Trade Union as an ‘Operational Creditor’: The Supreme Court’s Case for Purposive Interpretation

May 19, 2019

[Rongeet Poddar is a fourth-year student at WBNUJS Kolkata.]

 

The Supreme Court of India in JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Company Limited has recently allowed a trade union to file an application for initiating a corporate insolvency resolution process (CIRP) as an operational creditor under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). The appellant trade union had issued a demand notice to the corporate debtor by virtue of Section 8 of the IBC for the payment of outstanding dues of approximately 3000 workers following which it filed an application under Section 9 of the IBC for default in payments of operational debts. However, the Allahabad Bench of the National Company Law Tribunal (NCLT) refused to recognize the trade union as an operational creditor and rejected the application. The National Company Law Appellate Tribunal (NCLAT) also held that a trade union is not covered within the scope of an operational creditor. It also insisted upon the filing of separate applications by individual workers to be represented as operational creditors. However, the decision has been overturned by the Supreme Court.

 

Section 5(21) of the IBC defines an ‘operational debt’ as a claim in respect of provision of goods or services. The definition also covers  employment dues within its scope. Section 5(20) refers to an operational creditor as a ‘person’ to whom an operational debt is owed. If a strict literal interpretation of the meaning of ‘operational creditor’ is adopted, a trade union cannot not be regarded as an entity to which an operational debt is owed by the corporate debtor, as rightly held by the judicial forums below the Supreme Court. A trade union may only be characterized as an instrument of collective bargaining for the workers to whom employment dues may be owed by the corporate debtor. The trade union is not specifically engaged in the provision of any goods or services to the corporate debtor, unlike the workmen. Thus a literal interpretation of the statutory provisions in the IBC only supports the conclusion that workmen have to file their respective individual claims under Section 9 as separate operational creditors. The Supreme Court however opted for a purposive interpretation of the term ‘operational creditor’.

 

The apex court held that a trade union would come within the meaning of ‘person’ in Section 3(23) of the IBC. Clause (g) in the definition of ‘person’ includes any entity established under the statute. The court opined that the doctrine of noscitur a sociis has to be applied to interpret clause (g) and the meaning of clause (g) would have to be ascertained by reference to the preceding clauses. The previous entries in the definition of ‘person’ include a company, a trust, a partnership and limited liability partnership in clauses (c), (d), (e) and (f) respectively. The court held that all these entities are governed by different statutes and not strictly established by them. A company, for example, is governed by the Companies Act. It is not a body which has been set up by the legislation itself.

 

To further clear the ambiguity, the  Supreme Court took the aid of Section 15 (c) of the Trade Unions Act, 1926 which allows the general funds of a trade union to be spent on prosecution or defence of any legal proceeding in which the right of a member of the trade union may be in question. Accordingly, the court went on to hold that if a workman has not been paid wages by the corporate debtor, a trade union registered under Section 8 of the Trade Unions Act, 1926 can represent the workmen in an application for initiating CIRP under the IBC as the representative role of a trade union was clearly envisaged in Section 15(c) of the Act. The court thereby held a trade union would be an ‘entity established under a statute’.

 

The application of noscitur a sociis can be questioned on the rationale that the lawmakers would not have carved out a separate clause for an ‘entity established under a statute’ in the definition of ‘person’ in Section 3(23) of the IBC to allow the representation of trade unions as operational creditors when specific entities such as companies, trusts and partnerships have been explicitly enshrined in the preceding clauses. However, the literal rule of statutory interpretation was rightly disfavoured by the court in the instant case as such an approach would negate the object of setting up a trade union as the representative forum for the collective interests of workers in the context of the IBC.

 

When it is apparent that the question of representation of workers’ by the trade union as an ‘operational creditor’ under the IBC evaded the attention of the legislature, courts are obliged to fill the void, in the absence of suitable amendments. The Supreme Court has thus rightly followed the rationale of the Division Bench of the Bombay High Court in Sanjay Sadanand Varrier v. Power Horse India Pvt. Ltd. wherein a trade union was held to be competent to present a winding up petition under Section 439 of the Companies Act, 1956. Significantly, the Supreme Court also observed that Rule 6 coupled with Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 allowed a single worker to file a joint application for initiating CIRP on behalf of several workmen upon authorization by the others.

 

Denying the right to a trade union to initiate a CIRP as an ‘operational creditor’ would be contrary to the demands of justice as separate petitions can often be onerous for individual workers in light of the various costs associated with the insolvency resolution process. A trade union, on the other hand, offers the prospect of pooling of collective resources of all workers. Furthermore, courts must embrace a purposive interpretation of the IBC where a strict literal interpretation leads to an absurd conclusion in that individual workmen are allowed to apply for initiating the CIRP for recovering their employment dues while a trade union is prevented from doing so in the collective interest of workers. The judiciary in India has also traditionally not hesitated from interpreting labour laws as welfare legislations and there is no concrete reason as to why the question of representation of workmen by a trade union in pursuance of the provisions of the Trade Unions Act, 1926 should be an exception under the framework of the IBC. The operation of the IBC in India is a work in progress and the judiciary must step in to fill in the gaps in the law that have been overlooked by the legislature.

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