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SC’s purposive interpretation allows Trade Unions to file application for CIRP as “Operational Creditors”

In the recent ruling of the Supreme Court of India in JK Jute Mill Mazdoor Morcha v Juggilal Kamlapat Jute Mills Company Limited, it set aside the findings of Hon. NCLAT and empowered Trade Unions to file an application before adjudicating authority for the initiation of insolvency resolution process(CIRP) as Operational Creditors.
The Trade Union had issued a notice for repayment of outstanding dues to the corporate debtor. The demand notice was served on behalf of 3000 workers (roughly) under S.8 of Insolvency and Bankruptcy Code, 2016 (IBC, 2016) and subsequently an application under S.9 of IBC was placed before the Adjudicating authority for initiation of corporate Insolvency resolution process. (CIRP). 
The application was placed before the Allahabad Bench of the National Company Law Tribunal (NCLT) which rejected the application on the finding that Trade Unions cannot be read into the definition of ‘operational creditors’ provided in S. 5(20) of the IBC, 2016 basing its findings on a writ petition sub-judice before Hon. Delhi High court. The trade Union then took the matter before Hon. National Company Law Appellate Tribunal (NCLAT).
NCLAT’s Ruling
The Hon. NCLAT also dismissed the application and held that Trade Unions cannot be termed or classified as operational creditors. Workers, on the other hand will have to make individual applications to the Adjudicating authority in the capacity of operational creditors for initiation of CIRP. However, Supreme Court didn’t agree with the findings of NCLAT and over-ruled its decision.
Supreme Court’s decision
According to Section 5(21) of the Insolvency and Bankruptcy Code, ‘operational debt’ means a claim in respect of provision of ‘goods or services’ and it is inclusive of employment dues. Section 5(20) of the Act, defines ‘operational creditor’ as the person to whom such operational debt is owed and this definition is inclusive of a person to whom, such debt is legally transferred or assigned. If a narrow literal interpretation is adopted in accordance to S. 5(20) of the Act, then it can be observed that Trade Unions would not be covered under the ambit of definition of operational creditor as it cannot be considered as an entity to which operational debt is owed by Corporate debtors. It is the workmen and not the Trade Union who provide goods and services to the corporate debtor. According to the literal interpretation adopted hereby by the lower courts, it was concluded that IBC only supports the proposition that workmen have to file respective individual claims under Section 9 in the capacity of separate operational creditors.
The Supreme Court countermanded the findings of the lower courts and interpreted the term ‘operational creditor. The apex court went on to hold that Trade Union would come within the definition of ‘person’ as given by Section 3(23) of the IBC. The focus was on Clause (g) which includes ‘any entity established under the statute’ in the definition of ‘person’. The court applied the principle of noscitur a soccis to interpret the clause (g) of Section 3(23) and opined that the true meaning of clause (g) has to be ascertained by reference to preceding clauses. Section 3(23) in its clauses (c), (d), (e) and (f) include a company, a trust, a partnership and a limited liability partnership respectively and all these entities abovementioned are governed by different statues which do not strictly establish them. These entities do not need to be set up by the legislation itself.
The Supreme Court took a peculiar approach to further clarify on the ambiguity. The Court drew attention to the Section 15(c) of the Trade Unions Act, 1926 which allows the funds of the Union to be utilised for any prosecution or defence to any legal proceedings in which the right of any member of the Union is under consideration. The Court opined that the Trade Union can proceed on behalf of the workman who has not been paid wages to initiate the Corporate Insolvency resolution process under the IBC as the Section 15(c) of the Trade Union Act, clearly envisages the representative role of the Trade Union. The Court hereby opined that the Trade Union would squarely fall under the definition of person under Clause (g) of the Section 3(23) which means a Trade Union would be an ‘entity established under a statute’
The application of the purposive interpretation of the Supreme Court by putting reliance on the principle of noscitur a sociis can be challenged with the question that it cannot be explicitly derived from the intention of the legislators that they intended to allow Trade Unions to be represented as operational creditors by carving a separate clause for an ‘entity established under a statute’ under the definition of person in Section 3(23) of IBC. When the definition of person under Section 3(23) explicitly mentions entities such as companies, trusts and partnerships, it is out of the way for the court to opine that Trade Unions would fit in clause (g). However, the court was of the opinion that a literal approach in the instant case would negate the basic object of establishment of Trade Union which acts in representative capacity for the collective interest of workers.
Analysing the previous instance where the Supreme Court had observed that Rule 6 along with Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, permits a single worker to file a joint application on behalf of several workmen for the initiation of CIRP against the corporate debtor, it is apparent that the question whether Trade Union would also qualify as ‘operational debtor’ skipped the attention of legislature. And it is the court’s duty to conclusively interpret the intention of the legislature.
Considering the fact that separate petitions by workmen of an establishment against the corporate debtor for the initiation of CIRP would be onerous for individual workers, denying Trade Unions the right to initiate CIRP in capacity of ‘operational creditor’ would defeat the very purpose of existence of Trade Unions. Literal interpretation leads to the absurd conclusion that individual workmen will have to file their separate claims for recovery of their employment dues. Trade Unions allow the freedom of pooling of collective resources of all workers. Further, the Supreme Court has rightly upheld the rights of workmen through a Trade Union, by allowing the purposive interpretation to eclipse the literal interpretation. Our judiciary has always endeavoured to interpret labour laws as beneficial welfare legislations and there could not be any reasons as to why the representation of workmen by trade unions should be an exception under the IBC framework. The functionality and operation of IBC in India is still a work in progress, it is nice and hence, it is the duty of our judiciary to fill in the voids that have been overlooked by the legislature.




Aakarsh Kumar is currently in his 4th year of B.A.LLB (H) at WB National University of Juridical Sciences (NUJS), Kolkata.


In Content Picture Credit: DNA India


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