Employees often get dejected thinking if their company is facing insolvency or getting dissolved then they will just lose employment and won’t have any monetary support. But this is not the case as the employees can actually file a claim for their wages and thus, they do not need to worry about this problem.
Employees often get dejected thinking, if their company is facing insolvency or getting dissolved then they will just lose employment and won’t have any monetary support. But this is not the case, as the employees can actually file a claim for their wages, and thus, they do not need to worry about this problem. However, another issue faced by the employee is that they do not understand the difference between filing the claim in case their company is facing CIRP or is in the liquidation process. In this blog, we will understand how the claim filing process should be differentiated between CIRP and the liquidation process through a few case laws. Case laws have also been used in this blog to bring the judiciary’s view on such contradictions.
Difference between Claims for CIRP and Liquidation Process
- In case the corporate is under Liquidation Process, the workers and workmen have got to file the claim in FORM E i.e. Proof of Claim by a Workman or Employee, Under Regulation 19 of the Insolvency and Bankruptcy (Liquidation Process) Regulations, 2016.
- In case the corporate is under CIRP, the workers and workmen have got to file the claim in FORM D i.e. Proof of Claim by a Workman or Employee, Under Regulation 9 of the Insolvency and Bankruptcy (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
The Necessity for Claims to be Different for CIRP and Liquidation
The claims filed by the workmen and employees have got to be differentiated as within the liquidation process because as per Section 53 of the Insolvency and Bankruptcy Act, 2016 (“IBC”) which provides for the order of priority during which the proceeds from the sale of liquidation assets is to be distributed which is as follows :
- The wages and any unpaid dues owed to employees aside from the workmen for the amount of 12 months preceding the liquidation commencement date rank below the secured creditors and workmen dues.
- The dues of workmen for the amount of 24 months preceding the liquidation commencement date rank equally with debts owed to secured creditors, which relinquish their interest in favor of liquidation estate.
Section 53 of IBC is given below:
“53. Distribution of assets. –
(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the nonce effective, the proceeds from the sale of the liquidation assets shall be distributed within the following order of priority and within such period as could also be specified, namely: –
(a) the insolvency resolution process costs and therefore the liquidation costs paid in full.
(b) the subsequent debts which shall rank equally between and among the following:
(i) Workmen’s dues for the amount of twenty-four months preceding the liquidation commencement date; and
(ii) debts owed to a secured creditor within the event such secured creditor has relinquished security within the manner began in section 52;
(c) wages and any unpaid dues owed to employees aside from workmen for the amount of twelve months preceding the liquidation commencement date;
(d) financial debts owed to unsecured creditors’….”
What is the Issue with Differentiation in Claims?
Primary Issue:
How the claims filed for CIRP and Liquidation Process by employees should be different under IBC 2016?
The word 'employee' isn't defined within the IBC, however, the term ‘workman’ is defined under the provisions of Section 3(36) of the Code and has an equivalent meaning as assigned thereto within the Industrial Disputes Act, 1947.
The Workmen has been defined under Section 2 (s) of the Commercial Disputes Act, 1947. The said definition is quoted below:
“Workman” is a person (including an apprentice) employed in an industry who does any manual, unskilled, skilled, technical, operational, clerical, or supervisory work for hire or reward, whether the terms of employment have been expressed or implied, and for the needs of any proceeding under this Act about an industrial dispute, includes any such one that has been dismissed, discharged, or retrenched about, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led thereto dispute, but doesn't include any such person.
(i) who is subject to the Air Force Act, 1950 (45 of 1950 ), or the Military Act, 1950 (46 of 1950 ), or the Navy Act, 1957 (62 of 1957 ); or
(ii) who is used within the police service or as a politician or other employee of a prison; or
(iii) who is used mainly during a managerial or administrative capacity; or
(iv) who, being employed during a supervisory capacity, draws wages exceeding ten thousand rupees per exercises, either by the character of the duties attached to the office or because of the powers vested in him, functions mainly of a managerial nature”
Other Issues:
Whether the services/business of the company debtor would come under the definition of Section 2(j) of the Commercial Dispute Act 1947?
Before answering the most issue, it's to be checked that whether company/corporate debtor would come under the ambit of Industry as defined under Section 2(j) of Commercial Dispute Act 1947?
The definition of Industry as defined under Section 2(j) of the Commercial Dispute Act 1947 is mentioned below:
“Industry” means any business, trade, undertaking, manufacture, or calling of employers and includes any calling, service, employment, handicraft, or industrial occupation or avocation of workmen.
Analyzing Case Laws to Resolve Issues
The Hon’ble Supreme Court within the Bangalore Water System and Sewerage Board v. R. Rajappa elaborated upon the definition of Industry. The term industry has been given a good scope and therefore the judgment overruled several earlier decisions. The court held any activity is going to be industrial if it fulfills the 'triple test', as under:
- With the cooperation between employers and employees.
- Systematic and arranged activity.
- For the assembly and distribution of products and services, whether or not capital has been invested for this activity.
Conclusion to the other Issue:
After browsing the above-mentioned triple test it's clear that the test laid down by the Hon’ble Supreme Court has got to be applied on the company/corporate debtor to see whether the company/corporate debtor would come under the ambit of Section 2(j) i.e. Industry or not. Just in case it's fulfilled, the company/corporate debtor would be an Industry and hence the definition lay down of workmen under Section 2(s) of Commercial Disputes Act, 1947 would be applied and has got to be checked, which is that the main issue as mentioned below.
Analysis for Main Issue:
The word 'employee ' isn't defined within the IBC, 2016 (“Code”), however, the term ‘workman’ is defined under the provisions of Section 3(36) of the Code and has an equivalent meaning as assigned thereto within the Industrial Disputes Act, 1947.
The Workmen has been defined under Section 2(s) of Commercial Disputes Act, 1947 and therefore the same has been quoted above.
In the matter of Delta Jute & Industries Ltd. Staff Association and Ors. v. State of West Bengal and Ors (Calcutta High Court), it had been held that an individual working in purely managerial and/or supervisory capacity doesn't fall within the definition of workman under Industrial Dispute Act. However, when an individual performs multifarious functions, the character of the most function performed by the person has got to be considered to work out if the person may be a “workman.” The designation of an individual isn't a conclusive thing about determining the character of labor. albeit an individual is designated as a supervisor, the employer has got to prove that his work and his duties were as a supervisor.
The exception to the overall rule would be that the person must be
- Draw quite Rs 10,000 as wages;
- Employed during a supervisory capacity; and
- Primarily perform the functions of managerial nature.
Analysing Section 2(S) Commercial Disputes Act, 1947 i.e. Definition Of Workmen:
- The emphasis is to exclude those persons who are performing mainly managerial work and are employed in supervisory capacity i.e. evaluating the work of their subordinates.
- Managerial work includes powers and duties associated with hiring and firing of the latest employees, the grant of leave to employees, and actual participation within the policy of the business. The managerial functions might not be performed as a consequence of a written contract but could also be implied from the powers vested during a person or the character of his duties.
- The number of working hours isn't considered while determining whether an individual qualifies as a “workman” or not. However, there must exist a master-servant relationship between the worker and his employer.
- An independent contractor can't be termed as a workman. The employer must be in a position to regulate the way of employees work.
- It may be assumed that the key thing generally addressed in determining whether an individual may be a worker is the essence of his/her role and therefore the duties that he/she is completing. Persons holding supervisory authority aren't usually known to be workmen under the Act.
Solutions to Main Issue Based on Case Laws
Employees are defined as:
There are various acts wherein the worker has been defined like under Section 2(f) of the workers' Provident Funds and Miscellaneous Provisions Act, 1952, Section 2 of the Payment of Wages Act, 1936, etc. Since the definition of employee isn't mentioned within the IBC 2016, but the definition of workmen is mentioned, one could infer from this, that the intention of the legislature is, if the employed person doesn’t fall into the ambit of the workmen, then he can be considered as an employee.
Workmen are defined as:
Therefore, to differentiate between the worker and workmen in the present scenario, the specified documents would be either an appointment letter or an offer letter (preferably the offer letter). However, it can be observed above that only the designation of a person isn’t the only important factor but the roles and duties being performed by them are also important. For this, one could ask from the erstwhile director of the company debtor a summary on what duties are being performed by the employed person supported designation.
With a clear understanding of the above terms in legal semantics, an employee will be able to understand the difference between filing a claim for CIRP and the liquidation process under IBC.
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