How commercial wisdom relegates labour welfare to the margins of the insolvency process

The Insolvency and Bankruptcy Code, 2016, by design, makes the committee of creditors the central decision-making authority in the insolvency process. With the Adjudicating Authority becoming a mute spectator, workers have to fight for their claims with both hands tied behind their back. 

This is part of our special issue on May Day 2022.

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THE Report of the Bankruptcy Law Reform Committee, 2015 is the foundational text of a regime changing legislation in India. On page two of its executive summary, the report sets out what it calls the "key economic question in the bankruptcy process."

The Report states,

"When a firm (referred to as the corporate debtor in the draft law) defaults, the question arises about what is to be done. Many possibilities can be envisioned…

…The Committee believes that there is only one correct forum for evaluating such possibilities, and making a decision: a creditors committee, where all financial creditors have votes in proportion to the magnitude of debt that they hold. In the past, laws in India have brought arms of the government (legislature, executive or judiciary) into this question. This has been strictly avoided by the Committee. The appropriate disposition of a defaulting firm is a business decision, and only the creditors should make it."

In one fell swoop and two innocuous paragraphs, the report gives birth to a jurisprudential tool that will come to define and decide the fate of India's labour workforce for the coming years.

Objective of Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016 [IBC] was brought in with the intention to transform India's lending market by improving the rate of recovery of loans. The Code permits creditors to invoke its provisions upon the occurrence of a debt default and then, under aegis of an independent tribunal, delegates the management of the affairs of the debtor to a specially formed committee. This committee, comprising of the major creditors of the debtor, then decides upon the future course of the company.

The code enjoins a duty upon the committee to run the company as a going concern and to come up with a plan for resolution of its debts, in terms of provisions of the code, within a fixed period of time. If no plan is agreed upon by the committee within the prescribed time, the tribunal is empowered to order the liquidation of the company.

As the IBC grows to dominate the market of debt recovery options for lenders, its provisions and the infrastructure of the Code is fast becoming the centre for disputants under the insolvency process. One of the most important, and probably the most vulnerable, stakeholders under this process are the workers of the debtor companies. Once admitted into the insolvency process, the Code contemplates what is called a moratorium on all pending litigations against the debtor. This means that no litigation can proceed while the insolvency process is ongoing.

Also read: IBC (Amendment) Ordinance, 2020: A Pandemic of Bad Drafting

Implications for labour welfare

The intention behind this provision is to ensure that the assets of the corporate debtor are not divested during the insolvency process. But the wide-ranging scale of the moratorium means that labour disputes, which are naturally more likely to crop up when a debtor is unable to pay its debts, are also prevented from being concluded. Thus, disputes involving illegal lock-outs, closures, non-implementation of wage settlements, unlawful suspensions, and denial of workman status, are all prematurely stopped at the behest of the insolvency process.

The effect of this provision is that workers are compelled to contest their legal claims under labour legislations, aside from the claims under the IBC, before the tribunal under the Code. For instance, in Ghanshyam Mishra's case from last year, the Supreme Court held that "as such, when the resolution plan is approved by [the National Company Law Tribunal], the claims, which are not part of the resolution plan, shall stand extinguished and the proceedings related thereto shall stand terminated." Therefore, to have their claims, including ones that are contested under labour legislations, workmen are compelled to intervene in the insolvency proceedings. Crucially, Ghanshyam Mishra consolidates this position by directing the termination of proceedings that have not been considered in the approved resolution plan. This, in effect, is a usurpation of jurisdiction from labour legislations, which are structurally designed to protect workers, to the insolvency process, which is admittedly designed to protect lenders.

This transmission of the forum for labour welfare is mirrored in the transmission of emphasis in the IBC jurisprudence of the Supreme Court. The Code has travelled the Supreme Court several times by now, and it is interesting to note how the court has construed the Code in its entirety and the kind of markers it has laid down for the tribunal to follow. In January, 2019, the Supreme Court, in Swiss Ribbons, held that "Above all, ultimately, the interests of all stakeholders are looked after as the corporate debtor itself becomes a beneficiary of the resolution scheme— workers are paid, the creditors in the long run will be repaid in full, and shareholders/investors are able to maximise their investment."

Thus, the court was keen to put the objective of keeping the corporate debtor alive as a going concern at the centre of the Code and its performance. By emphasising on this aspect, the court was keen to state that Code would be able sufficiently protect all stakeholders if the debtor continues its operations, and would eventually be able to regenerate the funds to pay all of its creditors.

Also read: Why Labour Law Reforms Must Focus on Efficient Justice Delivery Mechanisms for Ease of Doing Business

Doctrine of 'commercial wisdom'

In my submission, the court has consistently veered off this path and has adopted a different emphasis since then. As mentioned in the opening paragraph, one of the design features of the IBC is to place the committee of creditors as the central decision-making authority in the insolvency process. This has led to the formation of the doctrine of 'commercial wisdom' which envisages that, once admitted into insolvency, the decisions of the committee of creditors will decide the future of the debtor and by extension, all other creditors. The Supreme Court has pushed this doctrine so heavily that it is, inarguably, the central jurisprudential feature of the code now.

In fact, in Essar Steel in 2019, early in the 'commercial wisdom' regime, the Supreme Court attempted to harmonise these two legs of the Code. The court held: "[I]t is clear that when the Committee of Creditors exercises its commercial wisdom to arrive at a business decision to revive the corporate debtor, it must necessarily take into account these key features of the Code before it arrives at a commercial decision to pay off the dues of financial and operational creditors. There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or sub-class of creditors is with the Committee of Creditors, but, the decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors."

In my submission, this harmonisation has consistently been whittled down and the jurisprudence under 'commercial wisdom' is now threatening to cannibalise the entire Code. In subsequent judgments, the Supreme Court has repeatedly clarified that the role of the Adjudicating Authority (referred to as the tribunal in the foregoing paragraphs) is limited, and that judicial review is limited to ensuring compliance with the provisions of the Code. As judgments like Ghanshyam Mishra and other recently approved resolution plans show, this has had the effect of the Code conceding impetus, in entirety, to the committee of creditors.

By placing commercial wisdom, and the blind protection of the same, at the centre of the jurisprudence of the IBC, the Supreme Court has essentially handed lenders the keys to the Code. This has meant that the tribunal acts mostly as a muted spectator while lenders exercise their discretion to the best of their commercial interests.

How this has harmed stakeholders, including workers

As a matter of example, the group insolvency of Videocon Industries Ltd., one of the largest insolvencies in the country, saw the National Company Law Tribunal, Mumbai pass an order highlighting this very conundrum. The tribunal, while approving a plan that saw public banks forego 96 per cent of their claim, observed: "Since this is the Commercial Wisdom of the COC [committee of creditors] and as per the various judgements of the Hon'ble Supreme Court and by following the judicial precedents, discipline the Adjudicating Authority approves … resolution plan of the Successful Resolution Applicant with a suggestion, request to both CoC and the Successful Resolution Applicant to increase the pay-out amount to these Operational Creditors especially MSMEs."

The tribunal, clearly hamstrung by the jurisprudence of commercial wisdom, was unable to do anything about an outcome that would jeopardise the interests of several stakeholders, not least of whom are workers. The tribunal itself observed that many operational creditors, who were receiving a mere 0.72 per cent of their admitted claim amount, could themselves likely face insolvency proceedings in the future.

It is important to note the implication of this situation for workers, who have been funnelled into the insolvency process and are forced to contest their claims under this law. Placing commercial wisdom beyond the reproach of judicial review and making the adjudicatory authority a muted spectator would mean that workers have to fight for their claims with both hands tied behind their back.

Also read: Wanted: Innovative Approach for Resolution of Domestic Commercial Disputes of Low-Value Claims Post COVID-19

The Code, and its jurisprudence, has essentially exported labour welfare to commercial wisdom and while the text of the Code provides some guarantees to workmen, the implementation and interpretation of the same has been placed with lenders. This has meant that lenders can take this commercial wisdom to absurd interpretations. In the insolvency of Jet Airways, the approved resolution plan, while providing for a payment of Rs. 52 crores as against an admitted amount of Rs. 715 crores, proposes a bizarre solution for the rest of the workers' claims. The approved plan proposes the creation of a welfare trust, to be formed by workmen and employees, which will receive 0.5 per cent equity stake in the corporate debtor. The plan proposes that workers' claims be satisfied by the sale of this equity stake as and when the market valuation of the said stake reaches a proposed estimate.

While the future of these approved plans is subject to any appeals being decided at the Supreme Court (the Videocon Industries Ltd. plan is currently before the Supreme Court), it is clear that domination of commercial wisdom puts labour welfare at the risk of being relegated to the margins of the insolvency process. Workers, under the Code, hardly ever have a seat at the committee of creditors and in that scenario, the protection of their interests have been made subject to the business decisions of the committee of creditors.

In my submission, the question of labour welfare and the protection of their interests cannot ever tenably be called a business decision. I am certain that labour welfare, and scope of commercial wisdom to that extent, are headed for an inevitable collision course at the Supreme Court. Till the time that question is settled, it remains to be seen if and how lenders will protect workers.