Trade Union As “Operational Creditor”: Critical Analysis of the Judgment

[By Suprabh Garg]

The author is a third year student of National Law University, Odisha.

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 [“IBC”] empowers the Operational Creditors to initiate Corporate Insolvency Resolution Process [“CIRP”] against a Corporate Debtor, if it defaults in payment of ‘operational debt’. However, the ongoing debate whether Trade Union constitute as Operational Creditors, has been finally settled by the Apex Court in the case of JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Company Ltd. [“Jute Mill”] [i].

The Apex Court by clearing one of the grey areas of IBC provided employees an efficacious weapon to recover their hard earned labour from the insolvent Corporate Debtor. However, there are several unresolved issues which have arisen subsequent to this judgement, which have been dealt by the author in the later part.

TRADE UNION CONSTITUTE AS OPERATIONAL CREDITORS: JUDGEMENT ANALYSIS

The Supreme Court overruled the impugned order of the National Company Law Appellate Tribunal [ii], which had affirmed the order of National Company Law Tribunal Delhi [iii], holding that trade union was not an operational creditor since they did not qualify as ‘persons’ under IBC and further that no service are rendered by the Trade Unions to the Corporate Debtor. The Apex Court in a contrasting opinion held that Trade Unions constitute Operational Creditor on two grounds, firstly that Trade Unions fell within the definition of ‘person’ under IBC and subsequently qualified as Operational Creditor [1] and secondly that filing of individual petitions by employees would be burdensome and costly affair [2].

Trade Union Fell Within the Definition of Person under Section 3(23), IBC

Operational Creditor is defined under Section 5(20) of IBC as a ‘person’ to whom an operational debt is owed. Further, the term ‘operational debt’, defined under Section 5 (21), IBC inter-alia, includes claim in respect of services rendered including employment. The term ‘person’ for the purpose of IBC has been defined in Section 3(23), IBC, which in sub-clause (g) inter-alia, includes ‘any other entity established under a statute’.

The Court held that the Trade Unions fall under the definition of ‘person’ under Section 3(23)(g) since they are ‘entity established under a statute’ viz. The Trade Union Act, 1926 and therefore, they constitute as Operational Creditor under Section 5(20) read with Section 5(21), IBC.

Filing of Individual Petition by Employees – Burdensome and Costly Affair

The Court held that instead of filing one petition by Trade Union, if all the employees filed an individual petition, it would not only be burdensome but also a costly affair. Each employee would have to thereafter pay various costs, inter-alia, insolvency resolution process cost, the cost of interim resolution professional, the cost of appointing valuers etc. [iv], which were mandatory requirement. In such scenario, the processual law of IBC would become tyrant and deprive the employees of justice, thus increasing the burden of the courts. The Apex Court then, to support its contentions, reiterated its judgements in Kailash v. Nanhku [v], Sushil Kumar Sen v. State of Bihar [vi], State of Punjab v. Shamlal Murari [vii] wherein it was held that processual law should not be a tyrant, but an aid to justice.

The Court thus, held that such a stringent approach of processual law that would deny the employees opportunity of justice, should be rejected. Therefore, the Court held that a registered trade union which is formed for the purpose of regulating the relations between workman and their employees [viii] could maintain a petition as an Operational Creditor.

UNRESOLVED/DISPUTED ISSUES: A CRITICAL ANALYSIS

The Court in Jute Mill on the other hand also raised plethora of unresolved issues listed below.

Whether or Not a Trade Union Can File an Application Under Section 9, IBC Conjointly?

One of the issues that arose is whether or not a trade union can file an application under Section 9, IBC conjointly on behalf of its employees? [ix] According to the procedure established by IBC, an Operational Creditor to initiate CIRP has to file an application under Section 9, IBC in compliance of Rule 6 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (hereinafter “Rules”) [x], which mandates the filing of application in the format prescribed by Form 5 [xi].

Now, Section 8 and Section 9, IBC do not expressly talk about class action suits or joint petitions. However, ‘Note’ to Form 5 under Rule 6 allows for workmen/employees who are operational creditors to file in his/her individual or joint capacity. The ‘Note’ states:

Note: 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.” [xii]

There renowned rule of interpretation, sententia legis which was discussed by the Apex Court in Vishnu Pratap Sugar Works v. Chief Inspector of Stamps [xiii], held that a statute is to be construed according to the intent with which it was made and the duty of judicature is to act upon the true intention of the legislature –the mens or sententia legis.

In the view of the aforementioned ‘Note’ it appears that the legislature intended to allow joint suits by employees under Section 9, IBC and subsequently, it can be inferred that registered Trade Unions can file an application under Section 9, IBC co-jointly on behalf of one or more employees. However, more clarification is needed on this issue, which would continue to be a grey area until there is a judicial interpretation or a subsequent amendment to that effect,

Whether the Minimum Threshold of Rs. 1 Lakh would apply Individually or Collectively to Employees in Cases where the Application is Filed Conjointly?

A Trade Union as per Section 9 read with Section 4, IBC can file a CIRP application only when there is a default of minimum of rupees one lakh. However, one question which remains unresolved is whether the minimum criteria of rupees one lakh apply to the debt of an individual employee or will it apply collectively to the debt of more than one employee?

To deal more elaborately, let us take two hypothetical situations.

Situation 1 A Trade Union wants to file CIRP on behalf of its two employees who owe one lakh rupee each from a company.

Situation 2 A Trade Union wants to file CIRP on behalf of its two employees who owe fifty thousand each from a company

In both situations, the CIRP applications filed clearly meets the minimum threshold requirement of rupees one lakh, and technically both applications filed under Section 9, IBC will succeed if we were to go by the words of this judgement, wherein a Trade Union can file an application conjointly.

However, in the view of the author, the application filed under Situation 2, where the minimum requirement criteria are met collectively, would render Section 4, IBC futile and otiose. It is the duty of judicature to act upon the true intention of the legislature and a statute is to be construed according to the intent of them that make it and the -the mens or sententia legis [xiv]. The legislature while drafting Section 4, IBC clearly intended the minimum criteria of one lakh rupees to apply to a creditor individually and not co-jointly. If the courts allow the minimum criteria of one lakh collectively to an application filed by a Trade Union conjointly, then a situation may soon arise where an application filed conjointly on behalf of hundred employees, each owing thousand rupees would be able drag a billion-dollar company to insolvency.

In K. Kishan v. Vijay Nirman Co. (P.) Ltd [xv], the Apex Court had held that an operational creditor cannot use IBC either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. The Court had further held that an alarming effect of allowing the same would be that a small amount of say, two lakhs of rupees, would jeopardize an otherwise solvent company worth several crores of rupees.

The legislature never intended to contemplate such situation which would create chaos in the corporate world and render the provision of IBC otiose. The minimum threshold criteria of rupees one lakh should apply individually and not collectively.

The judgement has not dealt with this issue and till a judicial pronouncement or subsequent amendment clarifying the same is brought, this judgement would take precedence and Section 4, IBC will continue to be rendered futile and otiose.

CONCLUSION

The Supreme Court although cleared one of the grey areas of IBC by holding Trade Union to be Operational Creditors, however this judgment also opened a pandora box for numerous unresolved and disputed issues which need immediate judicial interpretations and/or subsequent amendments. Until there is clarity on the unresolved issues, the precedence and reliance on this judgement would keep on rendering the provisions of IBC otiose and futile.

Endnotes

[i] JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Mills Company Ltd., Civil Appeal No. 20978 of 2017.

[ii] JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Mills Company Ltd., Company Appeal (AT) (Insolvency) No. 82 of 2017.

[iii] JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Mills Company Ltd., C.P. No. (IB) 36/ALD/2017.

[iv] Regulation 31 and 33 of the Insolvency and Bankruptcy Code of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

[v] Kailash v. Nanhku, (2005) 4 SCC 480.

[vi] Sushil Kumar Sen v. State of Bihar, (1975) 1 SCC 774.

[vii] State of Punjab v. Shamlal Murari, (1976) 1 SCC 719.

[viii] Section 15, The Trade Union Act, 1963.

[ix]  Mondaq, ‘A Trade Union Can Initiate Proceedings as an Operational Creditor under The Insolvency and Bankruptcy Code’,

http://www.mondaq.com/india/x/811964/Insolvency+Bankruptcy/A+Trade+Union+Can+Initiate+Proceedings+As+An+Operational+Creditor+Under+The+Insolvency+And+Bankruptcy+Code

[x] Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016

[xi] Rule 6 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016

[xii] Note to Form 5, Rule 6 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016

[xiii] Vishnu Pratap Sugar Works v. Chief Inspector of Stamps, AIR 1968 SC 102

[xiv] ibid

[xv] K. Kishan v. Vijay Nirman Co. (P.) Ltd, Civil Appeal 21284 of 2017.

Leave a Reply

Your email address will not be published. Required fields are marked *

*
*