Why workers get a raw deal under 2016 Insolvency and Bankruptcy Code

[dropcap]A[/dropcap]s many as 2,280 workers of Moser Baer in Noida were left in the lurch in October after the National Company Law Tribunal (NCLT) initiated liquidation procedure against the company. Though the company has not declared official closure, the workers are jobless as the company is not running due to sheer mismanagement. Thanks to the moratorium on any claims on the company under the overriding Insolvency and Bankruptcy Code (IBC) during the liquidation process, the hapless workers cannot take recourse to normal legal channels to claim their wages even under Payment of Wages Act. Even seasoned labour law experts in Delhi are clueless about the fate of their jobs or how much of their dues they can recover.

Some commentators have expressed the opinion that the Insolvency and Bankruptcy Code (IBC) is relatively more advantageous to the workers than the past regime of handling sick companies through Bureau of Industrial and Financial Reconstruction (BFIR) under the Sick Industrial Companies Act, 1985 (SICA).

True, even in the case of default in payment of wages and other dues, even a single worker can move the National Company Law Tribunal (NCLT), to initiate insolvency proceedings before it. NCLT benches in Chennai and Delhi have already admitted the claims of workers of Aruna Hotels and Applied Electro-Magnetic respectively.

It is also true that the workers need not have to wait until erosion of 50% of the net worth of the company for it to report the matter to the resolution authorities as was the case under BIFR or for the accumulated losses to exceed the total net worth in any financial year for the BIFR to initiate the resolution process, either for rehabilitation or liquidation. Under IBC, mere default in payment to the workers can trigger initiation of the liquidation process.

In this sense, at first sight it might look that IBC is a radical weapon in the hands of the workers as well. But these are only partial truths. If we draw the overall balance-sheet, the negatives for workers under IBC might far outweigh the advantages.

For instance, under IBC, the workers' claims from the liquidation proceed are at first limited to the dues of just 12 months before the initiation of the resolution process and rest of the dues might be cleared if some money is left after all other dues are cleared. Is this a way of the law itself forcing the workers to forego a part of their claims?

Secondly, only a worker with a minimum of Rs. 1 lakh as dues can make a claim and no claim by any worker or employee can exceed Rs. 1 crore. Because of these restrictions, a huge contingent of workers cannot file their claims. In any case, unlike the American law which provides for collective class action suits in similar cases, in India, under IBC, workers can file only individual claims.

Resolution Professionals under NCLT have already reported instances of fraud exceeding Rs 40,000 crore even from among the mere 110 cases they had handled under IBC. In such cases of bankruptcy due to managerial malfeasance, the principles underlying the law of torts would naturally come into play in support of the workers. But artificially limiting the workers' claims beforehand or narrowing down the scope of dues arbitrarily is definitely violative of such principles of the law of torts.

In addition, the IBC law is not clear on what constitutes the dues. Under Section 325(3)(b) of the Companies Act, 2013, workers' dues include unpaid wages as well as other statutory dues like holiday remuneration, provident fund, pension fund, the gratuity etc. The contractual dues like productivity incentives, housing or transport allowances etc., that are part of the bilateral settlements entered into with the unions are also included. But the picture is hazy under IBC and the managements argue that they refer only to basic salary dues.

Under the earlier SICA-BIFR regime, the workers had the first claim during the liquidation process. But under IBC, the workers' claims comes next only to the first priority of meeting the resolution cost, and there too, their claims have been put on an equal footing ranking pari passu with the claims of other operational creditors. This means workers would get pretty little.

Worse, the workers have no representation in the resolution committee of creditors and have no say in the resolution process. They cannot ensure that the new employer who takes over the sick company would continue the same service conditions. This, despite in an NTC case (1983 AIR 75, 1983 SCR (1) 9), the Supreme Court ruling in 1982 that the workers should be heard by the liquidator. Thus the IBC, while giving some powers with one hand is taking away much more with the other.

Moser Baer is not an isolated case, but as per the data provided by Insolvency and Bankruptcy Board of India (IBBI), as on 18 September 2018, of the 977 companies brought under the NCLT 136 have been ordered for liquidation and already the number of workers involved might run into tens of thousands.

The Modi government has put in place an IBC only after being pushed to the edge by the mounting bank non-performing assets and is using IBC only as a blackmail tool to recover some money and has made the banks refer only less than a couple of hundred companies to the NCLT though the list of wilful defaulters itself contains more than 4000 companies. For its own political reasons, it might be dealing with the defaulting industry with kid gloves. But an RBI notification on 12 February 2018directed all banks to recognise a defaulting account the day after the default and start a 180-day process for recovery. If the process fails, the account was to be referred to the IBC for resolution. So it was expected that a flurry of new references would start from October. So, soon the number of workers affected could run into lakhs. With such a huge time-bomb ticking, the still exceptionally strong Indian trade union movement should come up with innovative proposals to protect the interests of workers under IBC. (IPA)

[Banner image: Moser Baer employees hold protest in Noida. Photo credit: Hindustan Times.]