The Insolvency and Bankruptcy Code, 2016
Part-II Insolvency Resolution and Liquidation for Corporate Persons
Chapter-III Liquidation Process
Section 53: Distribution of assets.
*53. (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely :—
(a)J2 the insolvency resolution process costs and the liquidation costs paid in full;
(b) the following debts which shall rank equally between and among the following :—
(i) workmen’s duesJ2 for the period of twenty-four months preceding the liquidation commencement date; and
(ii) debts owed to a secured creditorJ4 in the event such secured creditor has relinquished security in the manner set out in section 52;
(c) wagesJ2 and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;
(d) financial debts owed to unsecured creditors;
(e) the following dues shall rank equally between and among the following:—
(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;J6
(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;
(f) any remaining debts and dues;
(g) preference shareholders, if any; and
(h) equity shareholders or partners, as the case may be.
(2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the liquidator.
(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.
Explanation.- For the purpose of this section—
(i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and
(ii) the term “workmen’s dues” shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013.
Reference
*Effective from 15.12.2016.
Judicial Pronouncements:
J1. The Insolvency Law Committee in Report of the Insolvency Law Committee, March 2018 stated that the principles emerge from the ICICI Bank Ltd. v. SIDCO Leathers Ltd. and Ors. (2017) ibclaw.in 103 SC case are also applicable to the issue at hand under section 53 of the Code.
J2. 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, dues towards the wages/salaries of only those workmen/employees who actually worked during the CIRP are to be included in the CIRP costs. The rests of the claims towards the wages/salaries of the workmen/employees shall be governed by Sections 53(1)(b) & (c) of the IB Code. [Sunil Kumar Jain and Ors. v. Sundaresh Bhatt and Ors. (2022) ibclaw.in 23 SC, p9-10&14]
J3. 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. 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. [Sunil Kumar Jain and Ors. v. Sundaresh Bhatt and Ors. (2022) ibclaw.in 23 SC, p13]
J4. Under Section 53(1)(b)(ii) of IBC, the debts owed to a secured creditor, which would include the State under the Gujarat Value Added Tax, 2003, are to rank equally with other specified debts including debts on account of workman’s dues for a period of 24 months preceding the liquidation commencement date. [State Tax Officer v. Rainbow Papers Ltd. (2022) ibclaw.in 107 SC, p55]. Hon’ble Supreme Court in Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Pvt. Ltd. & Ors. (2023) ibclaw.in 81 SC, in para 49, held that Rainbow Papers did not notice the ‘waterfall mechanism’ under Section 53 – the provision had not been adverted to or extracted in the judgment. The dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. This design was either not brought to the notice of the court in Rainbow Papers (supra) or was missed altogether. In any event, the judgment has not taken note of the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to Central or State Government.
J5. The provisions under the IBC cannot be compared with that of the earlier regime, namely, the Companies Act, 1956/2013. For clause wise interpretation of Section 53, see Moser Baer Karamchari Union v. Union of India and Ors. (2023) ibclaw.in 59 SC.
J6. For the expression “government dues” under IBC, Paschimanchal Vidyut Vitran Nigam Ltd.
v. Raman Ispat Pvt. Ltd. & Ors. (2023) ibclaw.in 81 SC.
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