Code.
• They relied on the decisions of the Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India and Gujarat Urja Vikas Nigam Limited v. Amit Gupta, emphasizing the objective of the IBC Code to maximize the value of the assets of the Corporate Debtor.
• They argued that the wages/salaries 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.

Respondents’ Submissions:

• The respondents argued that the wages/salaries claimed by the appellants, who did not work during the CIRP, do not fall within the definition of CIRP costs.
• They submitted that only a few employees at the Mumbai location and workmen/employees from Surat assisted the RP during the CIRP. The remaining employees, including the appellants, did not perform any services.
• They contended that the Corporate Debtor was not a going concern during the CIRP, as the Dahej Yard was not operational since 2015 and the Surat Yard closed in October 2017.
• They submitted that the wages/salaries of the appellants would fall under Sections 53(1)(b) and 53(1)(c) of the IBC Code.
• They argued that costs incurred during the CIRP period qualify as CIRP costs only if they are approved by the COC.
• They submitted that the 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 IBC Code.
• They argued that the appellants did not help maintain the Corporate Debtor as a going concern as the Corporate Debtor was never a going concern.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the wages/salaries of the workmen/employees during the CIRP period can be included in the CIRP costs.
2. Whether the amount due and payable to the respective workmen/employees towards Pension Fund, Gratuity Fund, and Provident Fund is to be treated as part of the liquidation estate assets.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Swiss Ribbons Pvt. Ltd. v. Union of India [CITATION]* and Gujarat Urja Vikas Nigam Limited v. Amit Gupta [CITATION]* to emphasize the objective of the IBC Code, but clarified that this objective does not automatically qualify all employee dues as CIRP costs.
• The Court interpreted Section 5(13) of the IBC Code to mean that only the wages of those workmen/employees who actually worked during CIRP when the Corporate Debtor was a going concern can be included in CIRP costs.
• The Court interpreted Section 36(4) of the IBC Code to mean that provident fund, gratuity fund, and pension fund are to be excluded from the liquidation estate assets and are to be paid to the workmen/employees outside the liquidation process.
• The Court considered the legislative history of the IBC Code and the Companies Act, 2013, to understand the intent behind protecting workmen’s dues.

What weighed in the mind of the Court?

The Supreme Court emphasized the following points while arriving at its decision:

• The intent of the IBC Code is to protect the interests of workmen and employees, but not at the expense of the other creditors.
• The definition of CIRP costs under Section 5(13) of the IBC Code is specific and only includes costs incurred by the resolution professional in running the business of the corporate debtor as a going concern.
• The Court recognized the importance of the going concern status of the corporate debtor during CIRP for determining the eligibility of wages/salaries as CIRP costs.
• The Court acknowledged the legislative intent behind excluding provident fund, gratuity fund, and pension fund from the liquidation estate assets.
• The Court sought to balance the interests of all stakeholders in the insolvency process, including workmen, employees, and other creditors.

Fact:Law Ratio

The Court considered both the factual aspects of the case (whether the Corporate Debtor was a going concern and whether the workmen/employees actually worked) and the legal provisions of the IBC Code.

Logical Reasoning

Judgment

The Supreme Court 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”.
• If the Corporate Debtor was a going concern during CIRP and the employees actually worked, their wages/salaries are to be included in CIRP costs and paid in full first as per Section 53(1)(a) of the IBC Code.
• Other dues towards wages and salaries of the employees/workmen are to be governed by Sections 53(1)(b) and (c) of the IBC Code.
• “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.”
• The Court directed the Liquidator to independently adjudicate the claims of the workmen/employees after they submit their claims.

The Court clarified that the RP’s duty to manage the operations of the Corporate Debtor as a going concern under Section 20 of the IBC Code does not automatically mean that the Corporate Debtor was a going concern during the CIRP. It depends on the facts of each case.

Key Takeaways

• Wages/salaries during CIRP can be included in CIRP costs only if the Corporate Debtor was a going concern and the workmen/employees actually worked during that period.
• Provident fund, gratuity fund, and pension fund are excluded from the liquidation estate assets and must be paid to the workmen/employees outside the liquidation process.
• The Liquidator must independently adjudicate the claims of the workmen/employees.
• The going concern status of the Corporate Debtor during CIRP is a crucial factor in determining the eligibility of wages/salaries as CIRP costs.

Directions

The Supreme Court directed the Liquidator to:

• Allow the appellants to submit their claims.
• Adjudicate the claims in accordance with the law and on its merits, irrespective of whether the RP included them as CIRP costs.
• Determine whether the Corporate Debtor was a going concern during CIRP and whether the workmen/employees actually worked during that period.
• Pay the wages/salaries as CIRP costs if the above conditions are met.
• Keep aside the amount directed by the Adjudicating Authority/Appellate Tribunal for the workmen/employees’ dues.
• Complete the adjudication process within twelve weeks.

Development of Law

The ratio decidendi of this case is that the wages/salaries of the workmen/employees of the Corporate Debtor for the period during CIRP can be included in the CIRP costs only if it is established and proved that the IRP/RP 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. The Court also clarified that the provident fund, gratuity fund and pension fund are to be kept outside the liquidation process. This judgment clarifies the interpretation of Section 5(13) and Section 36(4) of the IBC Code and provides guidance on the treatment of workmen’s dues during CIRP.

Conclusion

The Supreme Court’s judgment in Sunil Kumar Jain vs. Sundaresh Bhatt clarifies the scope of CIRP costs and the priority of workmen’s dues under the IBC Code. The Court held that wages/salaries during CIRP can be included in CIRP costs only if the Corporate Debtor was a going concern and the workmen/employees actually worked during that period. The Court also reiterated that provident fund, gratuity fund, and pension fund are to be excluded from the liquidation estate assets. This judgment provides much-needed clarity on the rights of workmen and employees during insolvency proceedings.