SC weighs in on interplay of labour laws and IBC

By Abhishek Dutta and Vineet Shrivastava, Aureus Law Partners

India as a welfare state has enacted various labour laws in order to ensure the protection and promotion of the social and economic status of workers and the elimination of their exploitation.

Under the Indian constitution, trade union, labour and industrial disputes are included in the concurrent list, where both the central and state governments are competent to enact legislation, with certain matters reserved for the central government. In addition to these, the preamble of the constitution has secured social, economic and political justice, equality of status and opportunity. There have been some recent court decisions under the Insolvency and Bankruptcy Code, 2016, (code) that deal with the interpretation of labour legislation.

labour laws
Abhishek Dutta
Founder and managing partner
Aureus Law Partners

Recently, the Supreme Court, in the case of JK Jute Mill Mazdoor Morcha v Juggilal Kamalpat Jute Mills Company Ltd, upheld the insolvency application filed under section 9 of the code by a registered trade union considering it to be an operational creditor for the purposes of the code.

The National Company Law Tribunal (NCLT), while adjudicating the application filed by the trade union on behalf of nearly 3000 workers of the debtor, had held that the trade union was not covered as an operational creditor and had dismissed the insolvency application. In the appellate proceedings, the NCLAT had also dismissed the trade union’s application by stating that each worker could file an individual application before the NCLT.

The Supreme Court, after studying various provisions of the Trade Unions Act, 1926 (act), observed that a trade union being an entity established under the provisions of the act would fall under the definition of a person under section 3(23) of the code.

Further, rule 6, form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, also recognizes that claims can be made not only in an individual capacity but also conjointly.

labour laws
Vineet V Shrivastava
Aureus Law Partners

Also, a trade union that is recognized under section 8 of the act can sue or be sued in its name. The Supreme Court relied on the judgment of the division bench of Bombay High Court in the case of Sanjay Sadanand Varrier v Power Horse India Pvt Ltd, where a winding-up petition by a trade union under section 434 read with 439 of the Companies Act, 1956, was held to be maintainable. On the basis of these observations, the Supreme Court was of the view that filing individual petitions would be burdensome as each worker would, therefore, have to pay insolvency resolution process costs, costs of the interim resolution professional, costs of appointing valuers, and so on.

It observed that since a trade union is formed for the purpose of regulating the relations between employees and their employer, it can surely maintain a petition as an operational creditor under the code. On the basis of this, the Supreme Court remitted the petition to the NCLAT to decide the matter on its merits.

In another case, Alchemist Asset Reconstruction Co Ltd v Moser Baer India Limited, an application was filed by the workers of the debtor in liquidation, praying for a direction to the liquidator to exclude the amount that is due towards their provident fund, gratuity fund and pension fund from the waterfall mechanism provided for under section 53 of the code. The liquidator was of the view that as per explanation II to section 53 of the code, “workmen’s dues” have the same meaning as that assigned to it under section 326 of the Companies Act, 2013, and therefore gratuity shall be included for the purposes of section 53 of the code.

The NCLT observed that “liquidation estate” as defined under section 36 of the code clarifies in unequivocal terms that all sums due to any employee from the provident fund, pension fund and gratuity fund are not to be included in the expression “liquidation estate”.

Accordingly, the NCLT relying on the judgment of the NCLT Bombay bench in the case of Asset Reconstruction Company (India) Ltd v Precision Fasteners Ltd held that employees’ dues towards pension, provident fund and gratuity were not to be included in the liquidation estate and would not, therefore, be recovered by way of waterfall mechanism provided for under section 53 of the code. It further issued directions to make available funds to the provident fund, gratuity fund and pension fund of the debtor company in case of deficiencies in the said funds.