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Empowerment of employees - Insolvency & Bankruptcy Code

CS Divesh Goyal 
Updated on 01 August 2020

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Short Summary:

In this flash tabloid, the writer initiates by speak of the provisions of Insolvency & Bankruptcy Code, 2016 (hereafter referred as 'IBC') in relation to empowerment of employees, creditors, shareholders etc. As the bankruptcy law is going to enable the recovery process to move much more smoothly and effectively," 

'Employees' rights have been dramatically strengthened and as a result, if indeed there is a default event, employees are first in line to be able to secure their rights. (Section 178 IBC)

The main drive of the broadsheet, on the other hand, is upon the 'Strengthened power of Employee/ Workmen pursuant to provision of IBC along with decided case laws.'

Introduction:

It is just not banks which are wielding the provisions of the Bankruptcy Code to recover dues. Even employees have started approaching the National Company Law Tribunal (NCLT)/ Knocking the Door of NCLT as was seen in a one of the bankruptcy application filed by employees of Aruna Hotels in Chennai against their former employer. 

This Case set a benchmark for thousands of other employees.

The Bankruptcy Code meant to recover dues may soon benefit individual employees as well, and not only the banks, which until now have been known to make use of the provision to seek benefits.

I. WHO IS A WORKMAN?

Section 36(3) IBC states that 'Workmen' have same meaning to it in clause[1] (2) of section 2 of industrial Dispute Act, 1947.

Section 2(s) defines workman as any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work, for hire or reward, terms of employment be express or implied and includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of dispute. It excludes persons employed in army/Navy/Air Force/Police and those employed in mainly managerial or administrative, supervisory capacity and drawing wages of more than INR 6500.

II. WHO IS AN EMPLOYEE?

What makes one person an employer and the other an employee is not the nature of work performed by them but the manner how he is paid. In general terms, an employee is a  person who has been hired by the employer to perform a particular job or specific labour of the employer. From this definition, it can be analysed that a person can be termed as an employee if:

• He gets a specific wage or salary.
• His work in under the control of the employer.
• He has signed implied or written contract related to his work with the employer.

 

The claim can be initiated before the 'adjudicating authority' under Section 5(1) of the Code which is National Company Law Tribunal (NCLT) constituted under Section 408 of the Companies Act, 2013.

Provisions under the Law:

A. WHO CAN FILE APPLICATION?

As per Insolvency and Bankruptcy Code 2016, Corporate Insolvency Resolution process can be initiated by;

a. Financial Creditor
b. Operational Creditor and
c. Corporate Debtor

B. IBC Law divides Creditors into Two categories:

C.  In which category 'Employees/ Workmen' take account of?

IBC covers Employees / Workmen under the category of Operational Creditor:

D. Operational Creditor means:

• A person to whom an Operational Debt is owed and
• Any person to whom such debt has been legally assigned or transferred

E. Operational Debt has been defined by section 5(21) of IBC and it must fulfill following substantive elements namely:

(a) Debt arising out of professional goods; or
(b) Services: or
(c)  Out of Employment.
(d) It also covers dues arising under any law for the time being in force and payable to the Central or State Government or local authority.

Petition to NCLT for recovering of unpaid salary

As per above provisions, Under the Insolvency and Bankruptcy Code, employees and workmen are considered to be an operational creditor, and if the claim is related to the matter of employment, a petition can be filed before NCLT against the corporate debtors to resolve the issue.

If a company has not paid salary or wages to their employees or workmen, then the concerned employee and workmen can file a petition to NCLT for the recovery of their unpaid salary or wages.

ARUNA HOTEL v/s EMPLOYEE

The Chennai bench of NCLT admitted the application filed by three employees for commencement of the corporate insolvency resolution process and has appointed P Sriram as interim insolvency professional (IIP). Employees said that Aruna Hotels failed to pay arrears of salary, gratuity and leave salary of these employees.

In the case of Aruna Hotels, the court referred to the case of an employee D Ramjees, who joined as junior assistant and rose to the rank of company secretary. He had made a demand of Rs 2.6 crore but the respondent (the company) had denied the liability. What went in favour of the employee was that a day after the petition was filed before the NCLT on April 3, the MD, in a letter, acknowledged the liability of clearing these arrears. The court has directed the insolvency professional to take charge and declared moratorium of any legal action of recovery against the company till the completion of insolvency process. The court has also directed the other two employees N Krishnan and C Ganapathy to approach IIP with their claims.

CONCLUSION

These developments come at a time when lenders are keeping a close watch on how the new code will help them recover their dues .Since IBC has come into effect early this year, a variety of cases would set a precedent for future disputes.

The insolvency and Bankruptcy Code, 2016 is a weapon in the hands of the operational creditors as against corporate debtors to recover its debts. This code gives the employees as well as workmen of the company a great opportunity with an easy and fast procedure to recover their unpaid salary by applying to NCLT as against the debtor.


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Category Corporate Law
Other Articles by - CS Divesh Goyal 




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