Workers Protection under Insolvency & Bankruptcy Code, 2016

-Rachit Jaiswal (Semester 1,2019-24)

Symbiosis Law School, Noida

Abstract
Preamble of our Constitution is itself said that we are a socialist country but if you consider
this in the current scenario is this real that we have a socialist safeguard from our laws ?
Further, the direction in which we are going through our legislature approach is really
following our constitutional approach ? with the reference of this author wants to discuss
Insolvency and Bankruptcy Code, 2016 with the view of workers protection under Insolvency
and Bankruptcy Code and the waterfall mechanism of priority for payment debts given in the
Code for workers or operational creditors and discusses the recent judgements on the same
issue. Additionally, Author discuss the ILO Convention 173 i.e., Protection of Workers'
Claims (Employer's Insolvency) Convention, 1992 under the convention how the workers
given protection in the priority of payment and convention also provides social security for
the workers under the convention.
In addition to this, Author talks about the Holistic side of Indian Labour Laws and how
paradigm shift from socialist approach to capitalistic approach using by our legislature. The
paper will rely on various reports and other instruments of legal and doctrinal research.

Keywords : Socialist, Workers Protection, Insolvency and Bankruptcy Code 2016, ILO,
Convention 173
Part - I
Jurisprudence of Workers Protection

The case for a fair deal to labour is emphasized in the Directive Principles of State Policy of
the Constitution. The source and strength of industrial branch of Third World Jurisprudence
is social justice proclaimed in the Preamble to the Constitution. Myriad devices, half-hidden
in fold after fold of legal form depending on the degree of concealment needed, the type of
industry, the local conditions and the like, may be resorted to when labour legislation casts
welfare obligations on the real employer, based on Articles 38, 39, 42, 43 and 43-A of the
Constitution.1 The framers of the Constitution realized the progressive trends of social
philosophy and inter alia, provided them in the directive principles of State Policy, which
serves as a blue-print of Indian Pattern of Social Justice.

Social justice, equality and dignity of person are cornerstones of social democracy. The
concept of "social justice" which the Constitution of India engrafted consists of diverse
principles essential for the orderly growth and development of personality of every citizen.
"Social justice" is thus an integral part of justice in the generic sense. Justice is the genus, of
which social justice is one of its species. Social justice is a dynamic device to mitigate the
sufferings of the poor, weak, dalits, tribals and deprived sections of the society and to elevate
them to the level of equality to live a life with dignity of person. In other words, the aim of
social justice is to attain substantial degree of social, economic and political equality, which
is the legitimate expectation and constitutional goal. Social security, just and humane
conditions of work and leisure to workman are part of his meaningful right to life and to
achieve self-expression of his personality and to enjoy the life with dignity. The State should
provide facility and opportunities to enable them to reach at least minimum standard of
health, economic security and civilized living while sharing according to their capacity, social
and cultural heritage.2

1
Hussainbhai v/s. The Alath Factory Tezhilali Union and Others, AIR 1978 SC 1410 at para 05.
2
Air India Statutory Corporation v/s. United Labour Union, (1997) 9 SCC 388.
Part - II
Insolvency and Bankruptcy Code and Workers Protection

The Insolvency and Bankruptcy Code, 2016 has been enacted with an objective of
consolidating and amending the laws relating to re-organisation and insolvency resolution of
corporate persons, partnership firms and individuals in a time bound manner. 3

It aims at maximization of value of assets of such corporate persons, partnership firms and
individuals, promoting entrepreneurship, ensuring availability of credit and balancing the
interests of all stakeholders. The Insolvency and Bankruptcy Code, 2016 (hereinafter referred
as the Code) defines  debt as any liability or obligation in respect of a claim that is due from
any person. It includes both financial as well as operational debt.4

Workers and Operational Creditors protection under IBC

A financial debt arises purely out of the financial contracts entered into by the corporate
debtor with the financial creditor. Operational debt has been defined under Section 5 (21) of
the Code as a claim in respect of the provision of goods and services including employment
or a debt in respect of dues arising under any law for the time being in force and payable to
the Central Government, State Government or any local authority.5

An Operational Creditor under Section 5(20) of the Code shall include any person to whom
an operational debt is owed or has been legally assigned or transferred. Chapter II of the
Code which contains provisions relating to the Corporate Insolvency Resolution Process
(hereinafter referred to as CIRP) mentions that where a corporate debtor commits a default,
the CIRP in respect of such corporate debtor can be initiated by a financial creditor,
operational creditor or the corporate debtor himself.6

3
A Primer on the Insolvency and Bankruptcy Code, 2016, Nishith Desai Associates,
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/A-Primer-on-the-Insolvency-and-
Bankruptcy-Code.pdf, Last Visited – 10th October 2019.
4
Ibid.
5
Dulung Sengupta, Rights of Employees of Insolvent Companies Under The Insolvency and Bankruptcy Code,
2016, http://www.legalserviceindia.com/legal/article-669-rights-of-employees-of-insolvent-companies-under-
the-insolvency-and-bankruptcy-code-2016.html, Last Visited – 10th October 2019.
6
Ibid.
Thus the code provides that all employees and workmen must be considered within the ambit
of the definition of operational creditors and any due arising in the course of employment
shall be considered as operational debt.7

Waterfall Mechanism under IBC

Section 53 of the Code contains provisions for priority of payment of debts from the proceeds
from the sale of the liquidation assets. It reads that notwithstanding anything to the contrary
to any law for the time being in force, while distributing the assests, the order of priority as
mentioned in Section 53 has to be followed.8

Sub-section (1) clause (b) mentions that the workmen’s dues for the period of twenty four
months preceding the bankruptcy commencement date shall be treated equally with the debts
owed to secured creditors. Clause (c) provides priority to wages and unpaid dues owed to
employees other than workmen of the bankrupt for the period of twelve months preceding the
bankruptcy commencement days over the dues unpaid to Central or State Governments and
unsecured debts.9

Unless the first category is paid in full, the second or subsequent category does not get any
amount if the assets of the bankrupt company are insufficient to meet them. The claimants as
specified in the same category or rank will be taking it pari passu.10

Recent Judgments upholding the Rights of Employees of Insolvent Companies

7
Ibid.
8
Understanding the Insolvency and Bankruptcy Code, 2016 Analysing developments in jurisprudence, IBBI,
https://www.ibbi.gov.in/webadmin/pdf/whatsnew/2019/Jun/190609_UnderstandingtheIBC_Final_2019-06-
09%2018:20:22.pdf, Last Visited – 12th October, 2019.
9
Ibid.
10
Ibid.
Mr. N Subramanian vs. M/s Aruna Hotels Limited11

This was the first case where the employee approached the adjudicating authorities under this
Code for recovery of their dues against the former employer. The application in this case had
been filed by a former employee of the respondent company claiming arrears before the
NCLT in Chennai.

The employee had left his job in the year 2013 and in spite of multiple assurances by the
respondent company regarding the payment of the dues, the amount had not been settled. The
applicant attached a letter by the respondent company along with his petition where the
respondent company has assured the payment of the salary, a list or arrears and an interest of
9 per cent for late payment.

The employee sent a demand notice to the respondent company on 29.06.2017 and the
respondent company replied to it on 06.07.2017 stating that the salary had been paid by it and
only a gratuity amount of Rs. 5, 85, 577/- was due as on that date. The respondent company
in this case approached the City Civil Court in Chennai on 06.07.2017 and filed a suit against
the operational creditor to declare the previous letter and notice communications as null and
void and also grant a permanent injunction on the operational creditor for relying on those
letters.

The Court rejected this plea on the ground that the Suit had been filed after the delivery of the
Demand Notice by the operational creditor to the respondent company. Therefore the court
held that such a suit was instituted by the respondent company in order to circumvent the
initiation of the CIRP by the operational creditor against the corporate debtor. Therefore the
claim of the operational creditor was admitted by the adjudicating authority for the payment
of the unpaid due against the corporate debtor.

Mr. Suresh Narayan Singh vs. Tayo Rolls Ltd.12

11
Company Appeal (AT) (lnsolvency) No. 59 of 2017.
12
Company Appeal (AT) (Insolvency) No. 112 of 2018.
The appeal in this case was filed by Mr. Suresh Narayan Singh, who was an Authorized
Representative of 284 workers of “Tayo Rolls Limited” (hereinafter referred to as the
“corporate debtor”) against an order dated 03.01.2018 passed by the NCLT, Kolkata.

The NCLT had rejected an application filed by the appellant under Section 9 of the Code
against the corporate debtor on the ground that the application under Section 9 of the Code
has to filed individually and not jointly. The NCLT also noted that it is not practicable for
more than one operational creditor to file a joint petition as they will have to issue individual
demand notices under Section 8 of the Code.

The learned counsel appearing on behalf of the appellant contended that even if the individual
claim of the workmen is taken into consideration, the amount of dues which remain unpaid to
each individual worker would amount to more than Rs 1, 00, 000 and even then, an
individual workman in this case would have the right to file a separate application under
Section 9 of the Code. If Section 8 and 9 of the code are read with Form 5, it becomes clear
that the person authorized to act on behalf of the operational creditor is entitled to file an
application under Section 9.

The NCLAT held that there is a clear existence of all the required factors, i.e., a debt’ and a
default’, which were not disputed by the corporate debtor, and the application made under
section 9 was complete, therefore, the adjudicating authority should have admitted the
application instead of rejecting it on a technical ground that it was filed by the authorized
representative on behalf of 284 workmen. It held that as it is evident that the unpaid due to
each workman is more than the minimum amount of Rs 1, 00, 000 and there is a default on
part of the corporate debtor, the application under section 9 is fit to be admitted for the
initiation of CIRP against the corporate debtor.

Part - III
ILO Convention 173 – Workers Protection in Insolvency
Origin of Convention 173
The General Conference of the International Labour Organisation, Having been convened at
Geneva by the Governing Body of the International Labour Office, and having met in its 79th
Session on 3 June 1992, and Stressing the importance of the protection of workers' claims in
the event of the insolvency of their employer and recalling the provisions on this subject in
Article 11 of the Protection of Wages Convention, 1949, and Article 11 of the Workmen's
Compensation (Accidents) Convention, 1925, and Noting that, since the adoption of the
Protection of Wages Convention, 1949, greater value has been placed on the rehabilitation of
insolvent enterprises and that, because of the social and economic consequences of
insolvency, efforts should be made where possible to rehabilitate enterprises and safeguard
employment, and Noting that since the adoption of the aforementioned standards, significant
developments have taken place in the law and practice of many Members which have
improved the protection of workers' claims in the event of insolvency of their employer, and
considering that it would be timely for the Conference to adopt new standards on the subject
of workers' claims, and
Having decided upon the adoption of certain proposals with regard to the protection of
workers' claims in the event of the insolvency of their employer, which is the fourth item on
the agenda of the session, and Having determined that these proposals shall take the form of
an international Convention; adopts this twenty-third day of June of the year one thousand
nine hundred and ninety-two the following Convention, which may be cited as

Workers Protection
Part II of the convention talks about the Protection of workers' claims by means of a
privilege.
Article 5 of the convention states that “In the event of an employer's insolvency, workers'
claims arising out of their employment shall be protected by a privilege so that they are paid
out of the assets of the insolvent employer before non-privileged creditors can be paid their
share.”
Article 7 states that “National laws or regulations may limit the protection by privilege of
workers' claims to a prescribed amount, which shall not be below a socially acceptable level
and Where the privilege afforded to workers' claims is so limited, the prescribed amount shall
be adjusted as necessary so as to maintain its value.”
Article 8 states that “National laws or regulations shall give workers' claims a higher rank of
privilege than most other privileged claims, and in particular those of the State and the social
security system.”

Part – IV
Holistic side of Indian Labour Laws

In the name of simplifying laws, the government is trying to attack all workers in the country
– from the lowest paid to the highest, from those who live in villages to those in metropolitan
cities, from those who work in the smallest of farms, fields and inside households to those
who work in the most modern of factories and offices. This is an attack on the entire working
class.13

The Bills presuppose that the “use of technology in its (the laws) enforcement” will reduce
violations. In reality, the Bills use of technology is only to transform the entire system of
labour inspection.14 No longer to be based on checks and complaints, instead workplaces will
be inspected based on ‘random’ computerised selections with some even inspected online or
over the phone. Employers can also be informed beforehand.15

In addition, employers are no longer bound by law to cooperate with inspectors. The newly
designated ‘Inspectors-cum-Facilitators’, under the Bill, are meant to assist employers in
‘complying’ with the law and can even forgive them for violations. Except ‘technology’,
there is actually nothing in the law to ensure better compliance and implementation.16

The failure to implement labour law over the last 25 years has been the most significant route
through which workers’ rights have been undermined. All trade unions have long been
demanding that non-payment of minimum wages and such other violations of basic rights be

13
Gautam Mody, India's Labour Laws Are Being Amended for Companies, Not Workers, The Wire,
https://thewire.in/labour/indias-labour-laws-are-being-amended-for-companies-not-workers, Last Visited – 10
October 2019.
14
Decoding the Code: Survey on Twenty One Months of IBC in India, PWC,
https://www.pwc.in/assets/pdfs/publications/2018/decoding-the-code-survey-on-twenty-one-months-of-ibc-in-
india.pdf, Last Visited – 10 October, 2019.
15
Ibid.
16
Ibid.
made cognisable offences. Rather than responding to this, the Bills actually remove deterrents
including the attachment of property in cases on non-compliance.17

The stated effort in advancing the Labour Codes is to ‘simplify and rationalise’ the law with
the objective of removing the ‘multiplicity of definitions and authorities’. Both codes fall
well short of this claim – in fact now there is a definition of employee and worker that run
into each other and the creation of an additional authority – the Appellate Authority –
between the conciliation process and the courts. Workers as a result will have to only wait
longer for justice.18

Both Bills also clearly define the responsibility of the labour contractor as final. This is an
important departure which takes away the key responsibility of the principal employer for
payment of wages and other benefits including bonus; as also the criminal liability for
workplace accidents and deaths. The introduction of combined labour contract licences for all
tasks in an establishment removes the possibility of identifying from the contract licence, a
perennial task from a non-perennial task. It takes away the core principle of the Contract
Labour Act and will provide employers a legal cover to hire contract workers in perennial
and core tasks.19

Hence, India's Labour Laws Are Being Amended for Companies, Not Workers. In the name
of simplifying laws, the government is trying to attack all workers in the country.

17
Ibid.
18
Ibid.
19
Ibid.
Part – IV
Conclusion
Workers are the dominant partners in the industrial undertakings and without their co-
operation, effort, discipline, integrity and character the industry cannot survive. Therefore,
there should always be a good relationship between the employer and employee which is very
important. The profits of the industry must also be shared between the employers, workers
and the community. At the same time, as mentioned above, the workers must be safe, secured
and they should be provided with sufficient welfare measures, healthy working conditions so
that not only the employers will be benefited but the society and the nation shall also get the
positive result.