The last rites of sick units

Workers wait long enough to get dues after liquidation proceedings

Winding up an industrial unit is usually followed by a swarm of creditors. Financial institutions have the stamina to withstand the laborious procedures under various statutes. But the lifespan of workers is limited. Their families are crushed under the weight of the institutional creditors. Though various laws give workers primacy in the creditors' queue, it takes them decades to get their dues.

Early this month, the Supreme Court dealt with a case in which the company closed down in 1992, and litigation over the last rites was going on till now. The story has not ended yet. The 50-page judgment ended thus: "The Bombay High Court judgment is set aside. The Debt Recovery Tribunal and the official liquidator shall proceed further now concerning workers' dues as indicated in this judgment."

This case, Bank of Maharashtra vs Pandurang, ascended the judicial ladder to reach the Supreme Court, where it was gathering dust since 2005. Half a dozen statutes had to be trawled and, therefore, a larger bench was necessary. The main question was "whether the claims of workers who claim to be entitled to payment pari passu have to be considered by the official liquidator or by the tribunal".

The Court set 12 rules as guidelines for the future. They were largely in favour of workers - putting them at the head of the creditors' queue. Since the tribunal and the liquidator were reviving the proceedings regarding the workers' dues after more than two decades, the moot question is how many of the workers would be able to enjoy the benefit of the final order if it was in their favour.

This case is not unique. Many such disputes are still at the Board for Industrial and Financial Reconstruction (BIFR) or the tribunal stages, and have a long way to reach the high courts or the Supreme Court. A few weeks ago, a similar dispute over the claim of workers was decided after a decade. The court ruled that their dues under the Industrial Disputes Act and the Payment of Gratuity Act shall have preference over that of the state financial corporation (Karnataka State Finance Corporation vs Industrial Workers' General Union). Though the authorities allowed their claims, the labour commissioner, suspiciously, did not take action for a long time and the corporation sold the assets, leading to appeals up to the Supreme Court.

There are several statutes involved in such disputes. Though the Companies Act grants high priority to workers' claims, Sections 529 and 529A dealing with disbursement of sums from the sale of assets of a failed company are couched in complex clauses, leading to long-winded litigation. Then, there are laws like the Insolvency Act that have to be taken into account. In the constant tug of war between workers and the secured creditors, courts sway. In one case, Jitendra Nath vs Official Liquidator, the judges were divided 2:1. The Jharkhand High Court gave its judgment in favour of the banks and financial institutions. The workers moved the Supreme Court. It allowed their appeal. Hoping to end such disputes, the Court laid down a four-point formula.

Then, there are laws like the Sick Industries Act, under which the BIFR has been set up. While the board tries to revive sick units, payments of dues are usually suspended till a final decision. The law and its implementation are prone to gross misuse of various kinds, and the Act itself was supposed to give place to a new one. But the old law continues to burden the courts and the parties involved. The shrewd ones manipulate the provisions to their advantage.

Earlier judgments of the court have not put an end to the priority issue. In NTC Workers' Union vs P R Ramakrishnan, the court had stated that there was an obligation to see that "no secured or unsecured creditors, including banks or financial institutions, are paid before the workmen's dues are paid". But this view was seen to have been diluted by a later judgment in the case, Andhra Bank vs Official Liquidator. That judgment stated that an earlier judgment in the case of Allahabad Bank vs Canara Bank did not lay down the correct law and its propositions were at best "stray observations". The recent judgments show that there are several loose ends to the problems raised in winding up proceedings, amalgamation and transformation.

It is well known that there is a general dilution of labour laws in recent decades. The old and existing laws have not received a second look for long - either due to other preoccupations like rushing to the well of the Houses, or as a result of malign neglect. The fluctuating judicial decisions regarding workers' dues when an industrial unit closes down add to their woes.