Factual Background 

In the case of Moser Baer Karamchari Union v. Union of India, writ petitions were filed to have Section 327(7) of the Companies Act, 2013 struck down as being unconstitutionally arbitrary and in violation of Article 21 of the Indian Constitution, as well as to have the respondents instructed to exempt the statutory claims of “workmen dues” from the waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016, from consideration.

Observation of the Court 

The Supreme Court division bench Justice M.R. Shah and Justice Sanjiv Khanna has It was decided that Section 327(7) of the Companies Act, 2013, which prohibits Sections 326 and 327 of the Companies Act 2013, from being applied in the event of an IBC liquidation and applies with regard to the liquidation of a company under the IBC, cannot be deemed arbitrary and in violation of Article 21 of the Constitution of India. Furthermore, it was decided that in the event of a corporation being liquidated under the IBC, the assets must be distributed in accordance with Section 53 of the IBC, subject to Section 36(4) of the IBC.

The Court ruled that in the case of liquidation under the IBC, Sections 326 and 327 of the Companies Act, 2013, shall not be applied. Preferential payments in winding up under the Act’s 2013 provisions are made possible by Sections 326 and 327 of the Companies Act, 2013. However, in the event of an IBC liquidation, the distribution must be made in accordance with Section 53 of the IBC due to the establishment of the new regime under the IBC. The Court noted that the IBC was enacted on May 28, 2016, and that Section 53 of the IBC mandates that the distribution of assets in the event of an IBC liquidation be made. The Court further pointed out that the problem with Section 53 of the IBC’s requirement that the worker and secured creditor be treated equally only arises after the secured creditor has released its security and the situation falls under the stage of the liquidation pool. As a result, the Court dismissed the petitioners’ claims.