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Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma vs. Union of India

Not available · 2023 INSC 479Decided 2 May 2023
Not available
M.R. Shah · Sanjiv Khanna · Manoj Misra as the second judge

Background

Workers' unions of companies that went into liquidation under the Insolvency and Bankruptcy Code (IBC), including Moser Baer's employees, challenged Section 327(7) of the Companies Act, 2013, which excludes the ordinarily more worker-protective priority scheme under Sections 326-327 of the Companies Act from applying once a company is being liquidated under the IBC. They argued that IBC's "waterfall mechanism" in Section 53 (which caps workmen's dues at 24 months preceding liquidation and ranks them alongside secured creditors, rather than giving unlimited preferential treatment) was arbitrary and violated their right to livelihood/life under Article 21 and equality under Article 14, seeking a court order to give workmen's dues full priority regardless of the IBC.

Decision Breakdown

The Supreme Court traced the legislative history from the Companies Act, 1956's "overriding preferential payments" for workmen, through the 2013 Act, to the IBC's later, deliberately different Section 53 scheme, and held that Parliament consciously carved out liquidation under the IBC to follow its own comprehensive priority code rather than the Companies Act scheme. It found that Section 53 does protect workmen substantially, their dues for 24 months before liquidation rank equally with secured creditors who give up their security, and that secured creditors themselves take a significant "haircut" under this scheme, so workmen are not left unprotected. The Court reiterated that in economic and financial legislation, courts must give the legislature wide latitude ("play in the joints") and should not strike down a rational, deliberate policy choice merely because an alternative might be more generous, unless the provision is manifestly arbitrary, which this was not. It accordingly held Section 327(7) of the Companies Act, 2013 valid and dismissed the writ petitions, with no order as to costs.

Lesson Learnt

Courts will not second-guess a considered legislative choice on how to prioritize competing financial claims (like workmen's dues versus secured creditors) in insolvency law, so long as the scheme is not manifestly arbitrary: economic legislation gets significant deference, even where a different or more generous arrangement was previously available under another statute.

Official source (sci.gov.in)View Judgment (PDF)

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