'Best Food' was a restaurant located at a leased premises in Mumbai. It had a great reputation, award-winning chefs and tastefully designed interiors. Much of its business came from executive lunches and dinners. Followi

CS Professional · Insolvency - Law and Practice · PYQS · December 2024
'Best Food' was a restaurant located at a leased premises in Mumbai. It had a great reputation, award-winning chefs and tastefully designed interiors. Much of its business came from executive lunches and dinners. Following the opening of 'Heavens', another excellent restaurant in the nearby vicinity, business losses were incurred by Best Food and eventually Best Food became insolvent. All efforts towards reducing the rent or to sell the business were unsuccessful. Suppliers of food, beverages and utilities were unpaid for supplies provided in the previous 45-60 days, amounting to around ₹90,000. There were rental arrears for one month amounting to ₹50,000 towards landlord Gopal (the landlord had received advance rent for three months, lease deed provided for one-month rent as security and two month's rent as advance). Best Food also had a secured creditor, 'IBS Bank'. The bank indicated that it did not wish to appoint a receiver/file for insolvency as the accounts were regularly maintained. Best Food was managed by Mr. Ramesh, as a sole proprietor. He employed a staff of 10 people, including a chef, an assistant chef, six waiters and two housekeeping staff. The salaries due to these employees were paid in half since the past three months. In light of the above, answer the following questions with reference to the provisions of the Insolvency and Bankruptcy Code, 2016. In priority of payment of debts, state who will be paid before the wages and unpaid dues of employees of the bankrupt? How the priority is decided under the IBC 2016?

Answer & Explanation:

The first priority of payment shall be for the costs and expenses incurred by the bankruptcy trustee for the bankruptcy process in full. The Workmen's dues for the period of twenty-four months preceding the bankruptcy commencement date in pari passu with the debts owed to the secured creditors comes next in priority. Reason: Section 178(1) of the Insolvency and Bankruptcy Code, 2016, prescribes the priority of payments of debts as under: Notwithstanding anything to the contrary contained in any law enacted by the Parliament or the State Legislature for the time being in force, in the distribution of the final dividend, the following debts shall be paid in priority to all other debts: (a) firstly, the costs and expenses incurred by the bankruptcy trustee for the bankruptcy process in full; (b) secondly: i. the workmen's dues for the period of twenty-four months preceding the bankruptcy commencement date; and ii. debts owed to secured creditors. (c) thirdly, wages and any unpaid dues owed to employees, other than workmen, of the bankrupt for the period of twelve months preceding the bankruptcy commencement date; (d) fourthly, any amount due to the Central Government and the State Government including the amount to be received on account of 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 bankruptcy commencement date; (e) lastly, all other debts and dues owed by the bankrupt including unsecured debts.

Topics: Insolvency Resolution Process for Individuals and Partnership Firms

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