Have the IBC doors shut for workmen & employees?

The Finance Minister – in her speech announcing fiscal relief to mitigate the economic shockwaves resulting from the COVID-19 virus outbreak – declared that the minimum amount of default incurred by a company in order for it’s creditors to take recourse to the IBC, would be increased from Rs 1 lakh to Rs 1 crore. This has caused a stir in the industry circles, eliciting mixed reactions – with some lauding the move and others criticising it.

There is no question that a temporary respite was needed for the courts, tribunals and industry in these uncertain and unprecedented times. However, given that there were already hints of pre-COVID speculation regarding the Ministry’s plans to increase the default limit, this author fears that this increase may not be just a temporary fix and may indicate a much more permanent shift in policy.  This would be a travesty, as this 100-fold unqualified increase in the threshold requirement has effectively excluded one of the key stakeholders in the IBC from access to recourse – namely, the unpaid workman and employee. In a country where, according to 2011–12 figures from an  ILO Report[1], the average wage was about Rs 7410 per month (the average wage of casual workers being a mere Rs 4290 per month for a 30-day work month), the previous threshold limit of Rs 1 lakh was already an unrealistic and onerous condition for workmen to meet. Increasing the threshold to Rs 1 crore seems to have made it almost impossible for any employee to meet the conditions to seek recourse under the provisions of the IBC. This article seeks to focus on the right of employees and workmen to file applications under this code as operational creditors, and analyse whether there are any circumstances wherein the employees can still continue to seek recourse under the IBC.

  •  Legislative Intent – IBC as a settlement mechanism for employees

The position of the employee/workman was always central to the resolution framework within the IBC. It is for this reason that the legislature, in its wisdom, included employees and workmen within the class of operational creditors. Whenever a company finds itself in financial distress, it usually translates into employees and workmen not being paid their dues on time. This is because of the asymmetrical power relationship between the company and its employees. The employees have little to no bargaining power with respect to the company, and therefore failure to pay salaries has been oft considered an acceptable risk by companies, since an employee would seldom, if ever, pursue a legal battle against the might of the company.

The asymmetrical nature of this relationship was one of the key concerns for the Bankruptcy Law Reforms Committee (BLRC) Report, 2015[2]. The BLRC in its recommendations with regard to the IBC, laid considerable focus on the empowerment of workmen and employees, in order to enable them to settle their dues in a timely manner. The Report, in its introduction to the Insolvency Resolution Process, categorically stated 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 supplied)

Furthermore, the Joint Committee on Insolvency and Bankruptcy Code further observed that workers “were the nerve centre of any company” and that in the event of any company becoming insolvent or bankrupt, the workmen would always be adversely affected. In view of this the Joint Committee Report explicitly stated, in respect of employees and workmen, that ‘priority has to be given to their outstanding dues’. Following this, the workmen and employees have been given priority in claims under the waterfall mechanism enshrined under Section 53 of the Code. 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.

The centrality of the workman within the Code is very interestingly illustrated in the noting of the Joint Committee, which decided that ‘Notwithstanding debts owed to secured creditors being pari passu with the workmen’s dues and wages and unpaid dues to workmen of an insolvent company’, the wages and unpaid dues ‘may be placed under Item 1 and debts owed to secured creditor at Item 2 under Clause 53(1)(b)’ in order to reflect the centrality of the workman within the scheme of the Act. Thus, while it was always clear that the IBC was primarily a legislation for the resolution of sick companies, it was also supposed to operate as a Code to protect the interest of workmen and employees against a mightier company.

  • How can an employee file an application under the IBC?

 An employee, being an operational creditor under Section 5(20) r/w Section 5(21), can deliver a demand notice in terms of Section 8 and call upon the corporate debtor to satisfy its debts ‘on the occurrence of a default’. If after 10 days of receipt of such demand notice the corporate debtor fails to satisfy the debt or fails to raise any notice of dispute, then the operational creditor is entitled to file an application for the initiation of Corporate Insolvency Resolution Process against such a corporate debtor, under Section 9 of the IBC.

This right to file an application is subject to Section 4 which provides, that the IBC insofar as it relates to a corporate person, ‘shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh 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.’ (It is through the proviso contained in this section that the minimum amount of default has been specified by the Central Government to be Rs 1 crore  vide Notification dated 24.03.2020). Such an application for initiation of CIRP is made in terms of Rule 6(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. In terms of Rule 6(1) the operational creditor presents its application in the prescribed ‘Form 5’.

Crucially, the ‘Note’ to Form 5 asserts, ‘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.’ Thus, a special category of operational creditors is created under the IBC regime for the purposes of filing an application before the Adjudicating Authority whereby employees/workmen are entitled to present a claim in their joint capacity.

  •  What does it mean to file a claim jointly?

The question of what it means to file an application in a joint capacity has been a contentious one. The dispute boils down to whether employees – who do not meet the threshold requirement of Rs 1 lakh/crore under Section 4 in an individual capacity – can satisfy the onerous requirement by combining and jointly bringing their claims.

In Suresh Narayan Singh v. Tayo Rolls Ltd.,[3] the NCLAT set aside the judgment of the NCLT which had held that no application could be presented under Section 9 in a joint/ representational capacity. The NCLAT opined that (SCC OnLine para 4)

‘4. …where workmen/employees are ‘operational creditors’, the application may be made either by an ‘operational creditor’ in an individual capacity or in a joint capacity by one of them who is duly authorised for such purpose.                                                                             

(emphasis supplied)

However, the NCLAT went further to hold that: (SCC OnLine para 7)

‘7. …Only if in an individual claim of ‘operational creditor’ the amount of debt is less than one lakh rupees, it can be rejected being not maintainable.                                  

(emphasis supplied)

Thus while upholding the principle of representational applications, the NCLAT opined that the claims of each individual workman/employee needed to meet Section 4 threshold requirement.

This understanding of the NCLAT was followed by Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Co. Ltd.[4] where, rejecting the right of a trade union to file on behalf of the workers, the NCLAT had further observed: (SCC OnLine para 23)

‘23. This apart, members of a trade union/workmen association, who are workman or employee of a ‘corporate debtor’, some amount may be due to such individual workman/employee from a ‘corporate debtor’ including salary, gratuity, provident fund etc., in view of services rendered by them, but in such cases, in respect of each workman there will be separate cause of action, separate claim and separate date of default of debt.’

(emphasis supplied)

The Supreme Court setting aside the judgment of the NCLAT in J.K Jute Mills Mazdoor Morcha v. J.K Jute Mills Co. Ltd.[5], affirmed the right of a union to file on behalf of workers/employees in a representational capacity, and further went on to observe: (SCC p. 340)

 “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.

Thus, the Supreme Court rejected the view of the NCLAT and 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.

While the Supreme Court did not explicitly address the observations in Tayo Rolls[6] (supra), it is this author’s submission that Tayo Rolls has been implicitly overruled by the Supreme Court when it held that a joint application need not require each individual workman to state its individual claim separately, and that the joint application under Form 5 was on behalf of all workmen.

  • Conclusion

The legislature is not inclined to waste words, and every word employed by the legislative authorities must be given its due import and significance.[7] The legislative intent behind the inclusion of employees and workmen as operational creditors, was always to enable these persons to utilise the provisions of the IBC to settle their dues.

Workmen, as have been referred to in Form 5, are permitted to file an application under Section 9 of the IBC. The definition of workmen in the IBC under Section 3(36) has the same meaning as that assigned to workmen under the Industrial Disputes Act, 1947. The Industrial Disputes Act in turn defines a workman under Section 2(s)(iv) to exclude a person who, employed in a supervisory capacity, draws a wage exceeding Rs. 10,000 per month. Given this definition, it is hard to imagine a workman’s individual wage ever being sufficient to meet the threshold under Section 4, unless the legislature envisioned workmen working without pay for at least 1000 months (or 10 months pre notification) before they could become eligible to file an application under the IBC! It is therefore evident that the provision permitting workmen to file a joint petition, intended for them to be permitted to combine their claims and present a consolidated default.

The author’s understanding of the implication of J.K Jute Mills become all the more relevant now, given the recent increase of the threshold requirement to Rs 1 crore. In this context, it is crucial to give an expansive interpretation to joint applications by employees and workmen, lest they be left without recourse and the provisions of the IBC rendered merely salutary. Employees and workmen are among the most vulnerable amidst the present pandemic and denying them access to justice would only exacerbate their precariousness. Given the dire strait companies find themselves in, they may no longer feel obliged to pay their workers on time if there are no legal repercussions for the same.

It is also the recommendation of this author that the threshold raise must be qualified, and potentially be limited to only financial creditors. Financial creditors such as banks are better equipped to deal with the impact of COVID-19 than small-scale operational creditors. Denying smaller operational creditors – especially workmen and employees – a remedy under the IBC would have reverberations for the entire supply chain and industry as well.

Therefore, while the COVID-19 outbreak undoubtedly requires immediate and radical action by the Government to ameliorate the tremendous economic impact of the crisis, it is incumbent upon us to keep in mind the impact on the most vulnerable. Daily wagers and employees are already beginning to feel the brunt of the economic crisis due to salary cuts and delays. In these times, it is crucial for the worker to have access to invoke every possible legal mechanism in their arsenal, to secure their wages. In our quest to tackle this grave crisis, we must ensure that the solutions we come up with do not deny access to justice for those that need it most.


 *Ramchandra Madan is an Advocate, based in New Delhi. He holds a Master in Laws from The London School of Economics & Political Science. He currently practices the law in the courts of Delhi. He can be reached at Ramchandramadan@gmail.com

[1] https://www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/—sro-new_delhi/documents/publication/wcms_638305.pdf

[2] Report of the Bankruptcy Law Reforms Committee, Vol. I: Rationale and Design 

[3] 2018 SCC OnLine NCLAT 557 

[4] 2017 SCC OnLine NCLAT 257

[5] (2019) 11 SCC 332

[6] Suresh Narayan Singh v. Tayo Rolls Ltd., 2018 SCC OnLine NCLAT 557.

[7] Sonia Bhatia v. State of U.P., (1981) 2 SCC 585

Join the discussion

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.