Trade Union as Operational Creditor: The Conundrum of Purposive Interpretation

[Vishal Hablani is a 4th year B.A.L.L.B. (Hons.) student at WBNUJS, Kolkata]

Recently a judgment was passed by the Supreme Court in JK Jute Mill Mazdoor Morch v. Juggilal Kamlapat Jute Mills Company Ltd., wherein it was observed that a trade union could file an application in the capacity of an operational creditor, on behalf of workmen, for initiating the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016.

To qualify as an ‘operational creditor’ one should have provided an ‘operational debt’ to the corporate debtor. Operational debt has been defined under section 5(21) of the Code. It means “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 ….” The Court took into consideration the phrase “including employment” and observed that if the claim could be in respect of employment, it could be made by the person authorised by the workman, to whom the debt is due. A trade union was qualified as an operational creditor by placing reliance on the definitions of ‘operational creditor’ and ‘person’. ‘Operational Creditor’ has been defined under section 5(20) of the Code. It means “a person to whom an operational debt is owed…” The term ‘person’ has been defined under section 3(23) of the Code, and it includes an entity established under a statute.

The Court observed that since trade union is an entity established under the Trade Unions Act, 1926, it falls within the definitional ambit of term ‘person’ and, thus, could be qualified as an operational creditor. In addition to this, reliance was placed on section 15(c) of the Trade Unions Act, and it was observed that it is one of the objectives of the trade union to spend general funds on any of the legal proceedings in which any member of the trade union is a party, and the purpose sought to be achieved is to protect the rights of the member arising of out of the relations with the employer. Further, the Court took into consideration Part V of Form F, which has been referred to by Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Part V contains a note, which states: “where workmen/employees are operational creditors, the application may be made either in an individual capacity or in a joint capacity by one of them who is duly authorised for the purpose.” It was observed that it is not necessary for the workman to file a claim in an individual capacity, as it can be done conjointly as well. And since the claim can be filed conjointly, no restriction can be placed upon a trade union from filing the claim on behalf of workmen.

The purposive approach of interpretation undertaken by the Court could be appreciated for easing the process for workmen initiating the CIRP against the corporate debtor. This is particularly for the reason that after the admission of claim, an applicant is required to pay the cost of appointment of insolvency resolution professionals, cost of appointment of valuers, etc., which at times could be expensive for a workman, and might act as a deterrent against invoking the required remedy. However, at the same time it appears that the Court has sought to give a different meaning altogether to advance the cause of workmen, which was not contemplated by the drafters of the legislation. This is because the literal interpretation of the contested provisions pave way for a different course of action, instead of limiting or restricting the course of action the Court has arrived at. Usually the purposive interpretation is adopted for widening the ambit of limited meaning arrived at by employing the literal method of interpretation, so as to realise of the purpose for which the statute has been enacted.

The judgment passed by the Court could be questioned by taking into consideration the ground that it is not the trade union that renders services to the corporate debtor, and is thus not entitled to claim any dues regarding the same. This further implies that Trade union would not be covered within the definitional ambit of operational creditor, as was already observed by the National Company Law Tribunal (“NCLT”), and affirmed by the National Company Law Appellate Tribunal (“NCLAT”). In addition, I believe the reliance placed on the Note contained in Form V is misplaced, as conjoint filing of the claim could only be done if all the parties on behalf of whom claim is being filed are operational creditors. It is not merely the authorisation that is required for filing the claim. Authorisation can only be given if the person to whom authorisation is given is also an operational creditor. This could be inferred by taking into consideration that the possibility of filing of claim in a joint capacity by the authorised creditor is followed in Form V by the phrase “where workmen/employees are operational creditors”, which implies that authority to file claim in joint capacity can only be conferred on the workman or employee, if he is an operational creditor. However, the Court interpreted it as simply the case of authorization, and observed that claim can be filed by the trade union on behalf of workman even if the debt is not owed to it. The Court has sought to confer locus standi upon trade unions, even when there exists none, if we go by the literal interpretation. The observation made is further strengthened by taking into consideration the earlier analysis, wherein it was observed that a trade union could not be an operational creditor, as it does not provide any services to the corporate debtor.

One may consider that even though it is one of the objectives of trade unions to spend general funds on the cost of litigation, wherein its members are involved, it is not necessary to confer locus standi upon trade unions for filing the claim. Financial support can be extended even if the trade union is not a party to the dispute, to which the workman member is subjected to. In light of expenditure of general funds, section 15(c) of the Trade Unions Act employs the words – “the prosecution or defence of any legal proceeding to which the Trade Union or any member thereof is a party….” The phrase clearly takes into consideration the possibility of any member being a party to the dispute, even if the trade union itself has not sued, or is being sued. Thus, it can be inferred that general funds can be spent to provide financial assistance to the member workman, without conferring locus standi on the trade union to file the claim for initiating the CIRP.   

Trade Unions are meant to regulate relations between workmen and employer. The Industrial Disputes Act, 1947 facilitates the realisation of this purpose. It lays down the machinery for resolution of workmen disputes by the trade unions, acting on their behalf. There are many forums stated under Chapter II of the Industrial Disputes Act for resolution of workmen disputes; however, NCLT is not one of them. The Code is a specific law, and would thus override the general method of dispute resolution contemplated under the Industrial Disputes Act by trade unions, acting on behalf of workmen, with respect to recovery of dues. No locus standi shall be conferred upon trade unions, if workmen are treated as operational creditors.

Vishal Hablani

About the author

Add comment


Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Top Posts & Pages


Recent Comments


web analytics

Social Media