Current insolvency law overlooks certain labour, federal rights

Insolvency, bankruptcy, federal rights, labour rights, RBI, Supreme Court, The Federal, English news website
Corporate stress in India is rising

Two recent judgements from the Supreme Court (SC) have far-reaching implications for labour rights but they leave the question of federal rights on a related issue in the grey area. In a landmark judgement on April 30, 2019, the Supreme Court allowed trade unions to initiate insolvency proceedings against a company on behalf of workers whose dues were pending.

In another instance, on April 2, 2019, the SC struck down an RBI circular directing the banks to refer cases of loan defaults, where dues were pending for six months to National Company Law Tribunal (NCLT) for resolution under Insolvency and Bankruptcy Code (IBC).

On April 30, 2019, the apex court held that a registered trade union is also of the status of an operational creditor and can move for insolvency proceedings in NCLT under the IBC if dues from the company are pending to the workers it represents.

The pro-labour nature of this verdict goes without saying and the company managements henceforth would have to think twice before unduly delaying payment of salaries and other dues to the workers. The earlier judgement striking down the RBI circular might have caused dismay in some government quarters and bank circles, as that would obviously impede speedy resolution of the NPAs problem and might give a reprieve to the defaulters, including wilful ones.


But pushing a company for dissolution/resolution procedure after just six months of loan default and concluding the resolution process within next six months, which might result in its liquidation or sale to another owner is not in the interests of the workers either. There might be genuine reasons for default too. In this sense, this verdict is also a pro-labour one.

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While this is on the positive side, these judgements have also brought to light certain glaring omissions and legal vacuum relating to the IBC. The IBC has replaced the Sick Industrial Companies Act (SICA), under which the Bureau of Industrial Finance and Restructuring (BIFR) had been established, which used to address the issue of industrial sickness and closure. But IBC limits itself to loan default only. SICA defined a unit sick if 50% of its net worth had been eroded.

But there is no such definition of industrial sickness at all in IBC, and it doesn’t address the issue of sickness at all. Loan default itself is not tantamount to sickness and hence cannot be the justification for retrenchment or closure. Technically, in a legal sense, liquidation might not be the same as closure, but from workers’ angle, it amounts to the same.

In this sense, one law replaces another but leaves a gaping hole in crucial areas addressed by the earlier law. Under Section V(B) of the Industrial Disputes Act, a company with more than 100 workers, that seeks to declare closure, has to seek permission from the concerned state government. It empowered the state governments to check whether there are financially justifiable reasons for closure, and to curb malafide closures by management and to protect the interests of the workers.

The IBC overrides this provision in V(B) of ID Act, though it doesn’t make it explicit. This means the IBC also overrides certain powers of the state governments. In a similar scenario, the National Green Tribunal (NGT) has also started ordering the closure of industries without even taking concurrence of the state governments or the pollution control boards (PCBs) under them.

In one instance, where the Tamil Nadu government ordered the closure of the polluting Sterlite Copper in Tuticorin on the recommendation of the PCB, the NGT overruled it. This made the state government virtually powerless against the NGT as to decide either for or against closure of an enterprise. Does it mean the NGT Act too overrides the ID Act? The Supreme Court however set aside the NGT order and upheld the decision of the TN government to close Sterlite Copper.

Speaking to The Federal, Professor Babu Mathew of the National Law School of India University said, “Obviously, there are some grey areas around the IBC and when two or more laws apparently come into conflict, it is for the apex court to clarify the matter. Since IBC is quite new, no trade union or state government has challenged its overriding character before the apex court yet. So the labour jurisprudence in such matters is yet to develop.”

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“If it is for some extraneous considerations like pollution, both the NGT or state governments can have their respective powers of closure provided there are valid reasons for it. But Section V(B) of the ID Act has several provisions, and even prescribes a specific format to seek permission after clarifying several questions that there are valid financial reasons for the company to cease operations.”

“NCLT is also supposed to go into all these reasons before resolution, but there the trade union is now just yet another ‘operational creditor’ at par with financial creditors like lending banks, and workers enjoy no first claim or priority in settlement of their dues in full, as they enjoyed under BIFR”, he further added.

Considering that over 9000 cases are currently under the consideration of the NCLT, and more than half of the cases that ended in closure resulted in liquidation, and the majority of the remaining cases have crossed the stipulated 180 days for resolution, the interests of lakhs of workers would be unduly affected.

The trade unions might not be aware of the gravity of the situation yet, but the government should make necessary changes to fill the loopholes and vacuum in the law and protect the interests of the workers.