Tuesday, December 27, 2016

A Careless Concern for Workmen’s Dues: Insolvency Code of 2016

(The following guest post is contributed by Mridul Godha, a third-year student at the National Law University, Jodhpur)

The Joint Committee on the Insolvency and Bankruptcy Code of the Lok Sabha was much concerned about the welfare of workmen. “Workers are the nerve centre of the company. In the event of any company becoming insolvent or bankrupt, the workmen to get affected adversely and, therefore, priority has to be given to their outstanding dues” [sic]. To protect the interest of workmen, the Committee increased the dues to be preferentially paid to workmen under Clauses 53 and 178 of the Insolvency and Bankruptcy Code, 2016 to a period of twenty-four months instead of the earlier twelve months. Further, they placed the sub-clause on workmen’s dues at number one and put the secured creditor’s clause at number two, despite the pari passu status of the two sub-clauses, as a symbolic gesture of the importance given to workmen.

However, it seems like the Committee’s concern for the workmen’s dues was limited to the proceeds from the sale of the liquidation asset of the company in case of insolvency.

To explain this point, it is important to understand the procedure of liquidation proceedings under the Insolvency and Bankruptcy Code of 2016. Section 52 provides a secured creditor with two options in liquidation proceedings: (a) he may relinquish his security interest and receive proceeds from the sale of assets by the liquidator (which takes him to Section 53); or (b) he may realise the security interest on his own by following the procedure in Section 52 itself.

The procedure in the former case is amply clear. Section 53 provides the order of priority which must be followed while making payments from the proceeds received when the liquidator sells the company’s assets. This order is often called the waterfall. The waterfall under Section 53 places the workmen’s dues pari passu with the debts owed to a secured creditor. This is consistent with the waterfall under Section 529A of the 1956 Act and Section 326 of the 2013 Act.

The issue arises under the latter case, i.e., when the secured creditor opts out of the liquidation proceedings to realise the security interest on his own. The procedure for this option is in Section 52 and gives the secured creditor a great deal of freedom to enforce, realise, settle, compromise or deal with the secured assets to cover the debts due to it. While there is an obligation placed upon the secured creditor to identify the secured assets, get them approved by the liquidator and tender any surplus proceeds to the liquidator, there is no obligation to share a portion of the proceeds with the workmen. This is problematic.

First, it does not fit with the general scheme of the Companies Act of 2013 and 1956 wherein the workmen’s dues were in line with the secured creditor’s dues when the company was wound up due to insolvency. Second, it does not align with the rest of the scheme of the Insolvency Code of 2016 itself which prescribes the pari passu status to workmen’s dues under Sections 53 and 178. Third, it allows the secured creditor to “bypass” the need to share liquidation proceeds with workmen which he would otherwise be required to share under the Section 53 procedure.

The 2016 Code came into force on 5 August 2016 and it is still unclear whether the exclusion of workmen’s dues from the waterfall under Section 52 is an oversight by the drafters or not. While some commentators call this an ambiguity,[1] in my view, the clear exclusion of workmen from Section 52 and their inclusion elsewhere means that their claims are not pari passu with those of the secured creditor if the secured creditor exercises his/her right of enforcement under Section 52. In fact, the Joint Committee has discussed the workmen’s dues only in the context of Section 53 in its Report. My view is further buttressed by the fact that on 15 December 2016, the Government notified the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 which also omit mentioning that workmen are to get dues alongside a secured creditor. Had the exclusion of workmen been an oversight, these Regulations would have been utilized by the Government as an opportunity to clarify that the pari passu principle covers both the options available with the secured creditor in liquidation proceedings.

Did the Joint Committee really intend to put their concern for workmen into effect in one option and allow the secured creditors to “bypass” this concern by taking the second option? I do not think so.

[1] http://blogs.economictimes.indiatimes.com/et-commentary/how-bankruptcy-code-treats-secured-creditors/

6 comments:

Anonymous said...

Does not Section 53 start with a Non-obstante clause, which could be argued to imply that even for the matters covered under Section 52, the provisions of Section 53 would prevail.

Mridul Godha said...

The non-obstante clause of Section 53 applies only to proceeds from the sale of liquidation assets when the secured creditor has relinquished his interest under Section 52(1)(a). The problematic aspect mentioned in this post arises from Section 52(1)(b) which applies when the secured creditor realises his security on his own.

Anonymous said...

Thank you Mridul. Whilst undoubtedly, Section 52(1)(a) specifies that where the security has been relinquished, the same would be as per Section 53, the same however, in my mind, does not take away anything from the fact that Section 53 (having a non-obstante clause) provides that the proceeds from the sale of the liquidation assets would have to be distributed in accordance with Section 53. Are we saying that Section 53 overrides all other law, but not Section 52?

Mridul Godha said...

No, I strongly disagree with you. If Section 53's waterfall were to override the waterfall given under Section 52, what would be the point of differentiating between 52(1)(a) and 52(1)(b)? If I were to take your argument to its logical conclusion, then the distribution of proceeds from liquidation assets would happen in exactly the same hierarchy under both the options. What then would be the difference between the secured creditor relinquishing his assets (52(1)(a)) and realizing it on his own (52(1)(b))?

Anonymous said...

http://blogs.economictimes.indiatimes.com/et-commentary/how-bankruptcy-code-treats-secured-creditors/

Anonymous said...

The option given to a secured creditor under S.52 of the code is in the light of it's right to enforce it's security interest under SARFAESI, the Priority of claim under S.53 remains, the secured creditor may choose to enforce his rights against "such security interest" which is owed to him (S.52 of the code). He has now relinquished his right to claim any further dues from the liquidation process on the remaining assetes, isn't it?
The question of workman dues under S.52 wouldn't arise so far as the secured creditor enforces his rights with respect to "such security interest",would it?