Diminishing Material Utility of IBC Towards One Primary Stakeholder

[By Kirti Gupta]

The author is a student a Hidayatullah National Law University, Raipur.

Introduction

The Insolvency and Bankruptcy Code, 2016 (the Code) promises to deal with the mammoth task of stabilising the Indian economy in this era of peculiarly volatile market conditions. The Preamble of the Code, enumerates the objective which strives to reform the insolvency framework and aid the transition from debtor to creditor centric regime.

While the Code attempts at stabilising the economy in the times of COVID-19, the author reasonably assumes that there remains a lacuna in the law, which could be detrimental to the stakeholders in the near future. The author has objectively circumscribed the scope of this article to probable disorientation expected to follow the  Gazette Notification dated 24-03-2020 [MCA Notification S.O. 1205 E] (notification).

The notification by the virtue of the power vested with the Central Government, vide proviso to Section 4 of the Code, increased the threshold of the default amount to INR 1 crore from INR 1 lakh. The author opines that considering the crooked power dynamics that hovers around the company and its employee’s relationship, the increased threshold shall predominantly deny workmen/employees, a measure of recourse under the Code, thereby defeating the objective of the Code.

Legislative Intent Behind the Position of Workmen/Employees Under the Code

The Code attempts at reorganisation and insolvency resolution in a time-bound manner without digressing from defined rights of all stakeholders, which reasons the paramount intention behind the position of employee and workman in the resolution framework.

It was understood, that in the event of a business failure leading to bankruptcy, the worst affected loft is the workman and employee. This proposition was highlighted in the Joint Committee on the Insolvency and Bankruptcy Code, 2015, where it was significantly observed that the workers are the nerve centre of the company and are affected adversely in the time of insolvency. Therefore, their outstanding dues are entitled to priority.

It’s mandatory for the resolution plan to necessarily provide for protections to Operational Creditors (OC), which includes workmen and employees, for the speedy recovery of the due payments, significantly reflected in the Bankruptcy Law Reforms Committee report (the “BLRC Report”). It was highlighted in the BLRC Report, that the provisions for providing protection to the workmen and employees is with an intent to;

‘… empower the workmen and employees to initiate insolvency proceedings, settle their dues fast and move on to some other job instead of waiting for their dues for years together…’

Moreover, The UNCITRAL Legislative Guide on Insolvency Law, elucidates that vulnerable groups such as workmen and employee shall be afforded special protection as a measure against business failure by acknowledging primacy of their rights, while discharging the debt under the insolvency laws.

Legitimate Recourse for the Workman/Employee Under the Code

Section 8 of the Code allows OC to deliver a demand notice to the corporate debtor (CD) on the occurrence of default, and further, on expiry of 10 days, where CD fails to satisfy the dues or notify of any dispute, OC can file an application to initiate Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Code.

The application is made w.r.t Rule 6(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (the Regulation), where the application is filed according to prescribed Form 5. It is imperative to note here, that Note to Form 5 provides, ‘Where workmen/employees are operational creditors, the application may be made either in an individual capacity or in a joint capacity by one of them who is duly authorized for the purpose.’ This implies that workmen and employees can file an application in their joint capacity.

Diminishing Utility of the Code for Workman/Employee

The predicament of the government in devising measures that secure economy and cater to the needs of instrumental stakeholders is understandable, however, it is equally imperative to not decide hastily, which could cause irreversible damage Au contraire.

The author opines that an increase in threshold neglects one of the primary stakeholders, i.e. workmen/employees. Increasing the quantum to the maximum permitted limit by the Code, without any consideration for the influenced stakeholders is an inconsiderate and a rushed decision. This is evident by the quantum of average wage earned in this country, which is INR 7410 per month, according to the ILO Report. Thus, it makes it immensely challenging for an employee to initiate CIRP for the payment of his past dues after the increased threshold considering the average wage. Therefore, it is essential to address the question of filing an application conjointly under the regulation, otherwise it becomes nearly impossible to meet the prescribed threshold.

In Uttam Galva Steels Limited v. DF Deutsche Forfait AG and Ors.[i] (Uttam Galva), NCLAT decided that application by OC cannot be filed jointly, because unlike Section 7, Section 8 and 9 do not provide for such provision. Moreover, it was held in Para 20, that it is impractical for more than one OC to file a joint petition due to the varied amount of default at different dates for each individual.

Ascended by another NCLT judgment, Suresh Narayan Singh v. Tayo Rolls Limited[ii] (Tayo Rolls), provides that the Note in Form 5 is not in consonance with provision  Section 9 of the Code as it does not authorise a joint application or joint demand notice by the OC, and therefore, it was requested to be reconsidered by the appropriate authorities. However, this judgment was overruled by NCLAT[iii], where the application was allowed, nevertheless, it was stated in Para 6, that where an individual claim of OC is less than 1 lakh, it cannot be maintainable.

Later, Supreme Court (SC) in J.K Jute Mills Mazdoor Morcha v. J.K Jute Mills Co. Ltd.[iv] (Jute Mills) took a slightly different stance w.r.t representational applications. The Bench decided, that a trade union represents its members who are workers and are owed debts by the employer. Thus, it is the authority which has been transferred from all the workmen to one, who shall on behalf of all, file such petition under Rule 6 of the Regulation. While the SC allowed to file an application by a trade union under Form 5, it failed to explicitly reflect on objections raised in previous NCLAT rulings of Uttam Galva and Tayo Rolls.

In the event where the joint application is dismissed as the threshold isn’t met individually, a potential mode of recovery is denied.. Workman shall either have to wait for another 10 years to meet the threshold, or seek another legal remedy. The former is highly non-pragmatic and insensitive, since a workman who is highly dependent on the income and most affected by the financial crisis, cannot sit unemployed for 10 years in order to confirm eligibility. Further, a mere attempt at seeking recourse under another legislation such as Industrial Dispute Act, 1947, highlights the inability of the Code at according a rightful remedy to OC, hence defeating the objective of the Code.

Conclusion

It is crucial to widely interpret the terminology of legislations. In Kailash v. Nankhu and Ors. Justice Nariman reiterated the aforementioned pronouncements in  Jute Mills while giving a purposive interpretation to the Code, reminding the significance of judicial interpretation to serve justice.

Therefore, if the Courts fail to allow the workmen/employee to file applications jointly under Form 5, they will be denied the utility of the Code to settle their disputes. Moreover, the author opines, that where the aftermath of the recently promulgated Ordinance would temporarily suspend the mode of recovery for the various stakeholders, the increased threshold by 100 times will cause permanent damage to the rights of the workman and employee.

It is pertinent to note, that recently in February, 2020, in the Insolvency Law Committee Report (ILC) the committee agreed that the threshold must be revised in a modified manner, considering Code has been significant in empowering OCs to initiate CIRP against large CDs. Therefore, the Committee decided that OCs should be subjected to a threshold of INR 5 lakh only.

While the author understands the Government’s quandary leading to the increased threshold, the author suggests that the threshold must be diversified w.r.t the financial background of the stakeholders involved, and thus introducing an adequate bifurcation in Section 4 as per ILC’s recommendation.

The economic condition of workmen and employees has already started to deteriorate, making it essential to provide them with all the plausible means to secure their wages, otherwise, it would be difficult for them to meet the threshold even jointly.  It’s the paramount responsibility of the Government to introduce such measures that are capable of stabilizing the turmoil caused by COVID-19, however, one has to think holistically, where the interests of all the stakeholders are met, and not left unattended.

Endnotes:

[i] Uttam Galva Steels Limited v. DF Deutsch Forfait AG and Ors.; Company Appeal (At) (Insolvency) 39 of 2017.

[ii] Suresh Narayan Singh v. Tayo Rolls Limited; CP (IB) No. 701/KB/2017.

[iii] Suresh Narayan Singh v. Tayo Rolls Limited; Company Appeal (AT) (Insolvency) No. 112 of 2018.

[iv] J.K Jute Mills Mazdoor Morcha v. J.K Jute Mills Co. Ltd.; 2019 11 SCC 332.

[v] Kailash v. Nankhu and Ors.; 2005 4 SCC 480.

[vi] Ghanshyam Dass and Ors. v. Dominion of India and Ors.; 1984 3 SCC 46.

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