Open Access Research Article
ANALYSING THE AMBIT OF WORKMEN DUES UNDER IBC, 2016
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Article Details
ANALYSING THE AMBIT OF WORKMEN DUES
UNDER IBC, 2016
Authored By - Shreya Sharma,
LLM Corporate and Business Law,
Gujrat National Law University,
Gandhinagar.
Abstract
The realm of business is fundamentally
characterised by its dynamic nature, susceptible to both periods of expansion
and contraction and frequently impacted by unpredictable market factors. In the
present setting, the fundamental objective of regulatory frameworks is to
foster entrepreneurship and innovation while concurrently establishing
streamlined systems to effectively resolve instances of financial failures. The
primary aim of the Insolvency and Bankruptcy Code, 2016, is to facilitate the
rescue and revival of financially viable organisations andto optimise the value
of assets involved in the insolvency process.
This paper examines the complex domain of workmen’s
dues within the context of IBC 2016, investigating the legislative, regulatory,
and judicial dimensions that shape the handling of these dues in circumstances
of liquidation. Individuals employed in manual labour, frequently originating
from socioeconomically challenged circumstances, find themselves in a
precarious situation when a corporation encounters insolvency or bankruptcy.
The IBC endeavours to protect its rights and interests.
In pursuance of the aim of this article, the
Waterfall Mechanism and Liquidation Estate under Section 53 and Section 36,
respectively, are extensively discussed along with the conflict between the
Companies Act and IBC, 2016.
Keywords: Workmen Dues, Section 53, Liquidation Estate, Provident Fund,
Gratuity, Pension Fund, Trade Union.
Introduction
Any business is an organisation which has
properties just like a human body, which may grow or decay. The world of
business and the market are volatile. The overarching objective of legal
frameworks is to foster and promote entrepreneurial endeavours and the
development of innovative solutions. Commercial projects will likely experience
failure, but they will be promptly and efficiently addressed. Entrepreneurs and
lenders will have the capacity to progress rather than being burdened by prior
judgments[1].
The fundamental objectives of the IBC 2016 are
twofold. There are two primary objectives in implementing the Corporate
Insolvency Resolution Process: firstly, to salvage financially sustainable
firms and companies, and secondly, to optimise the worth of assets[2].
Numerous individuals have sought to exploit the
limited awareness of labourers on their rights by engaging in strategic
bankruptcy to circumvent and undermine these rights. The enactment of
appropriate legislation was necessary to safeguard workers’ rights in situations
of insolvency and bankruptcy, leading to the inception of IBC 2016.
The initiation of a liquidation case occurs when
the CIRP is unsuccessful. The mechanism by which the payment of proceeds is
carried out during the liquidation process and the specific order in which
these proceeds are paid is referred to as the Liquidation Waterfall Mechanism.
This mechanism is outlined in section 53 of the Code.
Workers, as a collective, predominantly originate
from socio-economic backgrounds characterised by lower levels of affluence.
Consequently, there has arisen a necessity to address social justice issues by
implementing labour-friendly measures such as the Insolvency and Bankruptcy
Regime in India.
Issue at Hand
The Workmen Dues jurisprudence is complex with
respect to implementation. There is a conflicting approach in the Companies Act
and IBC with respect to what entails Workmen Dues that has been the question of
law under various judgements. Furthermore, whether Workmen collectively can
fill an application has been contentious. Lastly, the manner in which these
dues are cleared has also been a point of interest in insolvency and bankruptcy
jurisprudence.
Legislative Background
Section 53: Waterfall Mechanism
Section 53 deals with the distribution of assetsin
situations where CIRP fails. The Section has to be read with Regulations 33 and
35 of the Liquidation Regulation[3]
and supersedes Sections 326 and 327[4].
The priority order that determines the distribution is called the waterfall
mechanism.
The distribution is as follows:
1. The Liquidation and CIRP Costs are paid in
full:
a.
Section 5(13) and
Regulation 31 of CIRP Regulations state that only CoC ratified expenses shall
be accounted for. If not ratified accordingly,it is borne by the Applicant
itself.
b.
The second tier pertains to
the settlement of workmen’s dues and obligations payable to a secured creditor,
both of which hold an equal ranking.
c.
The third component
pertains to wages and outstanding dues owed to employees who are not
classified as workmen.
d.
The remaining assets are
allocated towards the settlement of financial obligations owing to unsecured
creditors.
e.
The fifth category pertains
to the total amount of money owed to the Central and State Governments and any
unpaid debts owed to a secured creditor following the enforcement of a security
interest.
f.
The final three categories
in the order of precedence are other dues, debts owed to preference
shareholders, and monies due to equity shareholders or partners.
The allocation of assets within a specific group of
entities can be either fully disbursed or, in cases where the amount is
inadequate, distributed proportionally. The rule additionally stipulates that
the Liquidator shall invalidate contractual agreements executed by two or more
receivers if they impede the orderly distribution of assets.[5]
Legislative Intent for Settlement
Mechanism of Workmen’s Dues
The
role of the employee or workman has consistently held a pivotal position in the
resolution framework established by the IBC. When a company encounters
financial difficulties, it commonly results in delayed payment of wages and
salaries to employees and workers. The presence of an uneven power dynamic
between the corporation and its employees is the underlying explanation for
this phenomenon. The employees have minimal bargaining power in relation to the
organisation. Therefore, companies have frequently seen the non-payment of
salary as a tolerable risk, as employees are unlikely to engage in legal disputes
against the formidable might of the company.[6]
This
inherent disadvantageous position was a key concern of the Bankruptcy Law
Reforms Committee Report, 2015, stating that “under the proposed Code, it is
imperative that every creditor, regardless of whether they are a financial
creditor or an operational creditor, possesses the ability to commence the
insolvency resolution process (IRP). It is worth noting that operational
creditors encompass individuals such as workmen and employees who have
outstanding obligations from the past. The Committee further suggests that it
is imperative for a resolution plan to include specific safeguards for
operational creditors. This measure will allow workmen and employees to
commence insolvency proceedings, expedite the settlement of their outstanding
payments, and transition to alternative employment opportunities, rather than
enduring prolonged waiting periods for their dues, as is currently observed
under the prevailing system”[7].
The
Joint Committee on Insolvency and Bankruptcy Code also observed that employees
are regarded as the vital core of every organisation, and in the event of
insolvency or bankruptcy, they would inevitably face adverse outcomes. The
importance of the workmen’s participation within the Code is well demonstrated
by the acknowledgement bestowed upon the decision-making process of the Joint
Committee, noting that“in order to emphasise the importance
of workmen within the framework of the Act, it is proposed that wages and
unpaid dues to workmen of an insolvent company be categorised as Item 1, while
debts owed to secured creditors be categorised as Item 2 under Clause 53(1)
(b). This arrangement ensures that the rights of workmen are given equal
priority to those of secured creditors.”[8]
Provisions Relating to Workmen’s
Dues Settlement
Section 2(s) of Industrial
Disputes Act, 1947
“Workmen” encompasses
individuals, including apprentices, who are engaged in various industries to
perform a range of tasks, such as “manual, unskilled, skilled, technical, operational,
clerical, or supervisory work, in exchange for compensation”. This definition
applies regardless of whether the employment agreement is explicitly stated or
implied. Furthermore, within the context of legal proceedings related to an
industrial dispute, the term “workmen” also encompasses individuals who have
been terminated, discharged, or laid off in connection with or as a result of
that dispute or whose termination, discharge, or layoff has contributed to the
emergence of said dispute.
This category does not
encompass individuals who are working in the armed forces (Army/Navy/Air
Force/Police) or those who hold primarily management or administrative
supervisory positions and earn salaries exceeding INR 6500.
Section 5(20) read with Section 5(21) of IBC, 2016
Workman is anoperational
creditorper the language of the Section.
Section 8 of IBC, 2016
The provision grants
Operational Creditors the entitlement to issue a demand notice in the event of
a default, thereby requesting the corporate debtor to fulfil its outstanding
debts.
Section 9 of IBC, 2016
The Operation Creditor
has the right to file an application for initiation of CIRP after the
expiration of 10 days of receipt of the demand notice under Section 8 if the
corporate debtor fails to raise any notice of dispute.
Section 36 of IBC, 2016:
Liquidation Estate: Inclusions and Exclusions
The
Section omits the provident fund, the pension fund, and the
gratuity fund, any owed to workers or employees from the liquidation assets of the
corporate debtor. Consequently, these payments are also exempted from the scope
of the waterfall method outlined in portion 53.
Section 53(1)(b)(ii) of IBC, 2016:
Distribution of Assets
The
workmen’s dues for a period of 24 months preceding the liquidation date shall
be payable.
The
aforementioned payment can be made in its entirety or equitably among
recipients of the same category, specifically secured creditors, in situations
where the available funds are insufficient to satisfy the outstanding debts
fully.
Section 326(2) Explanation of
Companies Act, 2013: What are workmen’s dues:
The
text outlines the obligations of a company to pay wages, holiday remuneration,
compensation for workmen’s deaths or disablements, and amounts due from the
company’s provident, pension, and gratuity funds. It also mentions the
“workmen’s portion” in relation to secured creditors, which is equal to the sum
of workmen’s dues and debts.
Judicial Approach
The
judiciary has taken up the mantel to clear up the confusion and conflict to
uphold the rights of the inherently disadvantageous workmen. The past five
years have given clarity to the Workmen regarding their rights and the extent
thereof.
The
first pro-workmen approach was seen in JK Jute Mill Mazdoor
Morcha v. Juggilal Kamlapat Jute Mills Company Ltd. Through Its Director &
Ors.[9]
The fact of the case related to a Jute Mill, which opened and closed multiple
times until finally closing in 2014, had proceedings pending under the 1985
Act. Trade Union submitted a demand notice pursuant to Section 8 on behalf of a
group of 3000 workers seeking payment for delinquent dues. The NCLT and NCLAT
rejected the final application on the grounds that the Trade Union does not
meet the criteria of being an operational creditor since it does not fall under
the definition of a person as they have not provided any services. The
Union argued before the Supreme Court that a purposive interpretation should be
applied to acknowledge the Trade Union as an operational creditor under the
Code.
Hon’ble Justice RF
Nariman gave the judgement in favour of Trade Unions, stating that the Union
established under the Trade Unions Acts are persons under Section 3(23) of the
Code. Moreover, it should be noted that the acceptance of conjoined
applications is explicitly allowed in accordance with Rule 6, Form 5 of the
Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.
The Trade Union gathers financial resources that can be utilised to
resolve problems pertaining to its members.
Finally, the Court
emphasised that the trade union serves as the representative body for its
members, who are individuals engaged in labour and may have outstanding dues
owed to them by their employer. These dues are undeniably obligations arising
from the services provided by each workman, collectively represented by the
trade union.[10]
Another relief that can
be made out of this judgement is, with the increased threshold of the
requirement of Rs. 1 crore, an expansive interpretation to the joint
application allows workmen to be left with a recourse that might not have been
so on individual application.
The question of whether
dues are payable during the entity is going concern and if the same would
include Provident Funds, Pension and Gratuity. The same was answered in Sunil Kumar Jain v. Sundaresh Bhatt[11]. The
Facts related to an appeal by the workmen/employees against the order of NCLT,
which denied their claim for salary during the CIPRand the preceding period,
was dismissed by the National Company Law Appellate Tribunal. Consequently, the
workmen and employees sought recourse by appealing to the highest Court, namely
the Apex Court.
The Court cleared the
confusion with a clearly worded judgement, stating the following aspects:
1. Claims concerning wages during CIRP:
The conditions precedent must be established before any such payment can be
made. The twin test is conducted to ascertain the viability of the
Corporate debtor as a going concern and verify the real engagement of the
respective workmen during the relevant period. The scope of coverage is limited
to individuals employed as labourers throughout the CIRP.
2. Entitlement to Provident Fund,
Gratuity Fund and Pension funds: The Court observed that the workmen’s dues
shall be governed by Section 36(4)(iii) of IBC, which specifically excludesthe
same. Section 53(1) IBC shall not apply to the relevant dues, giving outright
protection, and the Liquidator has no claim over such dues.
This trend was followed
in the NLCAT judgement in Jet
Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia
Resolution Professional of Jet Airways (India) Ltd. and Others[12], which
was refused to be interfered with by the Supreme Court.
The issue that emerged in
the Jet Airways case pertained to whether the failure to pay mandatory
obligations such as Provident Fund and Gratuity, even if the provision were
made but not actually deposited, by the Successful Resolution Applicantwould
constitute a violation of Section 30(2)(b) and (e).
The contention by the
Resolution Applicant was that “workmen dues”, as stated in Explanation II of
Section 53(1)(b), include the statutory obligations of gratuity and provident
fund in the event of resolution. The word “workmen dues” is defined in Section
326 of CA, 2013. The concept encompasses both gratuity and provident funds.
Hence, the central point of contention revolved around the interpretation that
the gratuity dues and provident fund dues should be under the purview of the
term “workmen dues” and be limited to a duration of twenty-four months, as
stipulated in Section 53. The Resolution Applicant construed
that Section 36(a)(4)(iii)pertaining to a scenario involving liquidation.
This Section specifically includes the term “fund” in conjunction with the
terms “gratuity” and “provident fund”. The term “dues” is not explicitly
included in Section 36 of the Code and, therefore, cannot be invoked in the
context of resolutions.
The position was rejected
by the NCLAT, which determined that the employees were entitled to
receive the complete amount of gratuity and provident funds. The NCLAT further
deemed the Resolution Plan unsuitable due to its failure to include provisions
for the distribution of these payments.
Lastly, the most recent
judgement offering further clarity on conflict with the Companies Act, 2013 is
the Moser Baer Karamchari Union
through its President Mahesh Chand Sharma v. Union of India[13]. The
present matter pertains to a writ petition seeking the invalidation of Section
327(7) of the Companies Act 2013 on grounds of arbitrariness and violation of
Article 21 of the Constitution. Furthermore, a request was made to issue a
suitable writ, directive, or order of Mandamus to exclude the statutory
claims of the workers’ dues from the scope of Section 53 of IBC.
The Court touched on
aspects of workmen and employees’dues. Itreferred to provident fund, gratuity
and pension inclusion in liquidation estate under Section 53 of the Code and
whether the Liquidatorshould be directed to make provisions for the payment of
any outstanding provident funds, gratuity, and pension obligations to employees
and workers in situations where distinct statutory funds had not been
established for these specific reasons.
The Supreme Court upheld
the NCLAT order and dismissed the petition. The following key rulings were
made:
1. Section 271 of CA, 2013 deals with
workmen dues with respect to company wounding up on any grounds as mentioned
under clauses (a) to (e), which do not necessarily be out of intention to
revive and rehabilitation. Contrarily, the aim of IBC deals with revival and
rehabilitation specifically, and the grounds are also vastly different.
2. The Court statedthat to revive and
rehabilitate firms,all parties, including workers, needed sacrifices. Workmen
have a stake in the company’s revival, “so unless the burdensome sacrifices for
them are manifestly unjust and arbitrary”.
3. In instances wherein the
secured creditor does not release its security interest in
accordance with Section 52, they are obligated to remit the amount owed as
specified in Section 53(b)(i) to the Liquidator. This action serves
to safeguard the outstanding debts owed to the employees.
4. Furthermore, Section 327(7)of the
Companies Act 2013 clarifies that Sections 326 and 327 do not apply in
liquidation cases under the IBC. This exception was implemented due to the
implementation of the IBC and is notably relevant to the process of
liquidating a corporation under the IBC. Hence, it was categorically
stated that Section 327(7) is not arbitrary and does not infringe
upon the provisions of Article 21 within the Constitution of India. When a
company undergoes liquidation, according to the IBC, the distribution of
assets must comply with the provisions outlined in Section 53. Additionally,
corporations undergoing liquidation should consider the provisions specified in
Section 36(4) of the IBC.
The Courts have managed
to clarify the position and legislative intent concerning workmen’s dues in the
context of liquidation estate and CIRP.
Conclusion
The
situation surrounding workmen’s dues brings out the social and holistic intent
of the Code. The aspects of Section 36 and Section 53 reinstates the intention
that the interest of the workmen is paramount under the Code. The exclusion of
Employee Provident Funds, Pension Funds and Gratuity from Liquidation Estate is
a clear intention for funds to be kept aside as expected under relevant
schemes. The contesting language under the Companies Act has been formulated
for different intentions.
Nevertheless,
judicial efforts have provided answers to these questions of law by construing
the language of the Code wherein a balance has been struck between the
company’s rehabilitation and the stakeholders’ interest.
A
jurisprudence though evolved quite recently, does manage to encompass various
aspects that are a beneficial construction for the Workmen. Justice RF
Nariman’s initiative in 2019 allowing Traude Unions to file applications has
allowed the eventual cases discussed to see the light of justice.
The
law is clear now: a Workman is entitled to his dues for the past 24 months as
clearly made out under Section 53, and the pension funds, gratuity and other
schemes of workman enrichment shall not be under the purview of Liquidation
Estate, which is distributed among stakeholders. The schemes shall be carried
out as per the Labour Law and Regulation.
In
sum, the jurisprudence surrounding workmen’s dues in liquidation under the IBC
has evolved to provide a more equitable and balanced framework. These judicial
decisions have not only upheld the rights of workmen but also contributed to
the overall effectiveness of the insolvency resolution process in India. Going
forward, it is imperative that the legislative and judicial bodies continue to
collaborate in refining and improving the legal framework for insolvency cases,
considering the rights of workmen, the interests of creditors, and the broader
goals of economic revitalisation and growth. The evolving landscape of
insolvency law in India underscores the commitment to ensuring that the IBC
serves as a robust and equitable mechanism for addressing financial distress
while safeguarding the rights and interests of all stakeholders, especially the
vulnerable workmen who play a vital role in the corporate ecosystem.
[1]Datey VS, Taxmann’s
Insolvency and Bankruptcy Code Ready Reckoner (1st edn, Taxmann 2023)
.
[2]Katti Apoorva and Venkatesh Neha, ‘A Critical And
Comparative Analysis Of The '”Waterfall Mechanism” Provided under Insolvency
and Bankruptcy Code, 2016’ 4 Indian Journal of Law & Legal Research.
[3]ibid.
[4] Companies Act 2013
[5]VS (n 1).
[6]Mandan Ramchandra, ‘Have the IBC Doors Shut for
Workmen & Employees? | SCC Blog’ [2020] SCC OnLine Blog OpEd
[7]TK Vishwanathan, ‘The Report of the Bankruptcy Law
Reforms Committee Volume I: Rationale and Design’, vol I (2015).
[8]Sixteenth Loksabha, ‘Report of The Joint Committee on
The Insolvency and Bankruptcy Code’ (2014)
accessed 24 September 2023.
[9]JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Company
Ltd. Through Its Director & Ors. AIR 2019 SC
2138
[10] ibid.
[12]Jet Aircraft Maintenance Engineers Welfare Association v. Ashish
Chhawchharia Resolution Professional of Jet Airways (India) Ltd. and Others2022 SCC OnLine NCLAT 418
[13]Moser Baer Karamchari Union through its President Mahesh Chand
Sharma v. Union of India[2023] 238 CompCas 458 (SC)
Article Information
ANALYSING THE AMBIT OF WORKMEN DUES UNDER IBC, 2016
Authors: Shreya Sharma
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/10/04
- Issue 7
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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