Accumulated welfare benefits of employees and treatment under Resolution Plans

–Megha Mittal

(resolution@vinodkothari.com)

The preamble of the Insolvency and Bankruptcy Code, 2016 (“Code”) enshrines the principle of balance of interests of all stakeholders. A major part of the stakeholders is represented by employees and workmen. Employees and workmen are one of the most significant pillars on which the economy runs, and hence, it becomes important to understand their footing under the Code and ensure that they have necessary safeguards from being put in a helpless position in a situation where the employer gets into insolvency.

It must be noted that section 5(20) read with section 5(21) includes claims in respect of employment under the ambit of “operational debt”, and as such empowers employees to initiate an application for insolvency against its employer, under section 9 of the Code, that is, as an operational creditor. Further, section 53 of the Code accords priority to the workmen dues at par with secured creditors, and next priority is given to employee dues. Hence, while on one hand their position as an applicant is secured, the position of its claims, especially terminal claims remains a rather unexplored sphere.

In this article, the author attempts to place her views on the treatment of claims of employees and workmen, especially terminal benefits in the event of approval of resolution plan.

Who is an “employee” or “workman” under the Code?

While it is not defined in the Code, the term “employee” in general parlance refers to a person who is hired by the employer to perform a particular job or specific labour of the employer, and is entitled to a specific wage or salary and performs the work under the control or regulation set by the employer.

On the other hand, section 3 (36) of the Code states that the term “workmen” shall have the same meaning as provided under section 2 (s) of the Industrial Disputes Act, 1947[1], which states that “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 the purposes of 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 dispute…..”

Hence, the author takes the liberty to say that the terms “employee” and “workmen” are wide enough to include within its scope all persons who have been employed in a company.

Types of claim

For the purpose of the Code, the term ‘workmen dues’ has to be interpreted in terms of Explanation to section 326 of the Companies Act, 2013. As per the definition incorporated therein, the dues would cover wages and salaries, accrued holiday remuneration, workmen compensation, and all sums due from the provident fund, the pension fund, the gratuity fund, or any other fund for the welfare of the workmen, maintained by the company.

Broadly, the claims of employees and workmen may be classified as –

• Service claims arising during the terms of employment in lieu of service offered by the employee, salary, wages, bonus dues etc.;
• Welfare claims, which arise in view of societal considerations, to ensure that the employee’s welfare is ensured even after cessation of employment, e.g. gratuity, leave encashment superannuation dues, provident fund dues, workmen compensation for closure of the entity, etc. Such claims are mostly dependent on the tenure of employment.

Since unpaid salaries/ wages, and other sums accruing during the term of employment are also simultaneously recognized by the company in its books, claims towards such dues can be easily substantiated unlike the other category of claims which are represented only by way of provisions (e.g. provision for gratuity, etc.).

Hence, in a situation where the employer (company) goes into insolvency resolution process, general concerns may arise as to the treatment of such welfare claims under the resolution plans, given that the resolution plan may or may not provide for continuation of the same set of workforce of the corporate debtor. In particular, issue will relate to ‘running of time’ in cases the employees/workmen are retained, as most of the welfare claims depend on ‘continuity in services’ for a particular period of time.

In this article, we shall analyse the position of welfare claims of employees/workmen under different instances during CIRP.

Position of welfare claims

Whether welfare claims be filed by employees/workmen

Upon commencement of CIRP of a company, employees and workmen of the company are required to submit their claims in Form D, under Regulation 9 of the Insolvency and Bankruptcy (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”), in which the employees/ workmen set out their claims, along with proof thereof.

A pertinent question that arises here is whether the claims so submitted can include claims towards welfare claims also?

In light of the fact that a company under CIRP continues as a going-concern, the pre-requisites for claiming benefit claims, i.e. termination of employment, is not met and as such, the employee/ workman might not be in a position to claim the same at this juncture. Although, it must be noted that there is no explicit bar on the employees/ workmen from making such claims.

In some cases, it might be possible that the employees/ workmen file claims only w.r.t. their welfare claims even though no sums pertaining to salary/ wages are actually outstanding.

In any case, the books of the corporate debtor will have details of provisions against different kinds of welfare claims. The information memorandum prepared by the resolution professional shall have the details of such provisions, besides details as to employees/workmen. The resolution applicant, while preparing the resolution plan, should take these details into account.

Treatment of welfare claims under resolution plans

The Code was introduced with an objective to drive a failing company out of insolvency, resolution plan being the wheel. A resolution plan is a proposal that set outs a blueprint for revival of the corporate debtor as a going concern, free of all its past liabilities and dues, which essentially acts as the most significant catalyst/ motivator for resolution applicants.

Section 30 of the Code, read with Regulation 37 of the CIRP Regulations states that a resolution plan must provide for measures for reviving the company out of resolution, and the mode in which payments shall be made towards CIRP cost and creditors. While it is a given assumption that the claims towards dues during the course of employment viz. salary/ wages etc. must form part of the resolution plan, whether or not welfare claims are considered/ ought to be considered under resolution plans remains a question.

As mentioned above, a resolution plan is proposed to absolve the corporate debtor of all its past dues in lieu of the sum offered under the plan. However, what remains a matter of dilemma is whether the term “all” also includes the welfare claims of employees. It is essential to note that the question of welfare claims comes into picture upon termination of employment by way of closure of business altogether and hence, such claims are those which have not been recognised by the corporate debtor in its books as on the date of insolvency commencement.

In the case under consideration, there is no closure/dissolution of business per se; the resolution plan implies that the business of the corporate debtor will be taken over as a going-concern and as such, the question of disbursing welfare claims at the time of approval of resolution plan does not arise, unless the resolution plan, per se, seeks to terminate the services of the employees/workmen.

Scenario 1- Resolution plan proposes to terminate the services of employees/workmen

Such clause shall be deemed as termination, and as such, the employees/ workmen shall have the right to receive their claims towards gratuity, provident fund and other social security schemes. For instance, in the case of State Bank of India vs. Calyx Chemicals and Pharmaceuticals Limited[2], the resolution applicant being consortium of two companies, namely M/s. Khilari Infrastructure Pvt. Ltd. and M/s Topnotch Chemicals Pvt. Ltd explicitly provided for payment of benefit claims to the employees/ workmen of the corporate debtor till date of commencement of CIRP, as the plan provided for termination of employees.

It must be noted that in the case of Calyx Chemicals (supra), the very fact that the resolution plan provides for termination of all employees, leaves no iota of doubt that the employees became eligible to receive benefit claims and as such was provided for.

The above ruling makes it clear that where the resolution plan itself provides for termination of employment, the employee/workmen shall be eligible to receive their benefit claims under the plan itself as soon as the resolution plan is approved.

Scenario 2- Resolution plan proposes to continue the services of the employees/ workmen

Given that most of the welfare claims are statutory, the corporate debtor will have to pay such claims even after resolution. An important question, however, would be – whether, for the purpose of determining eligibility for and the quantum of welfare claims, the tenure of service of the employee shall be counted from the (original) date of joining the corporate debtor or from the date of approval of resolution plan.

It must be noted that approval of a resolution plan implies that the corporate debtor continues, either by way of a change in management, or by any other scheme of arrangement/ compromise etc, the essence in all cases being the same – an arrangement. Hence, it is clear that approval of a resolution plan implies revival and not rebirth of the corporate debtor; and for the workmen/ employees, it is nothing but continuance of employment, the only change being that of management or the name. Thus, it shall not be prudential to say that only because a resolution plan absolves past dues and liabilities, welfare claims can also be washed-out.

A parallel may be drawn with schemes of arrangement, merger etc. under the Companies Act, 2013, under which absorption of employees of the transferor by the transferee is a common practice, wherein the tenure of employment of such employees is calculated w.e.f. their association with the transferor company in the first instance. Drawing analogy, resolution plans, which are essentially nothing but arrangements, must also imbibe the same principle.

Furthermore, section 25FF of the Industrial Disputes Act, 1947, a significant labour law in India, provides that in case of transfer of business, employees are deemed as automatically transferred if:

• the services was uninterrupted;
• the new employment terms are not less favourable; and
• the previous employment term is recognised for the purposes of calculating severance pay on termination of employment.

Owing to the gravitas of impact that a change in employer has on the employee and his rights, despite the aforesaid provisions of the ID Act, the Hon’ble Supreme Court in Sunil Kr. Ghosh v. K. Ram Chandran ((2011) 14 SCC 320)[3] held that no employee/ workman can be forced to work under a new employee by way of an arrangement, operation of law, whatsoever; and as such, held that in the event employees are transferred to a new employer, it is mandatory for the old employer to take the consent of the workmen even if there is no change in the terms and conditions of their service and they are transferred on same or more favourable terms. In the event the workmen do not consent to such transfer, they will have to be given retrenchment compensation as per the provisions of the ID Act.

Again, in Bombay Garage Ltd. v. Industrial Tribunal (1953) 1 Lab LJ 14 (Bombay)[4], the Hon’ble High Court of Bombay held that “an employer cannot deprive his employees of the benefits that have accrued to them by reason of past services merely by transferring his business to another person or to another limited company.” Hence, it is established that rightful claims of workmen/ employees cannot be washed-out.

The rulings, as above, may lead to the following observations –

• (i) the employees of the corporate debtor are entitled to the welfare benefits
• (ii) where plan provides for continuance of employment, the employees must be given the option/ right to opt out of such continued employment
• in case of continued employment, the employee shall be entitled to welfare claims in accordance with tenure of employment (original)

Impact of defaults in contributions by the Corporate Debtor

A major chunk of what constitutes “benefit claims” are of the nature which require regular contributions by the employer and employee both. Considering that the Indian set-up has been infamous for rampant default in contribution by employers, it shall be important to understand consequence of such default upon the incoming resolution applicant/ transferee in other cases.

In such conundrum, one may see section 17B of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952[5] which provides that

“Where an employer, in relation to an establishment, transfers that establishment in whole or in part, by sale, gift, lease or licence or in any other manner whatsoever, the employer and the person to whom the establishment is so transferred shall jointly and severally be liable to pay the contribution and other sums due from the employer under any provision of this Act or the Scheme…” (Emphasis Supplied)

However, the proviso to section 17B provides that the liability of the transferee shall be limited to the value of assets taken over. Going by such provision, it may be presumed that since under the Corporate Debtor, under the Code, is taken over in totality, a harmonious interpretation of the Code and EPF Act would imply that the resolution applicant shall be liable to make good default in contributions by the Corporate Debtor. Hence, default in contribution, if any, shall be informed to the resolution applicant to ensure that the same can be covered under the plan.

The Hon’ble Supreme Court in McLeod Russel India Limited vs. Regional Provident Fund Commissioner, Jalpaiguri and Others [2014(8)Scale 272][6][7] also appreciated the transferees liability to make good the defaults by the old employer, and as such secured the employees from wrong-doings of the employer.

Hence, the author is of the view that the laws in place also have an anti-washout sentiment which must be upheld under the Code, so as to reap optimum benefits from the existing legal framework.

Conclusion

In the said pretext, while a prudential perspective shall to be provide for benefit claims of the employees/ workmen, in absence of any explicit provision under the Code, is left to be a matter of interpretation.

The author is of the view that specific guidelines w.r.t. treatment of benefit claims under resolution plan are required to be laid down. In absence of guiding provisions, regulations in this regard, the employees/ workmen will be put in a helpless and vulnerable state, which shall only make “welfare” claims, a misnomer.

[1] https://labour.gov.in/sites/default/files/THEINDUSTRIALDISPUTES_ACT1947_0.pdf

[2] https://nclt.gov.in/sites/default/files/final-orders-pdf/Calyx%20Chemicals%20%26%20Pharmaceuticals%20Limited%20MA%201346-2018%20in%20CP%201554-2017%20NCLT%20ON%2016.04.2019%20FINAL.pdf

[3] https://indiankanoon.org/doc/126987801/

[4] https://indiankanoon.org/doc/338977/

[5] https://indiankanoon.org/doc/1120899/

[6] https://indiankanoon.org/doc/172573279/

[7] See also:

Assistant Provident Fund  vs M.Girilal (Hon’ble Madras High Court)–https://indiankanoon.org/doc/103256084/

Dalgaon Agro Industries Ltd. vs. Union of Inia (Hon’ble Calcutta High Court)-  https://indiankanoon.org/doc/1452331/