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The court highlighted that every change in the waterfall mechanism is bound to lead to cascading effects on the balance of rights and interests of the secured creditors, operational creditors and even the central and state governments
The Supreme Court has on Tuesday declined to tinker with waterfall mechanism under the Insolvency and Bankruptcy Code 2016, saying any rearrangement in the hierarchy on disbursing payment on liquidation of a company may lead to several trips and disrupt the working of the equilibrium.
The top court rejected a plea to strike down a provision of the Companies Act, 2013 which stated that workers' dues will not get preferential payment in case a company underwent for liquidation as per the Code.
A bench of Justices M R Shah and Sanjiv Khanna dismissed a batch of petitions filed by Moser Baer Karamchari Union and others to quash Section 327(7) of the Companies Act, 2013 as arbitrary and violative of Article 21 of the Constitution.
In their writ petitions, the workers union, along with others, asked the court to keep statutory claims of the workmen’s dues out of the purview of waterfall mechanism under Section 53 of the IBC. They also sought other directions, including one enabling them to get their dues of 24 months released without any further delay.
"We will not set aside the legislation, solely on the ground that some or marginal sacrifice is to be made by the workers," the bench said.
In fact, the secured creditors are taking significant hair-cut and workmen are being compensated on an equitable basis in a just and proper manner as per Section 53 of the Code, it added.
The court declared that the guiding principle for IBC in setting the priority of payments in liquidation was to bring the practices in India in line with global practices.
"For the revival and rehabilitation of the companies, certain sacrifices are required from all quarters, including the workmen. In case of insolvent companies, for the sake of survival and regeneration, everyone, including the secured creditors and the central and state government, are required to make sacrifices," the bench said.
It pointed out the waterfall mechanism prescribed in the Code with reference to the workmen’s dues is a well-considered and thought-out decision.
“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 in its judgement.
The court further highlighted that every change in the waterfall mechanism is bound to lead to cascading effects on the balance of rights and interests of the secured creditors, operational creditors and even the central and state governments.
“These are all complex economic matters wherein various conflicting interests have to be balanced, and a holistic rather than a one-sided, approach is to be taken. Each opinion may have merit, but the court can hardly substitute its own wisdom or view for that of the legislature, especially when the enactment is the outcome of a thought-out and ruminated review on complex fiscal and commercial challenges facing the economy,” it said.
In the 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 bench said.
The IBC is a new insolvency mechanism, therefore, the provisions under it cannot be compared with that of the earlier regime, namely, the Companies Act, 1956/2013, it added.
"The Code recognises the financial impact on secured creditors or financial institutions dealing with public money, as their economic health is equally important for the general public as well as the national economy. Unless there is economic growth and fresh investments in the industry, employment opportunities will not be available, which would in turn lead to economic woes, insolvencies and bankruptcies," the bench pointed out.
Senior advocate K V Viswanathan, appeared as amicus curiae in the matter. Senior advocate Gopal Sankaranarayanan represented the petitioners. Additional Solicitor General Balbir Singh argued the matter on behalf of the Union government.
Case Title: Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma vs Union of India and Ors.
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