Introduction

The division bench of the Supreme Court of India (Supreme Court) comprising of Hon’ble Justice Mr R.F. Nariman and Hon’ble Justice Mr Vineet Saran, in its judgment dated 30 April 2019 in J.K. Jute Mill Mazdoor Morcha v Juggilal Kamlapat Jute Mills Company Ltd & Ors has held that a trade union  is an operational creditor for the purpose of initiating the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).

Brief Facts

The Respondent No 1 company was closed down in March 2014, leaving behind outstanding dues of its workers. Accordingly, a demand notice was issued by the appellant trade union (Appellant) on behalf of around three thousand workers under Section 8 of the IBC. Thereafter, a petition was filed by the Appellant before the National Company Law Tribunal (NCLT) under Section 9 of the IBC. The NCLT and thereafter the National Company Law Appellate Tribunal (NCLAT) dismissed the said petition inter alia on the ground that a trade union is not covered as an operational creditor under applicable law. Hence, the present appeal was brought before the Supreme Court. 

Arguments of the Appellant

The following arguments of the Appellant was briefly recorded in the judgment:

  • Basis both literal interpretation and purposive interpretation, a trade union would be an operational creditor within the meaning of the IBC and as such, a Section 9 petition filed by a trade union would be maintainable; and
  • The winding-up regime under the Companies Act, 1956 permitted the filing of winding-up petitions at the instance of a trade union. Reliance was placed on the decision of a division bench of the Bombay High Court in Sadanand Varrier v Power Horse India Private Limited (2017) 5 Mah LJ 876.

Arguments of Respondent No 1

The following arguments of Respondent No 1 were recorded in the judgment:

  • As no services are rendered by a trade union to the corporate debtor to claim any dues which can be termed as debts, trade unions will not come within the definition of operational creditors; and
  • Each claim of each workman is a separate cause of action in law and therefore a separate claim. As such, a collective application by a trade union would not be maintainable.

Ruling of Supreme Court

A. Trade Union is a Person

The Supreme Court reproduced and analysed certain statutory provisions as follows:

  1. As per Section 5(20) of the IBC (Definition of operational creditor), an operational creditor is a ‘person’;
  2. As per Section 5(21) of the IBC (Definition of operational debt), an operational debt means a claim in respect of the provision of, inter alia, services including employment;
  3. As per sub-clause (g) of Section 3(23) of the IBC (Definition of person), a ‘person’ includes any other entity, other than the entities described from sub-clauses (a) to (f) therein, established under a statute;
  4. As per Section 8 of the Trade Unions Act, 1926 (Registration), the Registrar, on being satisfied that the trade union has complied with all the requirements of the said Act in regard to registration, shall register the trade union by entering in a register to be maintained in the form and manner as may be prescribed.

On reading together the aforesaid provisions, the Supreme Court concluded that it is was evident that a trade union is an entity established and governed by the Trade Unions Act, 1926 and would therefore fall within the aforesaid definition of ‘person’ and as such, may be an operational creditor. Thus, an operational debt being a claim in respect of employment could be made by a trade union.

B. Trade Union can sue on behalf of employees / workmen:

The Supreme Court relied on the following statutory provisions to supplement the fact that a trade union could file on behalf of employees / workmen:

  1. As per Form 5 under Rule 6(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, when workmen / employees are operational creditors, the application may be made either in an individual capacity or a joint capacity by someone duly authorised to do so; and
  2. As per Section 13 of the Trade Unions Act, 1926 (Incorporation of registered Trade Unions), every registered trade union shall be a body corporate by the name under which it is registered and shall by the said name sue and be sued.

The aforesaid judgment in Sanjay Sadanand Varrier v Power Horse India Pvt Ltd was also relied upon to uphold that a trade union can prosecute or defend any legal proceeding to which the trade union or member thereof is a party, when such action is undertaken for securing or protecting rights arising out of the relationship of any member of the trade union with its employer. This judgment upheld the initiation of winding-up proceedings at the instance of a trade union, under the erstwhile Companies Act, 1956 regime. Thus, it was held that claims may be made not only in an individual capacity but also conjointly.

Comments

The immediate outcome of the decision is that applications for initiation of the CIRP can be filed by a registered trade union for recovery of employee dues. This is consistent with the earlier winding-up regime and provides an effective tool for employees to initiate insolvency of their corporate employers, in the hope that the CIRP may prove an effective way of replacing the management and / or recovering their dues.

Certain other important principles are implicit in the reasoning of the Supreme Court. Firstly, a collection of operational creditors may file a single application under Section 9 of the IBC, provided that such application is instituted by a ‘person’ as defined under the IBC. This assumes importance as the IBC expressly permits only a collection of financial creditors under the IBC to file a joint application for commencement of CIRP. Secondly, it confirms that a collection of causes of action may be espoused by way of a single application under the IBC. This is important as the NCLAT, in its earlier judgment in International Road Dynamics South Asia Private Limited v Reliance Infrastructure Limited Company Appeal (AT) (Insolvency) No. 72 of 2017, held that different claim(s) arising out of different agreements or work orders, having different amount and different dates of default, cannot be clubbed together for alleged default of debt, on account of the causes of action being separate. The present decision provides some credence to the argument against the correctness of the said NCLAT decision. Lastly, the present decision adds to the purposive interpretation of the IBC by the Supreme Court. While a trade union does not strictly provide services for the creation of an operational debt, a claim by a trade union has been held by this judgment to be ‘in respect of’ the provision of goods or services under the definition of the operational debt.