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Analyses of Situation of Employees in India’s IBC Regime

By - King Stubb & Kasiva on April 6, 2023

Workers in general belong to lower socio-economic backgrounds, which have resulted in the need for social justice to be taken care of by making the IBC Regime in India, labor-friendly. A lot of people tried to take advantage of the fact that laborers are not aware of their rights and try to tramp over them while opting for strategic bankruptcy. This is why proper legislation had to be drafted to protect the rights of laborers during insolvency and bankruptcy. Insolvency and Bankruptcy Code 2016 has opened up new pathways for employees.

This article aims to explore the situation of employees under the IBC regime of India. Further, the aim is to look into the formal priorities given by the code to the employees. The paper has also given some suggestions as well as possible ways to improve the rights of the employees. The Insolvency and Bankruptcy Code 2016, is a highly significant code and it deals with insolvency and liquidation of Corporate Entities further, it deals with the bankruptcy of individuals and corporate firms. But majorly, while talking about labor rights, Code has tried its best to safeguard those.

Explanation of the Insolvency and Bankruptcy Code (IBC) in India: The underlying problems.

India is a growing economy, where it is important to maintain healthy credit generation and generation of cash flow, which is why when a company starts defaulting on its loans, seeking revival must be the first step[1]. For saving valuable credit from getting stuck into the system, it is important to revive companies.

The insolvency Process in FY 2022 in India resulted in haircuts that were above 90% for 100 out of 500 companies. On October 1, 2022, while speaking at an event for the 6th anniversary of the Insolvency and Bankruptcy Board of India (IBBI); Finance Minister Nirmala Sitharama said that India cannot afford to lose the sheen of its Insolvency and Bankruptcy Law.

In light of the Prime Minister's ambitious goal to make India a developed country by 2047, she emphasized the need to keep the sparkle of IBC as lively as it was when it was introduced in 2016, especially in the light of long delays in Insolvency cases and banks having taken exorbitantly deep haircuts.  She stated that taking hefty haircuts was not the ‘best resolution’ that IBC could offer to the banks.

This is partly because of the priority given to Employees and Operational Creditors before Financial Creditors in the CIRP process. And although this is a great problem, it is emphasized that employee rights must not be compromised for the same, and alternate solutions and deep-rooted problems like Assets losing value because of lengthy procedures must be focused on.

Employee rights and protections in the IBC regime

An employee is someone who is hired to do a specific job in exchange for compensation in form of wages or salary. The amount of wage or salary depends on the nature and amount of work a person is hired for. But it must be noted that their salary is an important part of employee rights as most of the time this is the only way they can bring food to the table for their families.

Employees can claim their dues from the National Company Law Tribunal in a fast-track manner under the IBC Regime of India. The IBC Regime of India makes sure that during Insolvency or Liquidation, by Section 53 of IBC[2], Employees are prioritized to secure their dues. Hence, employee rights, their legal protection, and their position are duly taken care of by the Insolvency and Bankruptcy Code, 2016. The IBC Code takes care of the employee rightsand it makes sure that employee claims in Insolvency proceedings are paid off.

The situation of employees in the IBC regime

During the Covid-19 pandemic; Finance Minister Nirmala Sitharaman announced during her speech that how fiscal limit for initiating CIRP would be increased from 1 lakh to 1 crore[3]. This ended up causing a stir in the Industry Circles while eliciting reactions all over, some lauding and some criticizing. At that time, it felt like a temporary respite. But post covid, this has not changed. But we must look at the fact that because of this increase in the threshold, employees and workmenhave been denied protection under IBC.

Earlier, Section 4 (1)[4] used to state:

  • This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees

Now after the amendment; this aforementioned threshold has been increased to 1 crore Rs. The 2011-12 Report of the International Labour Organization stated that the average wage in India is Rs. 7410 per month[5]. Such a high threshold closes the doors of remedy for many workers.

IBC provisions for employee interests

The definition of the term employee is missing in the Code, but the term 'Workman" has been defined by Section 3 of the Insolvency and Bankruptcy Code 2016. Section 3 (36) of the Insolvency and Bankruptcy Code 2016 states:

(36) "workman" shall have the same meaning as assigned to it in clause (s) of section 2 of the Industrial Disputes Act, 1947;

While Section 2 (s) of the Industrial Disputes Act 1947[6] states:

(s) "workman" means 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, whether the terms of employment be express or implied, and for any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, 9 that dispute, or whose dismissal, discharge or retrenchment has led to that disputebut does not include any such person—

………………. (iii) who is employed mainly in a managerial or administrative capacity; or……...

While deriving the definition of workman from Industrial Disputes Act, IBC goes ahead further and makes distinctions between blue-collar and white-collar workers in Section 53 (1) (c). Although, it is seen under Section 53 itself that IBC puts the interests of blue-collar workers ahead of those that are white-collar workers, which is good as blue-collar workers come from the most vulnerable sections of Society. Although, despite that, when the threshold for default has been increased from one lakh to one crore; the Code is failing to serve these blue-collarworkers with wages of barely 7410 per month on average, as the action cannot be initiated unless the default surpasses the threshold of one crore[7].

Employee claims in insolvency proceedings

The job of a good insolvency regime is to maximize the growth and employment prospects in an economy by differentiating between viable and unviable businesses. The Bankruptcy Reforms Committee pointed out that, in case a business is sustainable; restructuring through insolvency protects premature liquidation; thus, preserving the prospects of future growth, current jobs, and employment opportunities and maintaining the network of suppliers and vendors. And at the same time, when a business is deemed unviable, then fast as well as effective liquidation results in the re-allocation of important resources to more efficient sectors. But in all of these concerns, we must not forget the issue of Employee Rights.

As per the discussion above; the increased threshold of Section 4; not only affects Employee Claims in insolvency proceedings by not but also affects the goal of IBC to allocate resources efficiently in the economy by bringing them out of the bad debt cycle.

Impact of IBC on employee welfare

The preamble of the Insolvency and Bankruptcy Code 2016, has enshrined the principle of balance of the interests of all stakeholders. Although a major part of the stakeholders comprises workmen and employees. Employers and Workmen are important pillars of democracy, on which the economy is running and that is why it had seemed important to put proper safeguards in place while IBC was drafted.

The IBC has done a phenomenal job, as when Section 5 (20) is read, it states:

“(20) "operational creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;”

And further, as per Section 5(21);

“(21) "operational debt" means a claim in respect of the provision of goods or services including employment ……….”

This had allowed employers to file for CIRP for their dues and claims and had been a phenomenal step towards Employee welfare in India under IBC and still is, but the increased default threshold has created problems for employees in this regard.

Conclusion

We see that the workman that is defined under ID Act is the same as the workman in IBC 2016. And that there is a distinction between blue-collar and white-collar workers.

We know that claims related to employment come under the term “operational debt”; and Section 9 states:

“9. (1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process……”

We see that IBC is giving opportunity for employees to present their claims before the NCLAT.

Further, when we probe into Section 53, we find that; keeping the welfare of the employees in mind, it has made sure that they are the first ones to get their dues after liquidation or even during the insolvency proceedings.

But we also saw that, since the default threshold under the IBC was increased to 1 crore, a lot of workmen and employees now, have doors of the courts closed for them unless the default amount in terms of their unpaid dues does not exceed 1 crore, which is a long wait for especially blue-collar workers whose average wage is not even 10,000 as per the last ILO study. Hence, if the code is giving the workers, a chance to initiate CIRP proceedings, it must be made sure that it also removes the barriers that stand in the way, ensuring Employee welfare in India under IBC.

FAQs

What are the employee protections under the IBC regime?

The Code has defined workman as per ID Act and has made a distinction between blue-collar workers and other employees (although the term employee has not been defined in the code; hence we consider all other people than section 2 (s) of the ID Act, who was hired by Corporate Debtor as an employee), and has made sure that when workers are given priority in receiving their claims before anyone else, blue-collar workers get priority above white-collar workers. (Section 53 of IBC)

What happens to employee claims in the event of insolvency?

The insolvency and bankruptcy code came as a boon for the creditors. The code vested powers in the creditors for initiating insolvency and bankruptcy proceedings against the insolvent to bring forth an effective resolution for restoration. The Code focuses on bringing forth financial failure as soon as possible and making sure that asset value is maximized. Entities that are dragged by the creditors for insolvency may either end up finding a resolution from the resolution applicant or the company's management may make the settlement. But, when none of these occur; the company has to face liquidation.
In this whole process, the first step for the workmen and the employees is to file their claims with the Interim Resolution Professional (IRP). Where there are no claims that are provided by employees and in such a case the resolution plan is approved without such claims, then in that case, these debts don’t stand.
Section 30 (2) (b) states that;
(1)   The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan
(b) provides for the repayment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53;

How has IBC impacted employee welfare in India?

Section 53 combined with Section 30 (2) (b) has ensured employee welfare in India under IBC. Section 53 (1) (b) and Section 53 (1) (c) state the following for employees:
(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely-
(b) the following debts which shall rank equally between and among the following:
 (i) workmen's dues for the period of twenty-four months preceding the liquidation commencement date.
(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;”


[1]International Finance Corporation, Saltane V., Chen R., Guzmán MN, Measurable Results! Doing Business Project Encourages Economies to Reform Insolvency Frameworks, January 2013

[2]Insolvency and Bankruptcy Code 2016, Sec. 53, No. 31, Acts of Parliament, 2016 (India)

[3]Ministry of Corporate Affairs, F No. 30/9/2020-Insolvency, https://www.mca.gov.in/Ministry/pdf/Notification_28032020.pdf

[4]Insolvency and Bankruptcy Code 2016, Sec. 4 (1), No. 31, Acts of Parliament, 2016 (India)

[5]International Labor Organization, India Wage Report, https://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---sro-new_delhi/documents/publication/wcms_638305.pdf

[6]The Industrial Disputes Act, 1947, Sec. 2 (s), No. 14, Acts of Parliament, 1947, (India)

[7]Ritesh Kavdia & Shweta Vashishtha, Employees of Distressed Companies, 1-6, https://ibbi.gov.in/uploads/resources/ab649d43a68cc4e97d64189a272da8d2.pdf

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