India: Whether An Application Under Section 9 Of The Insolvency & Bankruptcy Code, 2016 Is Maintainable At The Instance Of Workmen Association?

Last Updated: 17 October 2017
Article by Satwik Singh

Under Chapter II of The Insolvency and Bankruptcy Code, 2016 (hereinafter to be referred as the "Code"), the mechanism for the initiation of the Corporate Insolvency Resolution Process (hereinafter to be referred as "CIRP") against the Corporate Debtor16, Financial Creditor17, Operational Creditor18 has been provided for according to the provisions of Section 7, 9, and 10 of the Code respectively.

The law is still crystallizing the fact as to which entities can come under the respective categories for initiation of CIRP as mentioned above. For instance the case of Nikhil Mehta vs. AMR Infrastructure19, looked at the question of whether the flat buyers will come under either of the two categories viz. Operational Creditors or Financial Creditors, in the case of D Ramjee vs. Aruna Hotels20, the Chennai bench of the Adjudicating Authority (hereinafter referred to as "NCLT") looked into the question of whether individuals can approach the NCLT for initiating the CIRP against the employer over the non-payment of various salary dues.

Similarly the issue of whether an application under Section 9 of the Code will be maintainable at the instance of Workmen Association was raised in the case of J.K.Jute Mills Mazdoor Morcha vs. Juggilal Kamlapat Jute Mills Co. Ltd21 before the Appellate Authority (hereinafter referred to as the "NCLAT"). The said matter arose out of an appeal against the order dated 28th April 2017 passed by the Allahabad bench of the NCLT, wherein the application preferred by the Appellant/ Workmen Association under Section 9 of the Code had been dismissed despite the fact that in the impugned order, the NCLT had accepted the contention that the Corporate Debtor cannot deny the liability for making payments of workmen's wages.

In the present appeal the appellants had approached the NCLAT on the grounds that they fall under the meaning of operational creditors under Section 5(20) of the Code since the Corporate Debtor owed operational debt to its workmen and employees in respect of services including employment as per sub section (21) of Section 5 of the Code, the appellants also contended that the Trade Union is a 'person' as defined under the provisions of sub section (23)(g) of the Trade Union Act read with Section 5(20) and (21) of the Code, and hence the petition is maintainable under the Code.

On the other hand, it was the contention of the respondent that the appellants' application under Section 9 of the Code is not maintainable as no 'operational debt' as envisaged under the provisions of sub-section (2) of Section 5 of the Code was owed and further they also contended that upon reading of subsection (20) of Section 5 along with Form 5 of Insolvency & Bankruptcy (Application to Adjudicating Authority Rules) 2016, (hereinafter referred to Adjudicating Authority Rules), it becomes clear that the application under Section 9 can only be filed by an 'operational creditor', that is an individual workman himself or the person which has been specifically authorized to act on behalf of the workmen, the implication of this fact is that since the Appellant here is a Trade Union, it will lack the authority to issue the demand notice and subsequently file the insolvency application under the Code. The Respondents went on to contend further that there is a pre-existing dispute prior to the filing on Section 9 application in the form of a pending civil suit before the Delhi High Court, and in that regard, the case of Kirusa Software Pvt. Ltd. vs. Mobilox Innovations Pvt Ltd22. becomes applicable which had held that in the event that there exists a dispute, the application under Section 9 will not be maintainable. Further the respondents also relied on the case of Smart Timing Steel Ltd. vs. National Steel and Agro Industries Limited23 which stated that the submission of certificate from any Financial Institution is mandatory for filing the application under Section 9 and that the same was not provided by the appellants.

CONCLUSION

The NCLAT, after going through the contentions of both the parties, examined the Code to ascertain whether a Trade Union will come under the meaning of 'operational creditor', and in that regard, the definition of 'Operational Debt24' as defined under sub-section(21) of Section 5 was examined to ascertain who can claim to be 'Operational Creditor' . The NCLAT concluded that the following can come under the definition of Operational Creditors:-

1. "The person who has claim in respect of provision of goods (supplied) to the 'corporate debtor;

2. Persons who have provided services to the 'corporate debtor', including those who are in employment;

and

3. Central Government, State Government and Local Authorities, who are entitled to claim debt in respect of dues arising under any Law for time being in force."

Based on the above mentioned criteria, it was held that any Trade Union or any association of workmen cannot come within the definition of 'operational creditor' as no services were rendered by the workmen's association/ trade union to the Corporate Debtor and thereby no due that could have been termed as, "debt" as defined under sub-section 11 of Section 3 could be ascertained. However the NCLAT at the same time also held that "it does not mean that an application under Section 9 of I&B Code is not maintainable at the instance of an individual employee/workman who has rendered services to the 'corporate debtor' and if there is debt and default such individual workman/ employee can prefer an application under Section 9 giving details of debt and date of default but it should not be less than one lakh rupees in view of Section 4 of the I&B Code." This case apart from stating that Trade Unions and workmen association cannot file their application under Section 9 of the Code, also further sheds light on the fact that employees can initiate CIRP against their employers if the operational dues are more than Rs One Lakh.

Footnotes

16 "corporate debtor" means a corporate person who owes a debt to any person

17 "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred

18 "operational creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred

19 Company Appeal (AT) (Insolvency) No. 7 of 2017, Order dated 21.07.2017

20 Company Appeal (AT) (Insolvency) No. 59 of 2017, Order dated 02.08.2017

21 Company Appeal (AT) (Insolvency) No. 82 of 2017

22 Company Appeal (AT) (Insolvency) 6 of 2017

23 Company Appeal (AT) (Insolvency) No. 28 of 2017

24 "operational debt" means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;

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