Objective of Insolvency & Bankruptcy Code 2016
The object of the Insolvency & Bankruptcy Code 2016 (“IBC”) is to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance of interests of all stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India and matters connected therewith or thereto. The statement further says that an effective legal framework for timely resolution of insolvency and bankruptcy would support the development of credit markets, encourage entrepreneurship, improve business, and facilitate more investments leading to higher economic growth and development.
The IBC was enacted by the Indian Parliament with the objective of unifying the legal regime on commercial insolvency. The process of Insolvency Resolution Process could be triggered by any Financial Creditor or Operational Creditor or by the Corporate Debtor itself, upon a corporate debtor’s default in payment/repayment of a debt, if the default is over and above the threshold limit as envisaged in Section 4 of the IBC.
Judgment dated 07.03.2023 of NCLAT in Company Appeal (AT) (Insolvency) No. 218 of 2023, titled as Sadashiv Nomaya Nayak & Ors versus Gammon Engineers and Contractors Private Limited, Mumbai.
Recently, on 07.03.2023, the National Company Law Appellate Tribunal (“NCLAT”) in Sadashiv Nomaya Nayak (supra) upheld an Order of NCLT, Mumbai, and has held that in a group/joint petition, u/s 9 IBC 2016 filed by employees/workmen, each of the employee/workmen has to overcome the minimum threshold limit as envisaged under Section 4 of the IBC. Germane to point out the threshold limit is Rs. 1 Crore as per Section 4, IBC. The aforementioned Judgment of the NCLAT has also been upheld by the Hon’ble Supreme Court of India, vide Order dated 15.05.2023 in Sadashiv Nomaya Nayak & Ors versus Gammon Engineers and Contractors Private Limited, Mumbai; Civil Appeal No. 3220 of 2023.
The Author with humility submits the NCLAT has wrongly interpreted the judgment of the Hon’ble Supreme Court in Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Co. Ltd., (2019) 11 SCC 332, and have also ignored the legislative intent, while laying down an erroneous interpretation of law. In fact, if the NCLAT judgment is not reviewed/reverses, the doors of IBC 2016 have been virtually shut down for employees/workmen.
Relevant Provisions of the Insolvency & Bankruptcy Code 2016, and its allied Rules.
Before going into the grounds as to why the Judgment of NCLAT is not a good law, it shall be imperative to mention the relevant provisions of IBC 2016, which are as under –
Section 4 of the IBC 2016, which prescribes the minimum threshold for initiation of Corporate Insolvency Resolution Process (“CIRP”), reads as under –
4. Application of this Part.—(1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one crore rupees:
Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees.
Section 9(1) of the IBC, which provides an Operational Creditor to knock the door of NCLT, reads as under –
9. Application for initiation of corporate insolvency resolution process by operational creditor.—
(1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.
Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 states as follows:
6. Application by operational creditor.—
(1) An operational creditor, shall make an application for initiating the corporate insolvency resolution process against a corporate debtor under Section 9 of the Code in Form 5, accompanied with documents and records required therein and as specified in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
(2) The applicant under sub-rule (1) shall dispatch forthwith, a copy of the application filed with the adjudicating authority, by registered post or speed post to the registered office of the corporate debtor.”
Form 5, to which Rule 6 (as abovementioned) refers, contains Part V, in which 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 authorised for the purpose.”
The Intention of the Legislature by allowing joint petition by a Workman/Employee
The legislature, in their own wisdom has made this exception for the Workman/Employees to file a joint petition/application under section 9 of the IBC 2016. This exception was carved out for the simple reason that the workman/employees can join and file a single petition/application, as the legislature was conscious of this fact, that a workman or an employee will not able to individually meet the threshold limit. Pertinently, this exception is not with any other class of Operational Creditors.
The NCLAT in its Order dated 07.03.2023 in Sadashiv Nomaya Nayak (supra), has erroneously interpreted the intention of the legislature, that the note in FORM 5 was incorporated for administrative purposes. Had this administrative purpose been the reason for this incorporation, then in that case, why such a provision was not there for other classes of Operational Creditors?
In fact, the Hon’ble Supreme Court, in Mazdoor Morcha (supra), explicitly held in its last para, while affirming the right of a trade union to file on behalf of workers/employees in a representational capacity, and went on to observe:
“17. …Equally, to state that for each workman there will be a separate cause of action, a separate claim, and a separate date of default would ignore the fact that a joint petition could be filed under Rule 6 read with Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, with authority from several workmen to one of them to file such petition on behalf of all.”
The Hon’ble Apex Court, while rejecting the view of the NCLAT, held that in terms of the Note in Form 5, there was no need for individual claim/cause of action/date of default to be separately set out. Meaning thereby, in a joint application, individual workman/employee, need not require to state its individual claim separately, and therefore, to state, that each individual has to overpass the threshold limit of Rs. 1 Crore, is contrary to the view expressed by the Hon’ble Supreme Court as well.
A reference to a Joint Petition by Financial Creditors under Section 7 of the Insolvency & Bankruptcy Code 2016
Furthermore, it shall be imperative to mention, that the IBC 2016, allows joint petition on behalf of the Financial Creditors as well, under section 7 of the Code. The Relevant portion of Section 7, IBC 2016, is reproduced herein for the sake of ready reference –
7. (1) A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
It is noteworthy, that the Hon’ble High Court of Rajasthan in Vishnu Oil Mill Private Ltd. Versus Union of India; D.B. Civil Writ Petition No. 2507/2022, vide Judgment dated 25.07.2022, have held that, in a joint petition u/s 7 IBC 2016, the claims of each Financial Creditors can be added to touch the minimum threshold of Rs. 1 Crore. The relevant portion of Vishnu Oil Mill (supra) is reproduced herein below –
“On a plain reading of Section 7, it becomes clear that there is no ambiguity in the provision which requires any interpretation other than what is conveyed in its literary sense. The section clearly stipulates that the application for triggering CIRP may be initiated by a financial creditor either individually or jointly with other financial creditors. Previously the threshold default limit for filing the CIRP application was only Rs.1 lakh and it has been drastically increased to Rs.1 crore vide Gazette Notification dated 24.03.2020. It can easily be envisaged that in cases of MSMEs, there may not exist financial creditors whose individual debt is Rs.1 crore or above. If the threshold limit was to be fixed at Rs.1 crore qua each individual financial creditor, then there was no reason whatsoever for allowing joint applications by financial creditors. The statute and the amendment made therein makes it clear that the same was formulated in such a manner so as to provide a means of efficacious redressal to the smaller financial creditors and to give them an opportunity of availing the speedy remedy under the IBC rather than being relegated to other onerous proceedings for securing their money.”
(Emphasis by the Author)
Certainly, there cannot be two laws, vis-à-vis same provisions, wherein Financial Creditors are allowed to add up the claim to touch the threshold, but the workman/employees who are the Operational Creditors, are not allowed. The language of both the provisions i.e., Section 7(1) of the IBC 2016, and the Note appended to Form 5 of the Rules, are mutatis mutandis, and therefore, two contrary views by different foras of the country call for immediate rectification.
It is also imperative to take note of the fact, that even the Union of India’s stand before the Hon’ble Rajasthan High Court in Vishnu Oil Mill (supra) was in support of the legislative intent, that in a joint petition, the claims of all Financial Creditors can be summed up to meet the minimum threshold limited as envisaged in Section 4 of the IBC 2016.
Whether an individual Employee or Workman can ever surpass the minimum threshold of Rs. 1 Crore; THE PRACTICAL CONUMDRUM CONUNDRUM
India is known for its cheap labours, and the wages paid in India, are in much lower side, if compared to the rest of the world. According to India Wage Report, prepared by International Labour Organisation (ILO)[1], the real average wage of a regular worker in 2011-2012 is Rs. 231 per day, with a compound average growth of 4.2% annually. Going by this data, the average annual income of a regular worker in 2011-12 would be around Rs. 83,000, and if considered the average growth, this figure may have not increased more than Rs. 1,50,000/- annually in 2022-23. A workman earning a mere Rs. 1.5 Lakhs yearly cannot at any yardstick be expected to have a due of more than Rs. 1 Crores. This is as unrealistic as it can be.
At this juncture, a reference to the definition of workman in the Industrial Disputes Act 1947, shall also be germane –
“(s) “workman” means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include any such person—
(i) who is subject to the Air Force Act, 1950 (45 of 1950), or the Army Act, 1950 (46 of 1950), or the Navy Act, 1957 (62 of 1957); or
(ii) who is employed in the police service or as an officer or other employee of a prison; or
(iii) who is employed mainly in a managerial or administrative capacity; or
(iv) who, being employed in a supervisory capacity, draws wages exceeding ten thousand rupees per mensem or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature.”
(Emphasis by the Author)
A perusal of sub-clause (iv) of Clause (s) of Section 2 of the Industrial Disputes Act 1947, would bring us to conclusion, that a person, if in a supervisory capacity is drawing more than Rs. 10,000/- per month, is outside the purview of “Workman”. Pertinently, when the legislature included a “workman” under the definition of Operational Creditor, it was conscious of the wages a workman gets, and this is the reason, an exception was carved out by allowing a Joint Petition. Any reverse interpretation of the legislative intent would cause conflicting views of the legislature vis-à-vis the two statutes, i.e., the ID Act 1947 and IBC 2016.
The Legislative intent to prioritize the welfare of an Employee/Workman qua IBC 2016.
Relevant in this context would be to refer the Bankruptcy Law Reform Committee 2015 (“BLRC Report”), which in its introductory part, mentions the following –
“…… However, the Committee proposes that any creditor, whether financial or operational, should be able to initiate the insolvency resolution process (IRP) under the proposed code. It may be noted that operational creditors will include workmen and employees whose past payments are due. The Committee also recommends that a resolution plan must necessarily provide for certain protections for operational creditors. This will 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 as is the case under the existing regime.”
(Emphasis by the Author)
The welfare of the Workman/Employee under the regime of IBC 2016, has been prioritised, which further gets evidenced from the fact that the workmen and employees have been given priority in claims under the waterfall mechanism enshrined under Section 53 of the IBC 2016. Under the mechanism, the dues of the workmen for the preceding 24 months are placed second on the priority list, only after the cost of the Insolvency Resolution Process, and are pari passu with debts owed to secured creditors in the event the creditor has relinquished its security. The dues of employees, other than the workmen, for the preceding 12 months is ranked third above even the unsecured creditors.
Furthermore, if the IBC 2016 is perused in its entirety, one could certainly observe that the interests of the workman have been taken care of, as it goes without saying that workman/employees are the backbone for the growth of any nation.
The Purposive Interpretation
The need of the hour is to lay down the correct & purposive interpretation of the IBC 2016, by the Hon’ble Supreme Court, as the Apex Court is being doing since, the Code has come into force. The purpose of the legislature was the redressal of the unpaid workmen/employees, and this was the reason, the workmen/employees were given this exception to file the petition in a joint capacity. Furthermore, a conjoint reading of Note appended to Form 5, and Section 4 of the IBC 2016, would certainly bring us to conclusion, that a petition, whether its joint or individual, has to cross the threshold limit; and it would lead to a perverse interpretation and against the intent of legislature, if a joint petition is segregated into individual petitions and asked to comply with Section 4 separately.
Conclusion
The Author is optimistic, that the Hon’ble NCLAT or the Hon’ble Supreme Court, shall come to the rescue of the Employees/Workmen, and will again open the doors of IBC for them.
[1] https://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---sro-new_delhi/documents/publication/wcms_638305.pdf
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