TRADE UNION – AN OPERATIONAL CREDITOR?

[Mr. M. GOVINDARAJAN]

Trade Union

Section 2(h) of the Trade Unions Act, 1926 defines the expression ‘trade union’ as any combination whether temporary or permanent, formed primarily for the purpose of regulating the relations between-

• workmen and employers; or
• workmen and workmen; or
• 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 13 of the Trade Unions Act, 1926 provides that every registered trade union shall be a body corporate by the name under which it is registered, and shall have the 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.

General fund of Trade Union

According to section 15 of the Trade Unions Act, 1926 the general fund of the trade union may be spent for the purpose of the prosecution or defence of any legal proceeding to which the trade union or any member thereof is a party when such prosecution of defence is undertaken for the purpose of securing or protecting any rights of the trade union as such or any rights arising out of the relations of any matter with his employer or with a person whom the member employs. 

Issue

The main issue to be discussed in this article as to whether the trade union can be considered as an operational creditor for the purpose of initiation of corporate insolvency resolution process (‘CIRP’ for short) under the Insolvency Bankruptcy Code, 2016 (‘Code’ for short) on behalf of the workmen registered with the trade union, with reference to the provisions of the Code and decided case law.

Operational creditor

Section 5(20) of the Code defines the expression ‘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.

Operational debt

Section 5(21) of the Code defines the expression ‘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.

CIRP by operational creditor

The provisions of the Code enable an operational creditor to initiate CIRP against a corporate debtor.  Section 8 of the Code provides that-

• An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.
• The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice bring to the notice of the operational creditor-
  • existence of a dispute, if any, or and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
  •  the payment of unpaid operational debt-
    • by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or
    • by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.

CIRP by trade union as operational creditor

Whether a trade union can act as an operational creditor to initiate CIRP against the employer?   The answer is positive.  This will be discussed in detail in the following case law:

In ‘JK Jute Mill Mazdoor Morcha v. Juggilal Kamalapat Jute Mills Company Limited through its Directors and others’ – 2019 (5) TMI 236 - SUPREME COURT, the appellant filed the present appeal against the order of National Company Law Appellate Tribunal dated 12.09.2017.  The jute mill of the corporate debtor, being closed and re-opened several times and finally closed on 07.03.2014.  Proceedings were pending under the Sick Industrial Companies (Special provisions) Act, 1985.  The appellant trade union issued a demand notice to the corporate debtor, the respondent, on behalf of its members workmen under section 8 of the Code for the payment of outstanding dues to the workers and members of the Trade Union on 14.03.2017.  The respondent duly replied to the notice on 31.03.2017 intimating that there is a dispute in this regard and cases were pending before various judicial fora.   The appellant filed an application before the Adjudicating Authority for initiation of CIRP under section 9 of the Code.  The Adjudicating Authority rejected the petition on the contention that the appellant is not covered under the definition of corporate debtor despite the Adjudicating Authority accepted that the dues to the worker members of the appellant were due to be payable.

Against the order of the Adjudicating Authority the appellant filed an appeal before the National Company Law Appellate Tribunal (‘Appellate Tribunal’ for short).    The Appellate Tribunal dismissed the appeal filed by the appeal upholding the order of the Adjudicating Authority.  However it directed the workers to file application individually since they would come under the definition of operational creditor.

Against the order of the Appellate Authority the appellant filed the present appeal before the Supreme Court.  The appellant took the court through the various provisions of the Code and relied on a Bombay High Court Judgment in ‘Sanjay Sadanand Varrier v. Power House India Private Limited’ – 2017 (3) TMI 1190 - BOMBAY HIGH COURT.  The appellant contended that the provisions of the Code would lead to the conclusion that the trade union would come under the definition of ‘operational creditor’ under the Code.

The respondent corporate debtor contended the following before the Supreme Court-

• No services are rendered by a trade union to the corporate debtor to claim any dues.
• As such the trade union would not come under the definition of ‘operational creditor’.
• Each claim of each workman is a separate cause of action in law, and therefore, separate claim would arise for which separate dates are there for each default.
• A collective application under the rubric of a registered trade union would not be maintainable.

The Supreme Court analyzed the provisions of the Trade Unions Act, 1926 in respect of trade union registration, duties and spending of the general funds and also analyzed the provisions for ‘operational creditor’ under the Code.

The Supreme Court observed, on the bare perusal of the Trade Unions Act, 1926, that-

• the trade union is certainly an entity established under the Trade Unions Act, 1926 and therefore would fall under the definition of the term ‘person’ under section 3(23) of the Code;
• Rule 6, Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 also recognizes that the claims may be made not only in individual capacity but also conjointly;
• Section 8 of the Trade Unions Act, 1926 specifies clearly that the trade union can sue and be sued as a body corporate under section 13 of that Act;
• the general fund of the trade union is generally collected from the members workers and that fund can be spent in the legal proceedings by virtue of industrial disputes etc.,

The Supreme Court also went through the judgment relied on by the appellant.  In this case it was held that if the workmen were not paid their wages/and or salary by the company, the workers will certainly be a creditor(s) under section 439(1)(b) of the Companies Act, 1956.  Section 15 of the Trade Unions Act, 1926 clearly mandates the trade union to take up this cause for and on behalf of its members.   Hence after complying with the provisions of section 434 of the Companies Act, 1956, the trade union would certainly be competent to present a winding up petition.  The Supreme Court observed that this judgment equally applied to the present case under the Code.

Further the Supreme Court observed that instead of one consolidated petition by a trade union representing a number of workers, filing individual petitions would be burdensome as each workman thereafter has to pay various costs under CIRP.   Looked at from any angle, there is no doubt that a registered union which is formed for the purpose of regulating the relations between the workmen and the employer can maintain a petition as an operational creditor on behalf of its members.    The Supreme Court allowed the appeal and set aside the order of the Appellate Tribunal.  The Supreme Court remanded the matter to the Appellate Tribunal to decide the appeal on merits.