Supreme Court Allows Trade Unions to File Insolvency Petitions on Behalf of Workers: JK Jute Mill Mazdoor Morcha vs. Juggilal Kamlapat Jute Mills Company Ltd. (2019)

Introduction

Date of the Judgment: April 30, 2019

Citation: (2019) INSC 414

Judges: R.F. Nariman, J. and Vineet Saran, J.

Can a trade union, representing numerous workers, file an insolvency petition on behalf of its members? The Supreme Court of India addressed this crucial question in a recent judgment, clarifying the position of trade unions as operational creditors under the Insolvency and Bankruptcy Code, 2016. The court’s decision has significant implications for workers seeking to recover unpaid dues from their employers. The bench comprised of Justice R.F. Nariman and Justice Vineet Saran, with the majority opinion authored by Justice R.F. Nariman.

Case Background

The case involves a long-standing dispute concerning the Juggilal Kamlapat Jute Mills. The mill had been closed and reopened multiple times before finally shutting down on March 7, 2014. Prior to this, proceedings were already underway under the Sick Industrial Companies (Special Provisions) Act, 1985. On March 14, 2017, the JK Jute Mill Mazdoor Morcha, a trade union, issued a demand notice to the company on behalf of approximately 3,000 workers, claiming outstanding dues. The company responded on March 31, 2017. The National Company Law Tribunal (NCLT) dismissed the trade union’s petition on April 28, 2017, stating that a trade union is not an operational creditor under the Insolvency and Bankruptcy Code. The National Company Law Appellate Tribunal (NCLAT) upheld this decision on September 12, 2017, suggesting that each worker should file an individual application.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT) dismissed the trade union’s petition, stating that a trade union does not qualify as an operational creditor under the Insolvency and Bankruptcy Code, 2016. The NCLT also noted the existence of suits filed by the respondent and pending writ petitions in the High Court of Delhi. The National Company Law Appellate Tribunal (NCLAT) upheld the NCLT’s decision, suggesting that each worker should file an individual application. The trade union then appealed to the Supreme Court of India.

Legal Framework

The Supreme Court examined several key provisions of the Insolvency and Bankruptcy Code, 2016 and the Trade Unions Act, 1926. The relevant provisions include:

• Section 5(20) of the Insolvency and Bankruptcy Code, 2016: Defines “operational creditor” as “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.”
• Section 5(21) of the Insolvency and Bankruptcy Code, 2016: Defines “operational debt” as “a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.”
• Section 3(23) of the Insolvency and Bankruptcy Code, 2016: Defines “person” to include “an individual; a Hindu Undivided Family; a company; a trust; a partnership; a limited liability partnership; and any other entity established under a statute, and includes a person resident outside India.”
• Section 2(h) of the Trade Unions Act, 1926: Defines “Trade Union” as “any combination, whether temporary or permanent, formed primarily for the purpose of regulating the relations between workmen and employers or between workmen and workmen, or between employers and employers, or for imposing restrictive conditions on the conduct of any trade or business, and includes any federation of two or more Trade Unions.”
• Section 2(g) of the Trade Unions Act, 1926: Defines “trade dispute” as “any dispute between employers and workmen or between workmen and workmen, or between employers and employers which is connected with the employment or non-employment, or the terms of employment or the conditions of labour, of any person, and “workmen” means all persons employed in trade or industry whether or not in the employment of the employer with whom the trade dispute arises.”
• Section 8 of the Trade Unions Act, 1926: Deals with the registration of trade unions.
• Section 13 of the Trade Unions Act, 1926: States that “Every registered Trade Union shall be a body corporate by the name under which it is registered, and shall have perpetual succession and a common seal with power to acquire and hold both movable and immovable property and to contract, and shall by the said name sue and be sued.”
• Section 15(c) and (d) of the Trade Unions Act, 1926: Specifies the objects on which general funds of a trade union can be spent, including “the prosecution or defence of any legal proceeding to which the Trade Union or any member thereof is a party” and “the conduct of trade disputes on behalf of the Trade Union or any member thereof.”
• Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016: Specifies the procedure for an operational creditor to initiate the corporate insolvency resolution process.
• Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016: Includes a note stating that “Where workmen/employees are operational creditors, the application may be made either in an individual capacity or in a joint capacity by one of them who is duly authorised for the purpose.”

Arguments

Appellant’s Arguments (JK Jute Mill Mazdoor Morcha):

• The appellant argued that a trade union is an entity established under the Trade Unions Act, 1926, and therefore falls within the definition of “person” under Section 3(23) of the Insolvency and Bankruptcy Code, 2016.

• The appellant contended that the dues owed to workers constitute an “operational debt” under Section 5(21) of the Code, as they arise from the provision of employment services. The trade union, therefore, can initiate insolvency proceedings on behalf of its members.

• The appellant relied on the Bombay High Court’s judgment in Sanjay Sadanand Varrier v. Power Horse India Pvt. Ltd., which held that a trade union can file a winding-up petition on behalf of its members. The appellant argued that the same principle should apply to insolvency petitions under the Code.

• The appellant also argued that Rule 6 and Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, permit joint applications by workers, supporting the trade union’s claim.

Respondent’s Arguments (Juggilal Kamlapat Jute Mills Company Ltd.):

• The respondent argued that a trade union does not provide services to the corporate debtor and therefore cannot be considered an operational creditor. The respondent argued that the dues owed to workers do not constitute an “operational debt” in relation to the trade union.

• The respondent contended that each worker’s claim is a separate cause of action, with separate dates of default. Therefore, a collective application by a trade union would not be maintainable. The respondent argued that each worker must file an individual application.

• The respondent cited the Supreme Court’s judgment in Commissioner of Income Tax (TDS), Kanpur and Anr. v. Canara Bank to argue that a trade union is not “established” under the Trade Unions Act in the same way that an entity is established under a statute, and therefore, does not fall under the definition of “person” in Section 3(23) of the Code.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether a trade union can be considered an operational creditor for the purpose of the Insolvency and Bankruptcy Code, 2016?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

The Supreme Court also considered the following legal provisions:

• Section 5(20) of the Insolvency and Bankruptcy Code, 2016: Defines “operational creditor”.
• Section 5(21) of the Insolvency and Bankruptcy Code, 2016: Defines “operational debt”.
• Section 3(23) of the Insolvency and Bankruptcy Code, 2016: Defines “person”.
• Section 2(h) of the Trade Unions Act, 1926: Defines “Trade Union”.
• Section 8 of the Trade Unions Act, 1926: Deals with the registration of trade unions.
• Section 13 of the Trade Unions Act, 1926: States that a registered Trade Union is a body corporate which can sue and be sued.
• Section 15(c) and (d) of the Trade Unions Act, 1926: Specifies the objects on which general funds of a trade union can be spent.
• Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016: Specifies the procedure for an operational creditor to initiate the corporate insolvency resolution process.
• Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016: Includes a note stating that applications may be made in an individual or joint capacity.

Judgment

How each authority was viewed by the Court:

• Sanjay Sadanand Varrier v. Power Horse India Pvt. Ltd. [CITATION]: The Court followed the rationale of the Bombay High Court, stating that the reasoning based upon Section 15(c) and (d) of the Trade Unions Act, 1926, equally applies to a petition filed under the Code.
• Commissioner of Income Tax (TDS), Kanpur and Anr. v. Canara Bank [CITATION]: The Court distinguished this judgment, stating that the context of Section 3(23) of the Code shows that this judgment has no application to the definition contained in Section 3(23). The Court stated that clause (g) of Section 3(23) has to be read noscitur a sociis with the previous clauses of Section 3(23).
• Kailash v. Nanhku and Ors. [CITATION]: The Court relied on this judgment to emphasize that procedural laws are meant to serve justice and should not be interpreted in a way that defeats the ends of justice.
• Sarah Mathew v. Institute of Cardio Vascular Diseases and Ors. [CITATION]: The Court cited this Constitution Bench decision to further support the view that procedural laws should be interpreted to advance the cause of justice.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The definition of “person” under Section 3(23) of the Insolvency and Bankruptcy Code, 2016, which includes “any other entity established under a statute.” The Court emphasized that a trade union, being registered under the Trade Unions Act, 1926, falls under this definition.
• The definition of “operational debt” under Section 5(21) of the Code, which includes debts arising from employment. The Court noted that the dues owed to workers for their services constitute an operational debt.
• The provisions of the Trade Unions Act, 1926, particularly Section 15(c) and (d), which allow trade unions to spend their funds on legal proceedings to protect the rights of their members.
• The practical difficulties that would arise if each worker had to file an individual insolvency petition. The Court noted that this would be burdensome and costly for the workers.
• The principle that procedural laws should be interpreted to advance the cause of justice, as highlighted in Kailash v. Nanhku and Ors. and Sarah Mathew v. Institute of Cardio Vascular Diseases and Ors.

Logical Reasoning:

The Court considered and rejected the argument that a trade union does not provide services to the corporate debtor, stating that the trade union represents its members, who provide services. The Court also rejected the argument that each worker’s claim is a separate cause of action, noting that joint petitions are permissible under the rules. The Court emphasized that a literal interpretation of the law that would lead to injustice must be avoided and that procedural laws are meant to serve justice.

The Court quoted from Kailash v. Nanhku and Ors., stating, “All the rules of procedure are the handmaid of justice… the object of prescribing procedure is to advance the cause of justice.” The Court also stated, “We must never forget that procedure is the handmaid of justice, and is meant to serve justice.” and “The humanist rule that procedure should be the handmaid, not the mistress, of legal justice compels consideration of vesting a residuary power in judges to act ex debito justitiae where the tragic sequel otherwise would be wholly inequitable.”

Key Takeaways

• A registered trade union is considered a “person” under Section 3(23) of the Insolvency and Bankruptcy Code, 2016.
• A trade union can file an insolvency petition as an operational creditor on behalf of its members for unpaid dues.
• This decision simplifies the process for workers to recover their dues and reduces the burden of individual filings.
• The judgment emphasizes that procedural laws should be interpreted to advance the cause of justice.

Directions

The Supreme Court set aside the judgment of the NCLAT and remanded the matter back to the NCLAT to decide the appeal on merits expeditiously.

Development of Law

The ratio decidendi of this case is that a trade union can be considered an operational creditor under the Insolvency and Bankruptcy Code, 2016, and can file an insolvency petition on behalf of its members. This decision clarifies the position of trade unions under the Code and provides a streamlined process for workers to recover their dues. This is a development of law as it clarifies the position of trade unions as operational creditors, which was not explicitly clear before this judgment.

Conclusion

The Supreme Court’s judgment in JK Jute Mill Mazdoor Morcha vs. Juggilal Kamlapat Jute Mills Company Ltd. is a significant victory for workers. By recognizing trade unions as operational creditors, the court has provided a more efficient and accessible way for workers to recover their unpaid dues through the insolvency process. This decision underscores the importance of interpreting procedural laws in a manner that promotes justice and protects the rights of workers.