“We must never forget that procedure is the handmaid of justice and is meant to serve justice” – Justice R.F. Nariman
The Hon’ble Apex Court has finally clarified the position of a Trade Union under the newly enacted Insolvency and Bankruptcy Code, 2016 (‘IBC’). The Hon’ble Apex Court in Civil Appeal No. 20978 of 2017 (2019 SCC OnLine SC 619) titled as JK Jute Mill Mazdoor Morcha vs. Juggilal Kamlapat Jute Mills Company Ltd. & Ors while dwelling on the important question that “whether a trade union could be an operational creditor for the purpose of IBC” vide its Judgment dated 30.04.2019 and held that the NCLAT was not correct in refusing to go into the issue whether the trade union would come within the ambit of “person” under Section 3 (23) of IBC also, it held that the NCLAT is not correct in stating that a trade union would not be an operational creditor as no services are rendered by the trade union to the corporate debtor. It further held that the trade union represents its members who are workers, to whom dues may be owed by the employer in the form of salaries, PF, TDS, gratitude, arrears, paid leaves, etc. which certainly constitutes a debt and can be collectively represented by the trade union. Thereby, alienating the need for each and every worker to individually file separate insolvency proceedings against its employer and spend his valuable money on filing individual insolvency proceedings.
Briefly, the case of the Appellant is that the Appellant is one of the registered trade unions of the workers of Juggilal Kamlapat Jute Mills Company Ltd. (‘JKJM/ Corporate Debtor/ CD’). JKJM operations had closed down for some time then restarted once again, then closed down then restarted but finally the operations have been closed permanently on 07.03.2014. Proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985 were pending against JKJM. Meanwhile, on 14.03.2017, after IBC was introduced, the Appellant issued a demand notice on behalf of its members under Section 9 of IBC for the outstanding dues payable to its members. The demand notice was duly replied by the CD on 31.03.2017. Thereafter, the Appellant approached the Hon’ble NCLT.
The main issue before the Hon’ble NCLT was whether a trade union can file and maintain a petition under section 9 of the IBC on behalf of its members.
The Hon’ble NCLT vide order dated 28.04.2017 dismissed the Petition under section 9 of IBC filed on behalf of the Appellant citing that winding-up petitions are pending before the Hon’ble High Court of Delhi and also it ultimately held that a trade union is not being covered as an operational creditor in terms of the provisions of IBC.
Aggrieved by the order dated 28.04.2017, the Appellant approached the Hon’ble NCLAT which vide order dated 12.09.2017 dismissed the Appeal of the Appellant and held that the Petition of the Appellant on behalf of its members is not maintainable relying upon the Judgment dated 28.07.2017 in the case of Uttam Galva Steel Limited vs. DF Deutsche Forfait AG & Anr. in Company Appeal (Insolvency) No. 39 of 2017. But the Hon’ble NCLAT affirmed its view that individual workers would be at liberty to approach the Hon’ble Tribunal given the fact that the individual worker falls within the ambit of Section 9 of IBC.
Aggrieved by the impugned order of the Hon’ble NCLAT, the Appellant filed the present appeal before the Hon’ble Apex Court. The main issue before the Hon’ble Apex Court was that whether the Hon’ble NCLAT was correct in dismissing the Appeal of the Appellants, whether the NCLAT was correct in refusing to go into the issue whether a trade union can file a petition on behalf of its members and whether or not can a trade union file insolvency proceeding before the Hon’ble Tribunal on behalf of its members/ workers.
Before dwelling further, it is significant to dissect the interpretation of Operational Creditor & operational debt under IBC. From the bare perusal of Section 5 (20) & Section 5 (21) of IBC it is quite clear that an operational creditor is a person to whom some operational debt is owed. In the present matter the workers were the employees of the CD and the unpaid salaries, gratuities, PF, TDS would constitute as operational debt due against the CD. Hence, the workers of the CD come within the ambit of Section 5 (20) & Section 5 (21) of IBC.
A conjoint reading of Rule 6(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 along with Form 5 to which Rule 6 (1) refers to makes it abundantly clear that the legislature at the time of enacting the Rules that the workmen/ employees can make a joint application by authorizing one person for initiating corporate insolvency proceedings against CD/ employer. It is further interesting to note that Section 3(23)(g) of IBC includes any other entity established under a statute as a person. Thereby meaning that any entity such as a trade union can bring on insolvency proceedings against the CD and the trade union can utilize the general funds of the trade union towards prosecution of legal proceedings either on behalf of itself or on behalf of its members.
The Hon’ble Apex Court in relation to trade union and winding up proceedings relied upon the Judgment of the Bombay High Court in Sanjay Sadanand Varrier vs. Power Horse India Pvt. Ltd. (2017 SCC OnLine Bom 328) held that:
“13. As can be seen from the said section, Registered Trade Unions can prosecute or defend any legal proceeding to which the Trade Union or member thereof is a party, when such prosecution or defence is undertaken for the purpose of securing or protecting any right of the Trade Union as such, or any rights arising out of the relations of any member with his employer or with a person whom the member employs. In fact, the Trade Union can even spend general funds on the conduct of trade disputes on behalf of the Trade Union or any member thereof.
14. On a conjoint reading of the provisions of the Companies Act, 1956 and more particularly sections 434 and 439 as well as the provisions of the Trade Unions Act, 1926, we are clearly of the view that looking to the mandate of sections 13 and 15 of the Trade Unions Act, 1926, there is no doubt in our mind that a Petition for winding up would be maintainable at the instance of the Trade Union. This is for the simple reason that section 15(c) and (d) clearly mandates that the prosecution or defence of any proceeding to which the Trade Union or any member thereof is a party as well as the conduct of trade disputes on behalf of the Trade Union or any member thereof can be done by the Trade Union. This would clearly go to show that the Trade Union, for and on behalf of its members can certainly prefer a winding up Petition as contemplated under section 439 of the said Act. ….. Hence, after complying with the provisions of section 434 of the Companies Act, 1956 the Trade Union would certainly be competent to present a winding-up Petition.”
The Hon’ble Apex Court also noted that despite the fact that the above Judgment of the Hon’ble Bombay High Court is in relation to winding up proceedings but the same rationale shall apply to proceedings under IBC as well.
“10……..We are of the view that instead of one consolidated petition by a trade union representing a number of workmen, filing individual petitions would be burdensome as each workman would thereafter have to pay insolvency resolution process costs, costs of the interim resolution professional, costs of appointing valuers, etc. under the provisions of the Code read with Regulations 31 and 33 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Looked at from any angle, there is no doubt that a registered trade union which is formed for the purpose of regulating the relations between workmen and their employer can maintain a petition as an operational creditor on behalf of its members. We must never forget that procedure is the handmaid of justice and is meant to serve justice.
11. The NCLAT, by the impugned judgment, is not correct in refusing to go into whether the trade union would come within the definition of “person” under Section 3(23) of the Code. Equally, the NCLAT is not correct in stating that a trade union would not be an operational creditor as no services are rendered by the trade union to the corporate debtor. What is clear is that the trade union represents its members who are workers, to whom dues may be owed by the employer, which are certain debts owed for services rendered by each individual workman, who are collectively represented by the trade union. 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. For all these reasons, we allow the appeal and set aside the judgment of the NCLAT.
The Hon’ble Apex Court has come to the conclusion that a trade union of the CD can file a joint application on behalf of its members for initiating corporate insolvency proceedings against the CD. This Judgment of the Hon’ble has two- fold benefits; firstly, it will save time not going to have to go through individuals claims of all the workers and secondly it will save time and money of each and every worker of the CD and rather than filing individual corporate insolvency proceedings the workers can file a single insolvency petition through their trade union.
This is indeed a very welcoming judgment and shall go a long way in protecting and asserting the rights of the workers/ employees of the CD.
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