India: India's Supreme Court Allows Registered Trade Unions To File Application As Operational Creditors On Behalf Of Members

Last Updated: 28 May 2019
Article by Majmudar & Partners

In a recent ruling, the Supreme Court (the "SC") resolved a long-standing dispute between JK Jute Mill Mazdoor Morcha (the "Union") and Juggilal Kamlapat Jute Mills Company Limited (the "Debtor") by allowing registered trade unions to initiate insolvency proceedings as operational creditors on behalf of their members under the Insolvency and Bankruptcy Code, 2016 (the "Code"). This update analyzes the SC's ruling.

Background

The Union had initiated insolvency proceedings against the Debtor by issuing a demand notice on behalf of approximately three thousand (3000) workers for payment of their outstanding dues. In adjudicating the dispute, the National Company Law Tribunal took the view that a trade union is not covered under the definition of operational creditor under the Code and dismissed the Union's application.

Thereafter, the National Company Law Appellate Tribunal (the "NCLAT") also dismissed the Union's appeal and observed that each worker must file an individual application.

The SC's Decision

The Union challenged the NCLAT's order in the SC. Pursuant to a review of the facts and the definition of operational creditor under the Code, the SC held that a registered trade union can maintain a petition as an operational creditor on behalf of its members. In the SC's view:

  • a trade union is an entity established under a statute, i.e., the Trade Unions Act, 1926, and therefore, the Union will come under the definition of a "person" and is capable of being owed an "operational debt" under the Code;
  • the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 expressly acknowledge that claims can be filed conjointly rather than solely in an individual capacity, and therefore, each workman need not file an individual application;
  • a purposive interpretation of the Code suggests that requiring each workman to file an individual application will be burdensome as each workman will have to bear several expenses, including, inter alia, the insolvency resolution process costs, expenses of the interim resolution professional and the cost to appoint valuers;
  • the primary function of procedural law is to aid, and not hinder, justice. Therefore, the claim of the workmen must not be dismissed on account of procedural impropriety; and
  • the ability of trade unions to engage in collective bargaining on behalf of their members will ensure that their dues are recovered more efficiently. On the other hand, not allowing collective representatives of workers to claim dues would result in a substantively unjust outcome.

Relying on the foregoing reasons, the SC allowed the Union's appeal and remanded the matter to the NCLAT for a consideration on the merits of the dispute.

Our Comments

The SC has adopted a purposive interpretation in an attempt to support workmen in recovering their dues from bankrupt companies. While, prima facie, the decision aids workmen, there are a number of ancillary issues from this interpretation that need to be considered.

One, the Code clearly defines an operational debt to mean a claim in respect of the supply of goods or services (including employment), or a debt in respect of payments due under law. Moreover, an operational creditor is defined as a person to whom an operational debt is owed or any person to whom an operational debt is legally assigned or transferred. Therefore, while the Union met the requirements of a person under the Code, it did not meet the requirements of an operational creditor, as it was neither a person to whom the debt was owed nor a person to whom the debt was legally assigned or transferred.

Two, the SC has observed that allowing a conjoint application will reduce the procedural burden on each workman. However, Rule 6 of the Insolvency and Bankruptcy (Adjudication of Authority) Rules, 2016, already contemplates the possibility of a conjoint application. The only difference being that rather than allowing a third party (such as a trade union who is not owed a debt) to file the application, the rule requires one of the workmen to file an application on behalf of the others.

Three, the SC reasoned that a trade union will be able to rely on the benefits of collective bargaining to recover the workmen's dues more efficiently. However, the impact of collective bargaining in an insolvency process is questionable, as the operational creditors do not actually play an active role but rely more on the Committee of Creditors (comprising the Financial Creditors) for their recoveries.

Therefore, although the SC has attempted to aid workmen, the lack of any unique benefits and the ease with which a liberal interpretation has been adopted creates a dangerous precedent for further jurisprudence on the provisions of the Code.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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