Trade unions are operational creditors under insolvency code

Trade unions are operational creditors under insolvency code

The Supreme Court, in the recent case of JK Jute Mill Mazdoor Morcha v Juggilal Kamlapat Jute Mills Company Ltd through Its Director & Ors, held that a trade union can file as an operational creditor for the purpose of the Insolvency and Bankruptcy Code, 2016 (IBC).

The court said that a trade union is certainly an entity established under the Trade Unions Act and would, therefore, fall within the definition of “person” under sections 3(23) of the IBC. Therefore, an operational debt, meaning a claim in respect of employment, could certainly be made by a person authorized to make such a claim on behalf of an employee.

The case was pending under the Sick Industrial Companies (Special Provisions) Act, 1985, after a long-drawn saga of the jute mill closing and reopening several times until it closed permanently in 2014. In 2017, the appellant issued a demand notice on behalf of roughly 3000 workers under section 8 of the IBC for outstanding dues of workers.

The National Company Law Tribunal (NCLT) dismissed the case holding that a trade union is not an operational creditor. The order was upheld by the National Company Law Appellate Tribunal (NCLAT), which observed that each worker may file an individual application before the NCLT.

The Supreme Court held that NCLAT’s finding that a trade union would not be an operational creditor as no services are rendered by the trade union to the corporate debtor is not tenable as the trade union represents its members who are workers, to whom the employer may owe dues, which are debts owed for services rendered by each individual employee, who are collectively represented by the trade union.

To state that for each employee there will be a separate cause of action, a separate claim, and a separate date of default ignores that a joint petition could be filed under rule 6 read with form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, with authority from several employees given to one of them to file such petition on behalf of all.

The general fund of the trade union, which represents collections from its members, can certainly be spent on the conduct of disputes involving a member or members thereof or for the prosecution of a legal proceeding to which the trade union is a party, and which is undertaken for the purpose of protecting their rights arising out of the relation of its members with their employer. This would include wages and other sums due from the employer.

The dispute digest is compiled by Bhasin & Co, a corporate law firm based in New Delhi. The authors can be contacted at Readers should not act on the basis of this information without seeking professional legal advice.