Swarnendu Chatterjee and Anwesha Pal.
[The authors are Advocate-On-Record, Supreme Court of India and PhD Scholar and Teaching Assistant at the West Bengal National University of Juridical Sciences, Kolkata (WBNUJS) respectively.]
Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Code”), since its enforcement in December 2016, has been somewhat successful in the resolution of bad debts/loans of the erring debtors and has tightened the noose on erring companies as well as fly by night companies. The legislative intent of the Code, was to simplify and fast-track the resolution process of the loans/credit facilities which were taken by the defaulting companies. The defaulting companies/corporate debtors in the pre-IBC era had an opportunity to drag the process under The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFEASI ACT 2002) and it was quite a time taking process which was resulting in increase of bad loans/Non-Performing Assets (NPA). .” The creditors/financial institutions after the enactment of the Code, used the legal recourse of filing application under Section 7 of the Code before the National Company Law Tribunals (NCLTs). The creditors generally adopt the route under the Code, as it is time-bound and the object of the Code, being resolution by keeping the corporate debtor as a going-concern.
The concept “Going-Concern” means that after admission of the application by the NCLTs, the Resolution Professional appointed by the NCLTs in the capacity of the administrator performs duties as specified under the Code and makes every endeavour to keep the business/functions of the corporate debtor running as usual and ensure that the workmen and the employees do not lose their employment. Resolution as a going-concern as mentioned in Regulation 38 of the IBBI (CIRP) Regulations, 2016 and as per the law laid down by Hon’ble Supreme Court in Committee of Creditors, Essar Steel limited vs. Satish Kumar Gupta[1] (hereinafter referred to as “Essar Judgment”) envisages that every endeavour should be made that the workmen and employees do not lose their respective employments. The Supreme Court in the Essar Judgment, however, did not specify the quantum of payment including the statutory dues of workmen/employees in cases of resolution and left it to the commercial wisdom of the Committee of Creditors.
However, even if the Successful Resolution Applicant does not want to retain all employees and workmen, then as per Regulation 38 (as referred above) all the dues of the workmen/employees and other operational creditors shall have to be paid upfront. The question which arose in the Jet Airways matter[2] related to whether non-payment of statutory dues like Provident Fund and Gratuity (even if the provision was made and was actually never deposited) by the Successful Resolution Applicant would have amounted to breach of Section 30(2)(b) and (e) of the Code? The law as laid down by the Hon’ble Supreme Court in the Essar Judgment[3] had clearly laid down that every resolution plan has to conform to the mandate under Section 30(2) especially sub-sections (b) and (e) which, in other words shall mean that it has conform to the statutory provisions in force as on date and as applicable. The argument of the respondents regarding the effect of overriding /non-obstante clause under Sec. 238 of the Code was also scrutinized and answered by the Bench. The Hon’ble NCLAT in the judgment of Jet Airways made it amply clear, which the authors in this article/paper shall discuss in detail, is that, non-payment of statutory dues like provident fund and gratuity and subsequent non-inclusion in the resolution plan shall result in infringement of Section 30(2) (e) of the Code. Further, the Hon’ble NCLAT held that, the welfare legislations which provided for the payment of provident fund and gratuity does not run counter to the Code and therefore the non-obstante clause; i.e. Section 238 of the Code, shall have no bearing on the payment of provident fund and gratuity .
The authors shall delve into the detailed analysis of how the Hon’ble NCLAT, within the limited parameters of judicial scrutiny of a resolution plan under Section 31 of the Code, proved that the role of the judiciary in passage of a resolution plan is not a mere rubber-stamp or a post office job. Instead the NCLAT shall minutely scrutinize the plan as to whether the laws of the land including the social welfare legislations do not run counter to Section 238 of the Code. The judgment has resulted in a new interpretation of Section 30(2)(e) of the Code, which is important for the Resolution Professionals and the Resolution Applicants to comply with in the future.The Jet Airways case being the first case of resolution of giant airline company, the judgment renders clarity as to how a resolution plan should conform to the mandate of Section 30(2) (e) of the Code, in addition to Section 30(2)(b) of the Code and also whether the ratio of the Essar Steel Judgment is proving to be a boon to the resolution applicants.
The arguments which were raised by the Respondents (Successful Resolution Applicant / Jalan-Kalrock, Committee of Creditors and the Resolution Professional) were that in a case of resolution, the statutory dues of provident fund and gratuity get covered within the term “workmen dues” as mentioned in Explanation II of Section 53(1)(b) of the Code. Section 326 of the Companies Act, 2013 defines the term “workmen dues”. This definition includes gratuity and provident fund. Therefore, the fulcrum of the argument was that the gratuity dues and provident fund dues shall be covered within the term “workmen dues” and be restricted to twenty-four months only as mentioned in Section 53 of the Code. The respondents drew such an interpretation as Section 36(a)(4) (iii) of the Code which refers to a situation of liquidation and mentions the word “fund” along with the terms – gratuity and provident fund. The word “dues” are not a part of Sec. 36 of the Code, hence cannot be referred in cases of resolution.
The Hon’ble NCLAT rejected the aforesaid argument of the respondents and upheld the ratio of Sikandar Singh Jamuwal vs. Vinay Talwar.[4] It further held that the workmen and the employees are entitled to full payment of gratuity and provident fund in addition to other dues (salary, leave encashment, etc).Furthermore, the Hon’ble NCLAT accepted the argument of the Appellants that the resolution plan fell foul of Section 30(2) (e) of the Code, as it did not have the provision for payments of gratuity and provident fund for employees and workmen, which shall have to be a part of the resolution plan in addition to the other dues of the workmen and employees.
Through this judgment, the Hon’ble NCLAT has opened a new line of jurisprudence and has affirmed the fact that although it has limited jurisdiction while adjudicating approval of a resolution plan, it still has the power to check if the resolution plan has passed the muster of Section 30(2)(b) and (e) of the Code, meaning thereby, that neither the NCLT nor the NCLAT are powerless or, are rubber stamp bodies for approval of resolution plans on basis of commercial wisdom of the Committee of Creditors. The workmen and the employees can now hope to see a new era post this judgment wherein every resolution plan must conform to the ratio laid down herein regarding payment of gratuity and provident fund. The authors are hopeful that the judgment shall pass the muster of approval from the Hon’ble Supreme Court, in case there is an appeal by any of the respondents in the matter.
[1] (2020) 8 SCC 531
[2] Judgment dated 21.10.2022 (Company Appeal [AT][INS] 683/2021 and batch of appeals- NCLAT, Delhi).
[3] Supra Note. 3
[4] 2022 SCCOnline NCLAT 125