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  • Heeya Sharma, Snigdha

Analyzing the Contours of the Doctrine of Commercial Wisdom in light of Equitable Treatment of the Stakeholders

[Heeya and Snigdha are students at Gujarat National Law University.]


Recently, the National Company Law Appellate Tribunal (NCLAT) in Amit Kumar Pandey and Others v. Pradeep Kumar Sethi, Resolution Professional and Others ruled that the claims of workmen as filed by their sub-contractors as 'operational debt' could not be given the same treatment as that given to the dues of other similarly situated workmen. The appeal was filed by a group of workers employed through a subcontractor wherein the key contention was that their claims were accepted only to the extent of 8% whereas similarly situated 'workmen' of the corporate debtor were entitled to receive the value of 100% of their claims during the corporate insolvency resolution process (CIRP).


The post is aimed at analyzing the judgment of the NCLAT in light of its reliance on the commercial wisdom of the committee of creditors (CoC) and the implications thereof on the treatment of workmen. It emphasizes on the need for a balanced approach that safeguards the rights of all stakeholders without compromising the objectives of the insolvency process.


The Reasoning of the Tribunal


The petitioners argued that though the subcontractors filed the claims on their behalf, they were classified as operational debt as opposed to dues of the workmen. The NCLAT, while specifically dealing with the challenge posed to the treatment of the resolution plan, found the resolution plan to be appropriately addressing the already categorised claims. The tribunal asserted that there exists no difference between the workmen employed directly by the corporate debtor and the workers employed through a subcontractor since both of them perform the same duties. The definition of a 'workman' under Section 3(36) of Insolvency and Bankruptcy Code 2016 (IBC) is synonymous with the definition of a 'workman' as described in Section 2(s) of the Industrial Disputes Act 1947, and hence, there is no distinction provided by law between directly employed workers or subcontracted workers.


However, relying upon the nature of the claim, as admitted in the resolution plan, the tribunal applied Section 53 of the IBC reflecting the waterfall mechanism to the present case. Section 53 provides the hierarchy in which the receipts from the sale of assets of the corporate debtor are distributed among the stakeholders in which workmen dues are dealt with in Section 53(1)(b) and operational debt at an even lower ladder. A rigid application of Section 53 in the present case that involves workers employed through a subcontractor features unique circumstances wherein a different interpretation based on the facts of the case is required to prevent an equitable outcome for any of the stakeholders. The court found this distinction to have been appropriately reflected in the resolution plan, where workmen dues were handled differently from operational debt.


Analysis


Upon the term 'workman'


In Amit Kumar Pandey v. Pardeep Kumar Sethi, the tribunal agreed to the limited aspect of the inclusion of workers engaged by sub-contractors under the ambit of the collective term ‘workman’ by placing its reliance on Section 2(s) of the Industrial Disputes Act 1947. The tribunal also found a lack of any difference between the two groups of workers within the ambit of law. This proposition has the effect of signifying that the workers employed through sub-contractors are entitled to the same rights and privileges including equal wages among other things, as the other workers are. However, in the present case, the tribunal drew a virtual difference between this group of workmen on the premise of the sub-contractor having filed the claim on behalf of the workers employed under him as 'operational creditors'. By limiting the scope of the main issue before the appellate tribunal to merely adjudicating upon the aspect of the treatment of different kinds of dues in the resolution plan, the tribunal denuded the essence of the grievance posed by such workers.


Upon the role of the Resolution Professional


The tribunal also placed its reliance on the act of collation and admittance of claims undertaken by the resolution professional as well as the commercial wisdom of the CoC and thereby found it untenable for a remedy to be provided at this stage of the CIRP. It is a settled position of law that the act of collation and admittance of claims is an administrative action of the resolution professional and in turn subject to judicial review. The aforesaid is a settled position of law as per multiple cases, quite notably, Swiss Ribbons Private Limited v. Union of India. Coupled with this is the fact that the approach taken by the adjudicating authority in dealing with disputed claims as well as the resolution plan is more often than not quite restricted, most notably due to the concern of breaching the commercial wisdom of the CoC. This reticence and thereby the lack of an appropriate adjudicatory framework forces the claim to be referred to a platform outside the CIRP framework which in turn defeats the “time-bound resolution” objective of the IBC.


On the aspect of the “commercial wisdom” of the CoC


Further, the doctrine of “commercial wisdom” has unequivocally become a center-piece of the jurisprudence surrounding IBC. More often than not, the decisions of the CoC governs the fate of the debtor and in turn, the other creditors. It is pertinent to note that in Essar Steel v. Satish Kumar Gupta, the court pressed on the decision of the CoC to be reflective of the interests of all stakeholders. Inarguably, this also stands as one of the primary objectives of the code. However, more often than not, this objective is not aptly translated to the actual resolution plan. For instance, in the Videocon Industries insolvency case, the huge haircut worth 96% of the amount triggered by the decision of the CoC worst affected the operational creditors of which MSMEs were a big share. The adjudicating authority approved the said plan with a mere suggestion of increased pay-outs to these operational creditors.


The doctrine of commercial wisdom can be seen in close proximity with the denudation of the objective of labor welfare by making it contingent on the decision of a set group of creditors. For instance, in Ghanashyam Mishra and Sons v. Edelweiss Asset Reconstruction, the disputed claims of the workmen were dismissed while giving primacy to the doctrine of commercial wisdom. Moreover, the apex court also terminated the proceedings pertaining to such disputed claims before other courts in order to maintain the objective of the CIRP framework.


Conclusion


In the present case, the move of the adjudicating authority in limiting the main issue to be a case of whether the adjudicating authority was correct in approving the resolution plan of such nature is justified to the said extent. However, it fails to consider the aspect that it indirectly leads to the treatment of the same set of workmen as two different categories of creditors while providing an inequitable remedy to one. The present judgment and several others reflect that there is a need for balance to be struck between the doctrine of commercial wisdom and ensuring the fair and equitable treatment of all stakeholders, especially those vulnerable to potential inequities. The resolution process should not compromise the fundamental objective of labor welfare, and a more robust adjudicatory framework to address such nuanced disparities is quite essential.

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