FACTS

In a nutshell, Appellant ( Mill Mazdoor Morcha) issued a demand notice on behalf of roughly 3000 workers under Section 8 of the Code for outstanding dues of the workmen. The said demand notice was replied by the Respondent on 31.03.2017. Subsequently, NCLT vide its judgment dated 28.04.2017 held that a trade union cannot be covered as an operational creditor for the purposes of Section 8 of the Code. NCLAT, affirming the ruling of NCLT, opined that each worker may file an individual application before the NCLT for the purpose of invocation of Section 8 of the Code.

FINAL RULING OF THE COURT

The Supreme Court held that NCLAT was 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. Additionally, NCLAT was held to be incorrect in stating that a trade union would not be an operational creditor since no services were rendered by the trade union to the corporate creditor. While allowing the appeal, the judgment of NCLAT was set aside by the Supreme Court in addition to remanding the matter to NCLAT for determination of appeal on merits.

ANALYSIS

For our purposes, Section 5(20) of the Code which defines operational creditor can be divided as follows

• A Person [any other entity established under a statute]
• To whom an operational debt is owed
• Includes any person to whom such debt has been legally assigned or transferred

Subsequently, Operational debt has been defined in Section 5(21) of the Code as

• Claim in respect of the provision of goods or services including employment
• Debt in respect of the payment of dues arising under any law for the time being in force and payable to CG, SG or any local authority

The Judgment also refers to the Rule 6 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 to be read in conjunction with Form 5, which provides that

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.

1. IMPLICATION OF THE RECOGNITION

If a trade union is said to be an operational creditor for the purposes of the IBC, it would be entitled to bring about an action under section 8 of the IBC i.e. in the occurrence of a default, the trade union could deliver a demand notice of unpaid operational debt to the corporate debtor in the form and manner so prescribed for and towards such end. While it is not as if trade union under the present scheme is en blanc barred from being an operational debtor. However presently, it would require that the operational debt is legally assigned or transferred to the trade union. Such assignment and transfer would transform trade union into an operational creditor. In the same breadth, Form 5 (the form pursuant to Section 8) posits application being made in a joint capacity by “one of them who is duly authorized for the purpose”. It is indeed an interesting question as to what “one of them” implies and whether it includes a trade union which is duly authorized for the purpose. A plain reading coupled with the fact that the form refers to “joint capacity by one of them” would imply that Form 5 is talking about one of the workmen/employee who is duly authorized for the purpose of filing application for all or some of the workmen/employee. Therefore, the picture that is revealed is that of devolvment of limited status that is contingent upon assignment and transfer by the operational creditor.

The judgment holds that Rule 6 and Form 5 recognize that claims may be made not only in an individual capacity but also “conjointly” by the operational creditor. With due respect, I have certain doubts as to the legality of such ruling since the terms “conjoint” and “joint capacity” differ significantly in terms of their meaning and coverage. Oxford Dictionary defines conjoint as “combining all or both people or things involved”[1] whereas joint application under Form 5 proposes a “joint capacity by one of them who is duly authorized”. The crucial distinction herein is the presence of an underlying requirement of identical or similar interest between the workmen/employee that authorizes and the workmen/employee that is consequently authorized to undertake application in joint capacity. The term “conjointly” does not encapsulate the said underlying requirement within its folds.

What is sought to be canvassed in the present case is a status for trade union under section 8 of the Code that is devoid of restraints we had talked about earlier. A status of operational creditor that is not contingent upon the requirements of operational debt being assigned or transferred would imply that the trade union could initiate proceedings under Section 8 without having an operational debt being owed to it or such debt being legally assigned or transferred to it by workmen/employee.

2. ESTABLISHED ‘BY’ OR ‘UNDER’: SECTION 3(23) OF THE CODE

The respondent also questioned whether a trade union can be held to be an “entity established under a statute”. An adverse Court’s decision on this count would have brought trade union out of the folds of “person” in Section 5(20) of the Code. The Respondent cited Commissioner of Income Tax (TDS), Kanpur v. Canara Bank that dealt with the expression “established by or under a central, state or provincial act” contained in Section 194-A(3)(iii) of the Income Tax Act, 1961. The said judgment held that while Noida authority was established as an authority under the State Act, a company incorporated and registered under the Companies Act, cannot be said to be “established” under the Companies Act. The case law and consequently the judgment were held by the Court to be inapplicable by referring to Section 3(23) of the Code. The judgment holds that pursuant to a noscitur a sociis interpretation being given to Section 3(23) of the code, the context in which the phrase “established under a statute” occurs makes it clear that a trade union when registered under the Trade Union Act would be “established” under as opposed to “established by” that Act in the sense of being governed by the said Act. The CIT (TDS) case pertains to New Okhla Industrial Development Authority (NOIDA) which was constituted by Notification issued under Section 3 of the Uttar Pradesh Industrial Area Development Act, 1976. The contentious issue herein arose due to non-deduction of TDS under Section 194A of the IT Act, 1961 in relation to payment of Twenty Crore Ten Lakh made as interest to authority in form of FDs/Deposits for the financial year 2005-2006. The judgment canvasses for a distinction between corporation established by the Act and body created under the Act. Illustrating the same, the court held that a company incorporated under the Companies Act is not created by the Companies Act but comes into existence with the provisions of the Act.[2] A company is thus not “established” under the Companies act rather, it is incorporated and registered under the companies Act.[3] The Court held that under clause (g) of the Section 3(23) of the code, the phrase “established under a statute” would be read as being governed by that act. The rationale for the same is that other clauses of Section 3(23) of the code include entities such as companies, trusts, partnerships and limited liability partnership which are “governed” and not “established” under the respective acts. Consequently, application of noscitur a sociis would reposition entities “established” to mean entities being “governed” by the Act. In Dalco Engineering, it was held that the word “established” refers to coming into existence by virtue of an enactment and it does not refer to a company which when it comes into existence is governed in accordance with the provision of the Companies Act. Herein, the difference between a corporation “established by” an act and “established under” an act is that a corporation established by an act when the act itself established the corporation. A corporation established ‘under’ the act is one that is brought into existence under and by the operation of an act. The term ‘under’ as opposed to ‘by’ reveals that the corporation so formulated would be a non-statutory corporation registered under the Companies Act as opposed to a statutory corporation brought into existence by the Act itself.

I’m not satisfied with the conclusion of the Court that Section 3(23) of the Code warrants application of noscitur a sociss as a rule of interpretation.

When we construe clause (g) and specifically “established under a statute”, we can reasonably hold that clause (g) does not require that the entity concerned by established by the Act itself. Instead, it follows that an entity established ‘under’ an act would be regulated by the provision of the statute in question. Had it been the intention of the statute to only include entities that are established expressly by the statute, the phrasing would have involved “by” as opposed to “under” the statute. However, it goes without saying that a clarificatory amendment is in order especially specifying the controlling legislation of the various entities listed in clause (c)-(g) of the Section 3(23) of the Code.

3. COLLECTIVE REPRESENTATION AND EQUIVALENCE WITH WINDING UP UNDER SECTION 434 AND 439 OF THE COMPANIES ACT, 1956

The Judgment also proceeds on the line of equivalence being drawn from Trade Union’s qualification to initiate winding up petition under Companies Act, 1956. The Bombay High Court judgment of Sanjay Sadanand Varrier was cited to buttress the submission that a conjoint reading of Section 434 and 439 of the Companies Act and the mandate of Section 13 and 15 of the Trade Union Act clearly provide for maintainability of winding up petition at the instance of the Trade Union. Section 15 of the Trade Union Act is hereby construed to be enabling for the trade union to take up the cause for and on behalf of its members.

Registered trade union recognized by Section 8 of the trade union act makes it clear that it can sue and be sued as a body corporate under section 13 of that act. Equally, the general fund of the trade union which is inter alia is from collections from workmen who are its members can certainly be spent on the conduct of disputes involving a member or members thereof or for the prosecution of a legal proceeding to which the trade union is a party and which is undertaken for the purpose of protecting the rights arising out of the relation of its members with their employer which would include wages and other sums due from the employer to workmen.

Trade Union Act, 1926 is an act to provide for registration of Trade union and in certain respects to define the law relating to registered Trade Unions. Varrier consequently holds that a trade union, though having a legitimate claim, cannot be shut out from approaching the appropriate forum for winding up the company on the ground that its members have not been paid their wages or salaries.

On this count, the ruling of the Court is well placed and is intended to serve the interest of individual workmen who may not be able to follow through with all procedural requirements of the Code. A “shut out” for anyone is difficult position to justify unless the same is met with malice and unclean hands.

The “procedure is the handmaiden of justice” is indeed a crafty argument insofar as it allows little space for criticism which in any case can easily be dismissed as a preference for formalism. The act of granting the status of operational creditor to trade union is premised on the belief that one consolidated petition by a trade union representing a number of workmen would be preferable to individual petitions especially when payment to insolvency professional, process costs and cost of appointment of valuers are likely to be duplicated.

On this count, the failure of the Court to account for the contention raised by the Respondent No.1 insofar as separate cause of action, claim and dates of default of each debt is concerned is possibly the most problematic aspect of this judgment. The distinct dates of default insofar as workmen are concerned strikes at the core of the collective representation. It is this omission that makes this judgment a partial victory for the workmen and employees. It would be interesting to see how the Courts in future address such issues.

[1] https://en.oxforddictionaries.com/definition/conjoint

[2] Sukhedev Singh v. Bhagatram Sardar Singh Raghuvanshi.

[3] Dalco Engineering Private Limited v. Satish Prabhakar Padhye and Others (2010) 4 SCC 378, ¶ 20.