Case Citation: Civil Appeal No. 5910 of 2019, Supreme Court of India, decided on April 19, 2022
Bench: Hon’ble Justices M.R. Shah and Aniruddha Bose
Corporate Debtor: M/s ABG Shipyard Limited
Key Legal Principle
The Supreme Court established twin conditions for inclusion of wages/salaries in CIRP costs:
- Going Concern Test: IRP/Resolution Professional must have managed corporate debtor as going concern during CIRP
- Actual Work Test: Concerned workmen/employees must have actually worked during CIRP period
Related Landmark Cases
Primary Precedents
- State Bank of India v. Moser Baer Karamchari Union (2019) NCLAT – Established that PF, gratuity, and pension fund dues are excluded from liquidation estate under Section 36(4)(a)(iii)
- Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia (2022) NCLAT – Clarified treatment of EPF dues during CIRP, upheld by Supreme Court
- Alchemist Asset Reconstruction Co. Ltd. v. Moser Baer India Ltd. (2019) NCLT New Delhi – Liquidator cannot treat excluded funds as liquidation estate assets
Waterfall Mechanism Cases
- Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. (2023) SC – Limited Rainbow Papers ruling to specific facts, reaffirmed Section 53 waterfall mechanism
- State Tax Officer v. Rainbow Papers Ltd. (2022) SC – Government dues as secured creditors (limited to specific circumstances)
- PR Commissioner of Income Tax v. Monnet Ispat and Energy Limited – Income tax dues cannot supersede secured creditors priority
CIRP Process Cases
- ESF Technologies Pvt. Ltd. v. Arshpreet Singh – Going concern determination during CIRP
- Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019) SC – Resolution process priorities and stakeholder protection
Detailed Statutory Framework
Section 5(13) – CIRP Costs Definition
- Costs incurred by RP in running business as going concern
- “Other costs” as specified by IBBI regulations
- Direct nexus required between work performed and costs claimed
Section 20 – RP’s Duties
- Mandatory obligation to manage corporate debtor as going concern
- Powers and responsibilities during CIRP period
- Reporting requirements to CoC and stakeholders
Section 36(4)(a)(iii) – Asset Exclusions
- Complete exclusion of PF, pension, and gratuity funds from liquidation estate
- Creates legal fiction treating these as third-party assets
- Liquidator has no claim over such excluded funds
- Distinction from Section 53 waterfall mechanism
Section 53 – Distribution Waterfall
- Priority (a): CIRP and liquidation costs (paid in full)
- Priority (b)(i): Workmen’s dues for 24 months preceding liquidation
- Priority (b)(ii): Secured creditor debts (if security relinquished)
- Priority (c): Employee dues (other than workmen) for 12 months
- Priority (d): Unsecured financial creditors
- Priority (e): Government dues and operational creditors
Regulatory Framework
IBBI Regulations – CIRP Process
- Regulation 33: CIRP cost verification and approval process
- Regulation 34: Committee of Creditors approval requirements
- Form A, B, C: Standardized formats for CIRP cost reporting
IBBI Regulations – Liquidation Process
- Regulation 19: Claims verification methodology
- Regulation 32: Asset realization procedures
- Regulation 41: Distribution of proceeds
Practical Applications
For Resolution Professionals
- Document going concern operations meticulously
- Maintain detailed records of employee work during CIRP
- Separate pre-CIRP and CIRP period wage claims
- Ensure compliance with twin conditions before claiming CIRP costs
For Liquidators
- Identify and segregate excluded funds under Section 36(4)
- Verify actual work performed during CIRP period
- Apply waterfall mechanism strictly per Section 53
- No authority over PF/gratuity/pension funds
For Workmen/Employees
- File separate claims for pre-CIRP and CIRP period wages
- Provide evidence of actual work during CIRP
- Understand exclusion benefits for statutory funds
- Know priority under Section 53 for different claim categories
Research Tips for Practitioners
Case Law Research Strategy
- Primary Sources: Always refer to Supreme Court judgments over High Court/NCLAT orders
- Recent Developments: Monitor NCLAT decisions on similar facts
- Sectoral Analysis: Study industry-specific applications (shipping, manufacturing, services)
Statutory Interpretation
- Legislative History: Review Parliamentary Committee reports on IBC
- Comparative Analysis: Study pre-IBC regime under Companies Act provisions
- Regulatory Updates: Track IBBI circulars and amendments
Documentation Best Practices
- Going Concern Evidence: Board resolutions, operational records, financial statements
- Work Performance Proof: Attendance records, salary disbursements, task completion certificates
- Timeline Analysis: Clear demarcation of pre-CIRP vs CIRP period claims
Examination Perspective
Critical Concepts for Limited Insolvency Exam
- Twin Test Application: Practical scenarios testing both conditions
- Section Interplay: Understanding relationship between Sections 36(4) and 53
- Priority Confusion: Distinguishing between asset exclusion and payment priority
- Regulatory Compliance: IBBI forms and procedures for cost claims
Common Exam Traps
- Assuming all employee dues during CIRP qualify as CIRP costs
- Confusing liquidation estate exclusion with payment priority
- Overlooking going concern requirement for cost inclusion
- Misapplying waterfall mechanism to excluded assets
Practice Questions Focus
- Factual scenarios requiring twin condition analysis
- Calculation problems involving multiple claim categories
- Timeline-based questions on CIRP vs pre-CIRP periods
- Regulatory procedure questions on cost verification
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© 2025 Chamber of Prakash K. Pandya. This analysis is for educational purposes and does not constitute legal advice.