Abstract

It is widely acknowledged that entities subjected to the Insolvency and Bankruptcy Code 2016 (IBC) have the potential to achieve resolution through a resolution applicant or settle matters with their management. In the absence of either option, the entity undergoes liquidation. Employees serves a ‘human resource’ for every entity, likewise their livelihood also depends upon survival of the entity. Against this background, it is imperative to understand the implications for the claims of workers and employees of such an entity within the framework of the IBC.  This article covers the latest developments in relation to the employer- employee relations and payment of dues, when an entity undergoes IBC proceedings.

Meaning of Employees

In the Insolvency and Bankruptcy Code, 2016 (Code) of India, the term ‘employee’ is not explicitly defined. However, the Code provides a definition for the term ‘workman’ under Section 3(36), which aligns with the definition given in the Industrial Disputes Act, 1947. According to this definition, a workman encompasses any individual, including apprentices, engaged in any industry to perform manual, unskilled, skilled, technical, operational, clerical, or supervisory work in exchange for remuneration. This definition applies to both express and implied employment agreements.

In the context of industrial dispute proceedings, the definition of workman also includes individuals who have been dismissed, discharged, or retrenched due to the dispute or whose termination has led to the dispute. However, the definition does not encompass armed forces personnel or individuals primarily employed in managerial or administrative capacities. Additionally, individuals employed in a supervisory role who earn wages exceeding ten thousand rupees per month or primarily perform managerial functions by nature of their duties or vested powers are not considered workmen.

While the term ‘employee’ is defined in various other legislations, its scope remains limited to the specific context of those legislations and cannot necessarily be extended to the provisions of the Code. It can be reasonably concluded that, apart from workmen, all individuals employed by a corporate debtor would be regarded as employees.

Position of Employees under IBC

The position of employees in IBC is categorised as operational creditors. The Insolvency and Bankruptcy Code (IBC) establishes a two-step process for initiating insolvency proceedings against a corporate debtor when requested by an operational creditor. Firstly, a demand notice must be sent to the corporate debtor in accordance with Section 8 of the code. The corporate debtor is expected to repay the debt within 10 days of receiving such a notice.Fate of Employees, When Employers Faces IBC Proceedings A Legal Analysis

If the corporate debtor fails to respond, the operational creditor can then file an application with the National Company Law Tribunal (NCLT) to initiate insolvency proceedings against the corporate debtor. The NCLT must accept or reject the application within 14 days. If accepted, the corporate resolution process will be initiated, which should be completed within 180 days.

Section 53 of the code outlines the provisions for the payment of debts from the sale of liquidation assets. According to the code, priority is given to the dues of employees and workmen during the resolution process. Workmen dues take precedence over employee dues in liquidation proceedings. The distribution of funds must adhere to the order specified in Section 53. Subsection (1), clause (b), stipulates that the salary dues of workmen for the 24 months prior to the commencement of bankruptcy should be treated equally to the debts owed to secured creditors.

Clause (c) states that priority should be given to salary, wages, and unpaid dues owed to employees, excluding workmen, for the 12 months preceding the liquidation commencement date. Clause (d) pertains to unsecured debts, while clause (e) addresses unpaid dues to the central and state governments. As per this section, only after fully satisfying the dues of the first category, will the remaining amount be distributed to other categories. Thus, employees and workmen are given priority over all other creditors.

Judicial Precedents

The case Mr. N Subramaniam v. Aruna Hotels Limited,[1] marked the initial instance in which the Insolvency and Bankruptcy Code (IBC) was invoked for the recovery of outstanding dues by an employee from their employer. The applicant, a former employee of the company, submitted an application to the National Company Law Tribunal in Chennai, seeking payment for the unpaid sum. Alongside the application, the applicant provided a letter from the respondent company guaranteeing salary payment, a comprehensive list of overdue amounts, and additionally claimed 9% interest for delayed payment.

In response to the applicant’s demand notice, the respondent initiated legal proceedings in the city civil court, seeking to invalidate the letters and notices presented by the applicant before the NCLT. However, the court dismissed the plea on the basis that the suit was filed subsequent to the delivery of the demand notice by the operational creditor. Consequently, the NCLT acknowledged and accepted the application put forth by the operational creditor.

In case of Suren Narayan v. Tato Rolls Ltd,[2] the applicant who represented a group of 284 workers, filed an application with the National Company Law Tribunal (NCLT). However, the application was dismissed based on the interpretation of section 9 of the Insolvency and Bankruptcy Code (IBC), which stipulates that applications must be filed individually rather than jointly. The adjudicating authority advised the workers to issue individual demand notices to the corporate debtor in accordance with section 8 of the code.

Subsequently, the case was appealed to the National Company Law Appellate Tribunal (NCLAT). During the appeal, the appellant’s counsel argued that despite being a joint application, the amount owed to each employee exceeded one lakh rupees. Therefore, they contended that the NCLAT should accept the application.

The NCLAT ruled in favour of the appellant, stating that the adjudicating authority should have accepted the joint application as all the necessary requirements had been fulfilled. The existence of a default, proper adherence to procedural steps, and the fact that the default amount for each worker exceeded one lakh rupees were considered decisive factors in the ruling.

The present scenario: SBI v. Moser Bear Karamchari Union[3]

In this case, the Moser Baer Karamachari Union and other employees had jointly filed an application under section 9 of the IBC for the initiation of insolvency proceedings against their employer, Moser Baer. The application and prayer were accepted by the NCLT,

The SBI, being the financial creditor of Moser Baer, appealed the NCLT’s decision. They argued that the NCLT had erred in its interpretation of the IBC.

The NCLAT held that Section 53 of the Insolvency and Bankruptcy Code (IBC), which outlines the prioritization of proceeds from the sale of liquidation estate assets, does not encompass the outstanding amounts owed for gratuity fund, provident fund, and pension fund. This conclusion was based on the following justifications:

1. Section 36(4)(a)(iii) of the IBC states that any amounts due to workmen from the gratuity fund, provident fund, and pension fund are not considered part of the assets of the liquidation estate. Consequently, these funds cannot be utilized for recovery purposes in liquidation proceedings.

2. Section 326 of the Companies Act, 2013 defines ‘workmen’s dues’ to include amounts due to workmen from the gratuity fund, provident fund, and pension fund. However, it is important to note that Section 53(1)(b)(i) of the IBC is a specific provision governing the distribution of workmen’s dues in liquidation proceedings and takes precedence over any other existing law as per the provisions of the IBC.

Furthermore, Section 53(1)(b)(i) of the IBC differs from Section 326 of the Companies Act, 2013 in that it specifically pertains to workmen’s dues within a 24-month period preceding the liquidation commencement date. Consequently, Explanation (iv) of Section 326 of the Companies Act, 2013 cannot be referred to for interpreting the meaning of ‘workmen’s dues’ under Section 53(1)(b)(i) of the IBC.

As a result, the NCLAT upheld the decision of the NCLT, leading to the dismissal of the appeal. Consequently, the liquidator was obligated to settle the outstanding amounts owed to the workmen for these funds. Dissatisfied with the NCLAT’s ruling, the State Bank of India chose to challenge the decision by filing an appeal before the Supreme Court.

After analysing the arguments presented by the parties involved, the Supreme Court held that there was no compelling justification to entertain the appeal lodged against the decision of the NCLAT in the Moser Baer Case. As a result, the Supreme Court affirmed the legal stance that the gratuity fund, provident fund, and pension fund do not constitute components of the ‘liquidation estate’ of the corporate debtor. Consequently, these funds are not subject to the distribution mechanism outlined in Section 53 of the Insolvency and Bankruptcy Code (IBC). Therefore, the appeal in question was dismissed.

Conclusion

The Insolvency and Bankruptcy Code serves as a powerful mechanism for safeguarding the rights of employees and workmen, recognizing their crucial role in bolstering the economy. It establishes a structured and time-bound process for the employees to pursue the recovery of their rightful dues from the corporate debtor. The regulatory authorities responsible for overseeing the process have effectively utilized the provisions, as evidenced by recent judgments. Moreover, the legislation incorporates specific exceptions that uphold equity and prevent any potential misuse by employees.

[1] Company Petition No. (IB) – 334( ND) / 2017 [

2] Company appeal (AT) (Insolvency) No. 112 of 2018

[3] SBI v. Moser Bear Karamchari Union, 2023 SCC OnLine SC 140.

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