akm18 Started The Discussion:
Please find a relevant provisions under Industrial Disputes Act.
Industrial Disputes Act
The object of the Act is to make provisions for investigation and settlement of industrial disputes. However, it makes other provisions in respect of lay off, retrenchment, closure etc. The purpose is to bring the conflicts between employer and employees to an amicable settlement. [The Act is achieving exactly opposite]. The Act provides machinery for settlement of disputes, if dispute cannot be solved through collective bargaining.
‘Industry’ under Industrial Disputes Act – The definition of ‘industry’ is as follows – ‘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. [section 2(j)]. Thus, the definition is very wide. - - The scope is much wider than what is generally understood by the term ‘industry’.
In Bangalore Water Supply & Sewerage Board v. Rajappa (1978) 2 SCC 213 = 36 FLR 266 = 1978(2) SCR 213 = 1978(1) LLJ 349 = AIR 1978 SC 548 (SC 7 member bench 5 v 2 judgment), a very wide interpretation to the term 'industry' was given. It was held that profit motive or a desire to generate income is not necessary. Any systematic activity organized by cooperation between employer and employees for the production and/or distribution of goods and services calculated to satisfy human wants and wishes is ‘industry’.
Thus, many hospitals, educational institutions, universities, charitable institutions and welfare organisations have got covered under the Act. Professions, clubs, cooperatives, research institutes etc. are also covered.
‘Industry Dispute’ and ‘Workman’ – The definition of ‘industrial dispute’ and ‘workman’ is as follows -
Industrial Dispute – Industrial dispute means any dispute or difference between employers and employers, or between employers and workmen, or between workmen and workmen, which is connected with the employment or non-employment or the terms and conditions of employment or with the conditions of labour, of any person. [section 2(k)]. - - Section 2A provides that dismissal, discharge, retrenchment of even a single workman will be ‘industrial dispute’ even if no other workman or any union is a party to the dispute.
Workman – ‘Workman’ means any person (including apprentice) employed in any industry to do any manual, clerical or supervisory work for hire or reward. It includes dismissed, discharged or retrenched person also. However, it does not include (i) Armed Forces i.e. those subject to Air Force Act, Army Act or Navy Act (ii) Police or employees of prison (iii) Employed in mainly managerial or administrative capacity or (iv) person in supervisory capacity drawing wages exceeding Rs 1,600 per month or functions are is mainly of managerial nature. [section 2(x)].
Adjudication of disputes – The Act provides for ‘Works Committee’ in factories employing 100 or more workers. [section 3]. The committee will consist of equal number of representatives of employer and employees. Representatives of employees will be selected in consultation with Registered Trade Union. The Works Committee will first try to settle disputes. If dispute is not solved, it will be referred to ‘Conciliation Officer’. He is appointed by Government. [section 4]. The matter may also be referred to ‘Board of Conciliation’. [section 4]. He will try to arrive at fair and amicable settlement acceptable to both parties. If he is unable to do so, he will send report to appropriate Government. [section 12(4)]. The Government may then refer the industrial dispute to Board of conciliation, Labour Court or Industrial Tribunal. [section 12(5)].
Employer and employees can voluntarily refer the matter to arbitration. [section 10A]. [This provision is very rarely used by employer and workmen. Generally, they prefer the Court route].
If no settlement is arrived at, there is three tier system of adjudication – Labour Court, Industrial Tribunal and National Tribunal. The order made by them is ‘award’.
‘Award’ means an interim or final determination of any industrial dispute or of any question relating thereto by any Labour Court, Industrial Tribunal or National Tribunal. It also includes arbitration award. [section 2(b)]. - - The ‘award’ is required to be published by State/Central Government within 30 days. [section 17]. The award becomes effective 30 days after its publication. [section 17A].
Labour Court – Labour Courts are constituted by State Governments u/s 7. It will be presided over by ‘Presiding Officer’. The Labour Court has powers in respect of * Interpretation of Standing Orders * Violation of Standing Orders * Discharge or dismissal of a workman * Withdrawal of any customary concession or privilege * Illegality or otherwise of a strike or lock-out * Other matters which are not under Industrial Tribunal. [Second Schedule to the Act]
Industrial tribunal – Industrial Tribunal is constituted by State Government u/s 7A. The tribunal will be presided over by ‘Presiding Officer. The Industrial Tribunal has powers in respect of * Wages, including period and mode of payment * Compensatory and other allowances * Hours of work and rest intervals * Leave with wages and holidays * Bonus, profit sharing, provident fund and gratuity * Shift working changes * Classification by grades * Rules of discipline * Ratinlanisation and retrenchment of workmen. [Third Schedule to Act].
National Tribunal – National Tribunal is formed by Central Government for adjudication of industrial disputes of national importance or where industrial establishments situated in more than one States are involved. [section 7B].
Reference of dispute – Appropriate Government can refer any dispute to Board of Conciliation, Court of Enquiry, Labour Court or Industrial Tribunal. [section 10(1)]. - - Appropriate Government means * Central Government in case of railways, docks, IFCI, ESIC, LIC, ONGC, UTI, Airport Authority, industry carried on by or under authority of Central Government * State Government in case of other industrial disputes [section 2(a)].
Court/Tribunal can reduce punishment and order reinstatement - As per section 11A, the Labour Court and Tribunal have wide powers. They can reappraise evidence. They can also see whether the punishment is disproportionate to the gravity of the misconduct proved. If the Court or Tribunal is of the view that the punishment is disproportionate, it can impose lesser punishment or even set aside the termination and order reinstatement. - - If Court orders reinstatement and employer files appeal in Higher Court, the employer is required to pay full wages to the employee during the period of pendency of proceedings with High Court or Supreme Court. However, if the workman was gainfully employed elsewhere, Court can order that payment of such wages is not to be made. [section 17B].
Settlement - ‘Settlement’ means a settlement arrived at in the course of conciliation proceedings. It includes a written agreement between employer and workmen arrived at otherwise than in course of conciliation proceedings (i.e. outside the conciliation proceedings). - - The difference is that settlement arrived at in course of conciliation or an arbitration award or award of labour court or Tribunal binds all parties to industrial dispute including present and future workmen and all parties who were summoned to appear in the proceedings. [section 18(3)]. If settlement is arrived at by mutual agreement, it binds only those who were actually party to agreement. [section 18(1)]. - - The settlement is binding during the period it is in force. Even after that period is over, it continues to be binding, unless a 2 month notice of termination is given by one party to another. [section 19(2]. - - If no period has been specified, settlement is valid for 6 months and an award is valid for one year.
Jurisdiction of civil court qua industrial dispute – Termination of a workman constitutes an Industrial Dispute. Relief sought can be given by forum under Industrial Disputes Act and hence, jurisdiction of civil court is impliedly barred. – Chandrakant Tukaram Nikam v. Municipal Corporation 2002 AIR SCW 710 = 2002(2) SCALE 77 = 2002 LLR 498 = 100 FJR 519 (SC 3 member bench).
Lay off, retrenchment and closure – ’Lay off’ means failure, refusal or inability of employer on account of shortage of coal, power or raw materials or accumulation of stock or break down of machinery or natural calamity; to give employment to a workman on muster roll. - - ‘Lay off’ means not giving employment within two hours after reporting to work. - - Lay off can be for half day also. In such case, worker can be asked to come in second half of the shift. [section 2(kkk)].
A factory employing 50 or more but less than 100 employees on an average per working day can lay off the workmen, who have completed one year of service, by paying compensation equal to 50% of salary (basic plus DA) (section 25C of IDA). - - Employer can offer him alternate employment, if the alternate employment does not call for any special skill or previous experience, and lay off compensation will not be payable if employee refuses to accept the alternate employment (section 25E).
Above provisions of compensation for lay off do not apply to (a) Industrial establishments employing less than 50 workmen (b) seasonal industry (c) Establishments employing 100 or more workmen, as in their case, prior approval of Appropriate Government is necessary u/s 25M(1).
Retrenchment – ‘Retrenchment’ means termination by the employer of service of a workman for any reason, other than as a punishment inflicted by a disciplinary action. However, ‘retrenchment’ does not include voluntary retirement or retirement on reaching age of superannuation or termination on account of non-renewal of contract or termination on account of continued ill-health of a workman. [section 2(oo)].
‘Retrenchment’ means discharge of surplus labour or staff by employer. It is not by way of punishment. The retrenchment should be on basis of ‘last in first out’ basis in respect of each category, i.e. junior-most employee in the category (where there is excess) should be retrenched first. [section 25G]. If employer wants to re-employer persons, first preference should be given to retrenched workmen. [section 25H].
A worker who has completed one year of service can be retrenched by giving one month notice (or paying one month’s salary) plus retrenchment compensation, at the time of retirement, @ 15 days’ average wages for every completed year of service (section 25F).
In Parry’s Employees Union v. Third Industrial Tribunal 2001 LLR 462 (Cal HC), it was held that for purposes of retrenchment compensation under ID Act, the monthly salary should be divided by 30. [Under Gratuity Act, it has to be divided by 26].
If number of workmen are 100 or more, prior permission of Appropriate Government is necessary u/s 25N(1)].
Meaning of ‘continuous service’ – Provisions of compensation for lay off and retrenchment are applicable only to workman who is in ‘continuous service’ for one year. As per section 25B, ‘continuous service’ includes service interrupted by sickness, authorised leave, accident or strike which is not illegal, or lock-out or cessation of work which is not due to fault of workman. -- In Workmen v. Management of American Express AIR 1986 SC 548 = 1985(4) SCC 71, it was held that ‘actually worked’ cannot mean only those days where workman worked with hammer, sickle or pen, but must necessarily comprehend all those days during which he was in the employment of employer and for which has been paid wages either under express of implied contract of service or by compulsion of statute, standing orders etc.
Closure – ‘Closure’ means permanent closing down of a place of employment or part thereof. [section 2(cc)]. - - Thus, closure can be of part of establishment also. - - 60 days notice should be given for closure to Government, if number of persons employed are 50 or more. 60 days notice is not necessary if number of persons employed are less than 50. [section 25FFA]. Compensation has to be given as if the workman is retrenched. [section 25FFF(1)]. - - If number of workmen employed are 100 or more, prior permission of Government is necessary for closure u/s 25-O.
Provisions for large industries for lay off and closure - Large industries employing 100 or more workmen on an average for preceding 12 months cannot lay-off, retrench or close down the undertaking without permission from Government (sections 25M to 25-O of Industrial Disputes Act). Invariably, such permission is almost never given, whatever may be the merits of the case.
Provisions of section 25M in respect of prior permission for lay off have been upheld in Papnasan Labour Union v. Madura Coats AIR 1995 SC 2200. Provisions of section 25N were upheld in Workmen v. Meenakshi Mills Ltd. - (1992) 62 Taxman 560 = 1992(1) SCALE 1248 = 1992 AIR SCW 1378 = (1992) 3 SCC 336 = JT 1992(3) SC 446 = 1992 LLR 481 = AIR 1994 SC 2696 (5 member bench). In this case, it was held that powers to give prior permission are quasi-judicial and hence opportunity of hearing must be given and the order giving permission or refusing permission is subject to judicial review. In Bharatia Electric Steel Co. Ltd. v. State of Haryana 1998 LLR 322 (P&H HC DB), it was observed that operation of section 25-O should be limited to cases where employer is acting arbitrarily or unfairly. If the reasons given by employer for closure are genuine and adequate, permission cannot be refused.
In Orissa Textiles v. State of Orissa 2002 AIR SCW 333 = 2002 LLR 225 = 100 FJR 342 (SC 5 member Constitution Bench), it was held that order u/s 35-O should be in writing with reasons. The order can be reviewed after one year, even for the same reasons.
If Banks refuse to give further loans to run the plant, the employer has to either abandon the plant or devise some dubious ways to surmount the difficulties. One of the major reason why foreign investors are reluctant to come to India in a big way is lack of ‘exit policy’. Some industrial sickness and closures are inevitable in a ‘market oriented economy’. Absence of official exit policy creates problems for honest employers (Dishonest employers devise their own ways).
Notice of change in conditions of service – Section 9A provides that an employer cannot effect any change in the conditions of service applicable to any workman without giving 21 days notice. Such notice is not required if there is settlement or award of Labour Court or Tribunal. As per fourth schedule to the Act, such 21 day notice is required if there is going to be change in wages, wage period, PF contribution, allowances, hours of work and rest intervals, shift timings, new rules of discipline, increase or decrease in number of persons employed in any department or shift.
Strike and lock-out – ‘Strike’ means a cessation of work by a body of persons employed in any industry, acting in combination, or a concerted refusal, or a refusal under a common understanding, of any number of persons who are or have been so employed to continue to work or to accept employment. [section 2(q)].
As per section 23, workman should not go on strike in * during pendency of conciliation proceedings and 7 days thereafter * during pendency of proceedings before Labour Court, Industrial Tribunal or National Tribunal * During period of arbitration proceedings * During period when settlement or award is in operation in respect of the matters covered by award or settlement.
Prohibition of strike and lock out in public utility service - .In case of public utility, employees have to give at least 14 days notice for strike. The notice is valid only if strike commences within 6 weeks. Otherwise, fresh notice is required. - - Similarly, an employer cannot declare lock out without giving 14 days notice. [section 22]. If such notice is received, Government authority should be informed within five days. - - As per section 2(n), ‘Public Utility Service’ includes railways, major port and docks, section of industry on the working of which safety of establishment depends, postal/telegraph/ telephone services, industry supplying power/ light/ water; system of public conservancy or sanitation. [section 2(n)]. In addition, Government can declare industry specified in Schedule I as ‘Public Utility Services’. Such declaration can be made for 6 months at a time [section 2(n)(vi)]. [Industries in first schedule include banking, transport, cement, coal, defence establishments, security press, hospitals and dispensaries, oil fields, mining of certain specified ores, foodstuff, cotton textiles, iron and steel etc].
Lock-out – ‘Lock-out’ means temporary closing or a place of employment or the suspension of work, or the refusal by an employer to continue to employ any number of persons employed by him. [section 2(l)]. - - Workers go on strike, while ‘lock-out’ is to be declared by employer.
Wages during strike period - Wages during strike period are payable only if the strike is both legal and justified - Syndicate Bank v. K Umesh Naik (1994) 5 SCC 572 = 1994 AIR SCW 4496 = 1994 II LLJ 836 = 1994 II LLN 1296 = (1994) 3 SCALE 565 = AIR 1995 SC 319 = 1994 II CLR 753 = 1994 LLR 883 (SC constitution bench) - followed in HMT Ltd. v. HMT Head Office Employees Assn 1997 AIR SCW 153 = AIR 1997 SC 585 = 1997 LLR 758. In HAL Employees Union v. Presiding Officer 1996 LLR 673 (SC), it was held that when lockout by employer is legal and justified, workmen are not entitled to payment of wages for the period during which the lock-out continued.
No work no pay - Principle of ‘No work no pay’ has been accepted by Supreme Court. - Bank of India v. T S Kelawala 1989 LLR 277 (1990 LLR 313 ?) = 1990(SUP) SCALE 140(2) = (1990) 4 SCC 744 (SC) * Syndicate Bank v. K Umesh Naik (1994) 5 SCC 572 = 1994 AIR SCW 4496 = 1994 II LLJ 836 = 1994 II LLN 1296 = AIR 1995 SC 319 = 1994(3) SCALE 565 = 1994 II CLR 753 = 1994 LLR 883 (SC constitution bench). The principle of ‘no work no pay’ is also applicable when a man was eligible for promotion but was not promoted and in fact did not work in the higher post. In such case, he is not eligible to get pay for higher scale - Paluru Ramkrishnaiah v. UOI - (1989) 2 SCR 92 - followed in State of Haryana v. OP Gupta - 1996(1) SCALE 602.
Illegal strike or lock-out – Strike or lock out in violation of sections 22 or 23 and when it is continuing in violation of order issued by Government u/s 10(3) (when matter is referred to Conciliation Board or Tribunal) is illegal. [section 24]. Fine upto Rs 50 per day to workman and Rs 1,000 to employer can be imposed. In addition, he can be imprisoned upto one month. [section 26].
Restrictions on employer pending proceedings – If any conciliation proceedings or proceedings are pending before arbitrator, labour court or Industrial Tribunal, following restrictions are applicable to employer.
No change in conditions of service in matters related to dispute – Employer shall not make any change in condition of service connected to dispute without permission of authority before whom proceedings are pending. [section 33(1)(a)]. Change which is not related to dispute can be made in accordance with standing orders without any permission. [section 33(2)(a)]
No removal of workman in matters related to dispute – Employer shall not discharge, dismiss or punish any workman in matter for any misconduct concerned to dispute, without permission of authority before whom proceedings are pending. [section 33(1)(b)]. Punishment which is not connected to dispute can be made in accordance with standing orders without any permission. However, dismissal or discharge of workman will require approval of the action. Application for approval should be made after action is taken. [section 33(2)(b)]. Prior permission is not necessary. Application for approval is required to be submitted after action is already taken. - -In Jaipur Zila Sahakari Bhoomi Vikas Bank v. Shri Ram Gopal 2002 AIR SCW 249 = 2002 LLR 237 (SC 5 member constitution bench), it was held that if the approval is not granted u/s 33(2)(b) of Industrial Disputes Act, the order of dismissal becomes ineffective from the date it was passed and employee becomes entitled to wages from date of dismissal to date of disapproval of application.
Protected workman - In every establishment, 1% of total workmen are recognised as ‘Protected workman’ u/s 33(3) (but minimum 5 and maximum 100). In case of such workmen, order for his dismissal, discharge or punishment cannot be passed without permission of authority before whom proceedings are pending, whether the issue is related to dispute or not. Such permission is required only during the period proceedings are pending and not after main reference is decided.
Unfair Labour Practices – Section 25T prohibits unfair labour practices by employer or workman or a trade union. If any person commits unfair labour practice, he is punishable with fine upto Rs 1,000 and imprisonment upto 6 months. [section 25U]. Fifth schedule to Act gives list of what are ‘Unfair Labour Practices’. Then major are as follows –
In case of employer - * Interfering in Trade Union activities * Threatening workmen to refrain them from trade union activities * Establish employer sponsored Trade Union * Discourage trade union activities by various means * Discharge or dismiss by way of victimization or falsely implicating workman * Abolish work of regular nature and to give that work to contractors * Mala fide transfer of workman under guise of management policy * Employ badli or casuals and continue them for years * Recruitment workmen during strike which is not illegal * Acts of force and violence * Not implementing settlement or agreement or award * Refuse collective bargaining * Continue illegal lock-out
In case of workmen and trade unions - * Support or instigate illegal strike * Coerce workmen to join or not to join a particular trade union * Threatening or intimidating workmen who do not join strike * Refuse collective bargaining in good faith * Coercive actions including ‘go slow’, ‘gherao’, ‘squatting on work premises after working hours’ etc. * Wilful damage to employer’s property * Acts of force or violence or intimidation.
Industrial Employment (Standing Orders) Act
There are ‘service conditions’ or ‘service rules’ for various employees like Government employees, bank employees, LIC employees etc. The Industrial Employment (Standing Orders) Act, 1947 is designed to provide service rules to workmen.
The object of the Act is to require employers in industrial establishments to formally define conditions of employment under them.
What are ‘Standing Orders’ - ‘Standing Orders’ means rules of conduct for workmen employed in industrial establishments. ‘Standing orders’ means rules relating to matters set out in the schedule to the Act. [section 2(g)]. The schedule to the Act requires that following should be specified in Standing Orders - (a) classification of workmen i.e. temporary, badli, casual, permanent, skilled etc. (b) manner of intimating to workmen working hours, shift working, transfers etc. (c) Holidays (d) Attendance and late coming rules (e) Leave rules (f) Leave eligibility and leave conditions (g) Closing and reopening of sections of industrial establishment (h) termination of employment, suspension, dismissal etc. for misconduct and acts or omissions which constitute misconduct (i) Retirement age (j) Means of redressal of workmen against unfair treatment or wrongful exactions by employer (k) Any other matter that may be prescribed.
Coverage of Act - The Act is applicable to all ‘industrial establishments’ employing 100 or more workmen. [section 1(3)].
‘Industrial establishment’ means (i) an industrial establishment as defined in section 2(i) of Payment of Wages Act (ii) Factory as defined in section 2(m) of Factories Act (iii) Railway (iv) Establishment of contractor who employs workmen for fulfilling contract with owner of an industrial establishment. [section 2(e)].
The term ‘industrial establishment’ includes factory, transport service, construction work, mines, plantation, workshop, building activity, transmission of power etc.
Workman - ‘Workman’ has meaning assigned to it under section 2(s) of Industrial Disputes Act. [section 2(i)]. Thus, ‘workman’ includes skilled, unskilled, manual or clerical work. However, ‘workman’ does not include employees engaged in managerial or administrative capacity or supervisory capacity. ‘Workman’ does not include workers subject to Army Act, Navy Act or Air Force Act or to police or prison services.
Approval of Standing Orders - Every employer covered under the Act has to prepare ‘Standing Orders’, covering the matters required in the ‘Standing Orders’. Five copies of these should be sent to Certifying Officer for approval. [section 3(1)]. ‘Certifying Officer’ means Labour Commissioner and any officer appointed by Government to be ‘Certifying Officer’. [section 2(c)].
The Certifying Officer will inform the Union and workmen and hear their objections. After that, he will certify the ‘Standing Orders’ for the industrial establishment. [section 5]. Till standing orders are certified, ‘Model Standing Order’ prepared by Government will automatically apply. [section12A].
Standing order should be displayed in English and local language on special notice boards at or near entrance of the establishment. [section 9]. Modifications of Standing Order shall be done by following similar procedure. [section 10].
Once the ‘Standing Orders’ are certified, they supersede any term and condition of employment, contained in the appointment letter. If there is inconsistency between ‘Standing Order’ and ‘Appointment Letter’, the provisions of ‘Standing Order’ prevail - Eicher Goodearth Ltd. v. R K Soni - (1993) XXIV LLR 524 = 1993 LLR 524 (Raj HC) * Printers House v. State of Haryana 1982 II LLN 327.
Standing orders are binding on employer and employee. These are statutorily imposed conditions of service. However, they are not statutory provisions themselves (meaning that the ‘Standing Orders’ even when approved, do not become ‘law’ in the sense in which Rules and Notifications issued under delegated legislation become after they are published as prescribed.) - Rajasthan SRTC v. Krishna Kant - AIR 1995 SC 1715 = (1995) 5 SCC 75 = 71 FLR 211 = 87 FJR 204 = 1995 AIR SCW 2683 = 1995 LLR 481 (SC).
Model Standing Orders - The Act has prescribed Model Standing Orders. These are automatically applicable till employer prepares his own ‘Standing Orders’ and these are approved by ‘Certifying Officer’. [section 12A].
Disciplinary Action - The most important use of ‘Standing Orders’ is in case of disciplinary action. A workman can be punished only if the act committed by him is a ‘misconduct’ as defined under the ‘Standing Orders’. The ‘Model Standing Orders’ contain such acts like insubordination, disobedience, fraud, dishonesty, damage to employer’s property, taking bribe, habitual absence or habitual late attendance, riotous behaviour, habitual neglect of work, strike in contravention of rules etc. as misconducts. The ‘Certified Standing Orders’ may cover other acts as ‘misconduct’, if approved by ‘Certifying Officer’.
Subsistence Allowance – Where a workman is suspended by employer pending investigation or enquiry into complaints or charges of misconduct against him, the workman shall be paid subsistence allowance equal to 50% of wages for first 90 days of suspension and 75% of wages for remaining period till completion of disciplinary proceedings. [section 10A(1)]. - - ‘Wages’ has same meaning as under section 2(rr) of Industrial Disputes Act. [section 2(i)].
Arun K Mishra[/b]
I am an HR persons having experience of morethan seven years my qualifications are BBA MLM PGDHRM let me know what are the legal proceeding should be adopted by a HR while closing down an establishment.
Restructuring and Liquidation1. Businesses need efficient and speedy procedures for exit as much as for start-up. World over, insolvency procedures help entrepreneurs close down unviable businesses and start up new ones. This ensures that the human and economic resources of a country are continuously rechannelised to efficient use thereby increasing the overall productivity of the economy. 2. However, as businesses grow in size there is also a danger that poor management, bad business judgement or plain fraud may result in a business becoming unviable. In such cases it is possible for the productivity of the enterprise to be restored at a low cost and without attendant trauma for the stakeholders by providing more capable managerial talent an opportunity to run it. In fact recent times have shown possibility of growth by entrepreneurs, some of them Indian, who have become dominant business entities internationally by achieving turnaround of sick firms and revitalization of dormant capacities. 3. The Indian system provides neither an opportunity for speedy and effective rehabilitation nor for an efficient exit. The process for rehabilitation, regulated by the Sick Industrial Companies (Special Provisions) Act 1985 through the institutional structure of BIFR is amenable to delays and does not provide a balanced or effective framework for all stakeholders. The process of liquidation and winding up is costly, inordinately lengthy and results in almost complete erosion of asset value. 4. The Committee noted that a beginning towards reform was made with the enactment of Companies (Second Amendment) Act, 2002, which in addition to significant changes in the restructuring and liquidation provisions provided for the setting up of a new institutional structure in the form of the National Company Law Tribunal (NCLT)/Tribunal and its Appellate Body, the National Company Law Appellate Tribunal (NCLAT). However, the process is not complete and a lot yet needs to be done. The constitution of the Tribunal is facing legal challenge and many parts of the enactment have not yet been notified. 5. Globally, reform in insolvency processes is recognized as an important means of improving competitiveness of any economy. It is particularly so in Indian context. Under the supervision of the United Nations Commission on International Trade Law (UNCITRAL), a Legislative Guide on Insolvency Law and Model Law on Cross Border Insolvency have been formulated and circulated to all countries. Similar initiatives have been taken up by other multilateral institutions. The Committee has had the benefit of consideration of such initiatives. Occasionally, a doubt is expressed as to whether developing countries should consider incorporation of such legal frameworks. The Committee feel that the Indian economy is now at a stage where articulation of a comprehensive framework that addresses insolvency issues would make a material difference to the productivity of the economy. The Committee is of the view that a review of the system for addressing corporate insolvency in the Indian context is urgently called for and recommends the following to the policy planners in India. Insolvency Law
6.1 An effective insolvency system is an important element of financial system stability. It is, therefore, essential to provide for a sound framework for restructuring and rehabilitation of companies along with a framework for winding up and liquidation. The framework should seek to preserve estate and maximize the value of assets; recognize inter se rights of creditors and provide equal treatment of similar creditors while dealing with small creditors equitably. It should enable a timely and efficient resolution of insolvency and establish a framework for cross border insolvency. The present framework does not provide a balanced resolution of various stakeholder issues, is time consuming and inefficient. 6.2 Corporate insolvency should be addressed in the Company Law. There is no need of a separate Insolvency Law for the present. Liquidation and Rehabilitation
7.1 The Insolvency law should strike a balance between rehabilitation and liquidation. It should provide an opportunity for genuine effort to explore restructuring/ rehabilitation of potentially viable businesses with consensus of stake holders reasonably arrived at. Where revival / rehabilitation is demonstrated as not being feasible, winding up should be resorted to. 7.2 Where circumstances justify, the process should allow for easy conversion of proceedings from one procedure to another. This will provide opportunity to businesses in liquidation to turnaround wherever possible. Similarly, conversion to liquidation might be appropriate even after a rehabilitation plan has been approved if such a plan was procured by fraud or the plan can no longer be implemented. 7.3 The Committee noted that a recent survey by World Bank (Doing business in 2005 – India Regional Profile) has pointed out that it took 10 years on an average to wind up / liquidate a company in India as compared to 1 to 6 years in other countries. Such lengthy time-frames are detrimental to the interest of all stakeholders. The process should be time-bound, aimed at maximizing the chances of preserving value for the stakeholders as well as the economy as a whole. 7.4 The Insolvency process should be overseen by a neutral forum in a non-intrusive manner. Such a single, independent Statutory forum, should have the capacity and expertise to deal with the specialized commercial and technical characteristics of the Insolvency Law and the process; make an assessment and decide the course of action (rehabilitation or liquidation) that may need to be adopted at the earliest possible stage while balancing the interests of all stakeholders equitably. The Committee noted that the Companies (Second Amendment) Act, 2002 had brought about significant changes in the provisions dealing with rehabilitation/winding up / liquidation of companies in the present Act and had also proposed that an institutional structure for the purpose be set up in the form of NCLT/NCLAT. This Institutional Structure, which would provide the desirable single independent forum is yet to be constituted. The Committee hope that this is done speedily and are of the view that its establishment would provide a major initiative for the reform of the insolvency system in the country. Focus on Rehabilitation
8. Law should provide a reasonable opportunity for rehabilitation of a business before a decision is taken to liquidate it so that it can be restored to productivity and become competitive. However this opportunity should incentivize genuine effort. Special care should be taken to ensure that this is not misused by any stakeholder to delay proceedings, strip asset value or otherwise work to the detriment of the business and other stakeholders. Time bound proceedings
9.1 A definite and predictable time frame should be provided for attempt at rehabilitation and for the liquidation process. The existing time frame in India is too long and keeps precious assets locked in proceedings for many years, destroying their value in the process. 9.2 A period of one year should be adequate for rehabilitation process from commencement of the process till sanction of a plan. There should also be a definite time period within which proceedings may commence from the date of filing of the application for rehabilitation. 9.3 The process should limit the possibility of appeals at every stage so that the process is not delayed through frivolous appeals or stalling tactics. 9.4 On an average a time frame of two years should be feasible for the liquidation process to be completed. 9.5 A fixed time period should be provided for each stage of rehabilitation and liquidation process. Extension at every stage should be rare and allowed only in exceptional circumstances and in any case without effecting the outer time limit provided for the process. Applicability and Accessibility
10.1 The Insolvency process should apply to all enterprises or corporate entities including small and medium enterprises except banks, financial institutions and insurance companies. 10.2 The concept of sick industrial company should be replaced by insolvent company or enterprise to bring it in harmony with the principles of the proposed Insolvency Law. 10.3 Both Debtors and Creditors should have fair access to the insolvency system upon showing proof of default. 10.4 Rather than erosion of net worth principle, test should prescribe default in payment of matured debt on demand (liquidity test) within a prescribed period. The balance sheet test tends to be more costly as it generally requires an expert evaluation to review books, records and financial data to determine the enterprise’s fair market value. While facilitating the invocation of process at an early stage, this would discourage manipulation of accounts to create erosion in net-worth. The opportunity of restructuring should be available before the asset is rendered non-performing. 10.5 Debtors seeking recourse to rehabilitation should be allowed to approach the Tribunal only with a draft scheme for rehabilitation for the consideration of Tribunal. This would bring forward genuine efforts of rehabilitation and provide an opportunity for assessing the viability of the business at the earliest to decide the appropriate course of action to be adopted. 10.6 Creditors being at least 3/4th in value should also be liable to file a scheme for rehabilitation. 10.7 If creditors approach for winding up, opportunity should be given to debtor to file a scheme if such an opportunity is sought. The process should enable consultation of scheme with the creditors and converting the liquidation proceedings into restructuring proceedings, if the Tribunal is of the opinion that there are fair chances that the company may revive. 10.8 The law should require the provision of relevant information about the Debtor to be made available for effective consideration of the scheme. The law should enable obtaining by the Tribunal, independent comment and analysis of that information by experts. Duties and prohibitions on admission
11.1 On admission of application for rehabilitation, the law should impose certain duties and prohibitions to apply to debtors and creditors for an effective resolution of Insolvency and balancing the stakeholders’ interests in the process. 11.2 There should be an automatic prohibition on Debtors’ rights to undertake transfer, sale or disposition of assets or parts of the business. Permission may be granted only to the extent necessary to operate the business, with the approval of the Tribunal. This would protect the assets, build confidence of secured creditors and encourage them to participate in the insolvency process. Summary Dismissal of proceedings
12. The law should vest with the Tribunal the power to summarily dismiss the proceedings for not meeting commencement standards with cost / sanction. Once rejected no further reference should be maintainable. Filing of repeated references by debtor in spite of earlier rejection has led to abuse of the process. Moratorium and suspension of proceedings
13.1 A limited standstill period is essential to provide an opportunity to genuine business to explore re-structuring. 13.2 The law should, therefore, impose a prohibition on the unauthorized disposition of the Debtors’ assets and suspension of actions by Creditors to enforce their rights or remedies against the Debtor on the assets for a limited prescribed period to preserve and protect assets besides maximizing its value. This will facilitate unobstructed conduct of Insolvency process by the Tribunal without having to deal with complexities of multiple creditor actions in Debt Recovery Tribunals. This will also encourage creditors to participate in the Insolvency process besides achieving fair and orderly administration and upholding fundamental objectives and policy of the Insolvency Law. 13.3 Rather than being automatic, the prohibitions should be on Tribunal’s order on a specific application with approval of majority creditors in value. The Tribunal should have adequate power to lift or modify the prohibition in case the circumstances so warrant. 13.4 The law should provide for treatment of unperformed contracts. Where the contracts provide for automatic termination on filing of insolvency, its enforcement should be stayed on commencement of insolvency. 13.5 There should be enabling provisions to interfere with the contractual obligations which are not fulfilled completely. Such interference or overriding powers would assist in achieving the objectives of the insolvency process. The power is necessary to facilitate taking appropriate business and other decisions including those directed at containing rise in liabilities and enhancing value of assets. 13.6 Exceptions of such powers are also essential to be insured in the law where there is a compelling, commercial, public or social interest in upholding the contractual rights of the counter party to the contract. Governance/Management (Rehabilitation proceedings)
14.1 In regard to the potentially insolvent companies, it is essential that self-regulatory measures be required to be taken by a company to protect the interests of various stakeholders, preserve assets and adopt such other measures as may be necessary to contain insolvency. This would enable Whistle Blowing on impending insolvency. The Committee is of the view that a meeting of the secured creditors should be convened by the debtor to consider a rehabilitation plan when the Company has failed to repay its due debt without waiting for creditors to act on default or filing of application for rehabilitation. There should be a provision that when accumulated losses in any financial year are equal to 25% or more of its average net worth during last two financial years and there is a default in making payments to the creditors, the companies should convene a General Meeting of shareholders without any delay to consider such a situation. 14.2 There should also be a greater role and responsibility for parties most affected by the insolvency once the proceedings aimed at addressing it are initiated. The key stakeholders should be incentivized to actively participate in the process. They should be consulted in the decision making. 14.3 While the law should permit use and disposal of assets in ordinary course of business, capacity for management of the affairs of the business by debtors should be put to test in consultation with secured creditors. Otherwise creditors should be provided rights of substitution of debtors. Assets should in either case be subjected to supervision or management by impartial, independent, effective and capable Administrator. This would enhance the confidence of the secured creditors in the process while preserving and protecting the assets. 14.4 Where circumstance justify such as failure to protect assets or deal with them in prejudicial manner, in the opinion of the Tribunal or majority creditors, full control of assets may be allowed to pass to administrator nominated by creditors through exercise of right of substitution. 14.5 In furtherance of achieving a fair, independent and balanced resolution of stakeholders interest, the role of Operating Agency envisaged under the existing law should be performed by on independent Administrator or such other qualified professional as may be prescribed. Currently banks and financial institutions are appointed as Operating Agency. Engagement of experts will also enhance the efficiency of process. The banks and financial institutions should participate in the operation through committee of creditors. Governance/Management in liquidation
15.1 The management of the going concern should be replaced by a qualified Administrator appointed by the Tribunal in consultation with the secured creditors with board authority to administer the estate in the interest of all stake holders. An independent Administrator would be able to provide the best treatment to the assets and preserve its value and take other necessary decisions in the best interest of the business. 15.2 The law should provide for Administrator to be able to prepare and file a scheme for turnaround of the company, if the business is viable in which case the creditors and ex-management should have an opportunity to comment on the scheme. 15.3 The Administrator should have the same obligation as the management to secured creditors with right of information and supervision. Governance : Secured Creditors and Creditors Committee
16.1 Secured creditors interests should be safeguarded by establishing a Committee of secured creditors. The Committee should enable creditors to actively participate in the insolvency process, monitor the process, and serve as a conduit for processing and distributing relevant information to other creditors and organizing creditors to decide on critical issues. This would provide a platform to all kinds of secured creditors to discuss the divergent views and build consensus and agreement on the issues that arise for consideration and decision. The process would also assist in expediting the insolvency process. 16.2 Law should provide for major decisions by general creditors assembly. There should be rules for appointment of members in the Creditors Committee and to determine the Committee’s membership, quorum and voting rules, powers and conduct meetings. 16.3 The Law should enable appointment of professional experts and specialists by Creditor Committee to advise them on various technical and legal issues. 16.4 Directors of a debtor corporation should be required to attend meetings of Creditors Committee so that the decisions can be made on a well informed basis. Governance : Unsecured Creditors
17.1 Unsecured creditors have no representation in the restructuring process. Lack of information leads to suspense and anxiety on their part resulting in multiple legal and other proceedings. This impacts the overall efficiency of the rehabilitation process. 17.2 A separate Committee to represent other categories of creditors and unsecured creditors and stakeholders could be formed with limited right to represent and hearing without right to vote on the plan and other decisions. Separate and independent rules for appointment of the creditors (other than secured) committee may be made with details of procedures for membership, quorum and voting rules, powers etc. 17.3 Enabling provisions would be required to coordinate meetings of unsecured and secured creditors to take decisions to move claims. 17.4 The law should provide for mechanism to recognize and record claims of unsecured creditors in preparation of the rehabilitation plan. Administration of Insolvency : Administrator and Liquidator
18.1 A panel of Administrators and Liquidators should be prepared and maintained by an independent body out of professionals with appropriate experience and knowledge of insolvency practice. The panel should be of individual advocates, accountants, company secretaries, costs and works accountants and other experts rather than the firms so that the independence and accountability of individuals may be determined. The panel should be prepared in a fair and transparent manner. This would also ensure that appropriate professionals who are appointed on the strength of their knowledge and experience provide the service rather than the other partners or colleagues in their firms. The law should however provide power to the Tribunal to make exceptions to the rule and appoint firms. 18.2 The Tribunal should have powers to appoint Administrator and Liquidators out of the panel maintained by the independent body and Official Liquidators from panel of officials made available by the Government. Identification, Collection, Preservation, Disposition of Debtor assets and Property
19.1 Law should provide a framework that incentivizes maximization of estate value. 19.2 The law should identify the assets that constitute the insolvency estate including assets of debtor (including those subject to security interest) and third party owned assets (such as leased and hypothecated assets) wherever located and provide for collection of assets forming part of insolvency estate by Administrator/ Liquidator. In the cases of rehabilitation, leased assets should form part of insolvency estate. 19.3 The law should provide for avoidance or cancellation of pre-bankruptcy fraudulent and preferential transactions, completed when the enterprise was insolvent or that resulted in its insolvency. 19.4 The suspect period prior to insolvency, during which the payments are presumed to be preferential and may be set aside, should be short to avoid disrupting normal commercial and credit relations. The period may be longer in case of gifts and related party transactions. Appropriate disclosure norms should be developed for this purpose. 19.5 The law should prescribe a flexible but transparent system for disposal of assets efficiently and at maximum values including sale by private treaty. 19.6 Where necessary, the law may allow for sales free and clear of security interests, charges or other encumbrances, subject to preserving the priority of interests in the proceeds from assets disposal. 19.7 The sale of assets should be carried out by the Administrator/ Liquidator under the supervision of court. Valuation of debtor estate
20.1 The Tribunal should appoint accountancy experts / professionals to ensure that true and fair picture of accounts of the debtor enterprise and financial assets is available. 20.2 Independent experts may be appointed as valuers for valuation of assets of a business concern under liquidation. 20.3 Debtors and Creditors should have the power to scrutinize and challenge the value before final order of fixing value. 20.4 There should be powers for annulment in appropriate cases with recovery/disgorgement. Claims Resolution : Treatment of Stake holders Rights and priorities on liquidation
21.1 The law should provide for prompt and interim distribution of claims to creditors in line with priorities determined by law. 21.2 Rights and priorities of creditors established prior to insolvency under commercial laws should be upheld to preserve the legitimate expectations of creditors and encourage greater predictability in commercial relationship. 21.3 The status of secured creditors should be pari passu with employees in respect of their claims after payment of claims related to costs and expenses of administration of liquidation. Remaining proceeds should be distributed, pari passu with other creditors, unless there are compelling reasons to justify giving preferential status to a particular debt. 21.4 The number of priority classes should be kept to minimum so that rights and expectations of classes created prior to insolvency are not diluted. 21.5 Public interests, Government claims should not get precedence over private rights in the Insolvency process. Assets are created in the enterprise by the secured creditors who have a prior right over the proceeds when assets are liquidated. The dues of others arise due to the activity these assets create and should be collected when the business is running. Plans : Formulation, Consideration, Voting and Approval
22.1 The law should not prescribe nature of plan except in terms of fundamental requirements and to prevent commercial abuse. This will provide the desired flexibility in preparation of the plan. The Tribunal should have the power to obtain independent comments on the plan. 22.2 Revival/rehabilitation plan should be approved by majority of secured creditors (75%) to bind all creditors. This would ensure that a small creditor is not able to stall the entire process even though the majority of the creditors are in favour of the plan. 22.3 In case no plan is approved, the business concern should automatically be liquidated. 22.4 There should also be enabling provisions to establish a mechanism for filing a negotiated plan for approval by Tribunal by the same majority class of creditors along with disclosure statements etc. and with supporting evidence of approval by majority. Scheme/Plan : Binding Effect, Implementation and Amendment, Discharge and Conclusion
23.1 There should be provision for monitoring and effective implementation of the scheme/ plan. 23.2 Provision should also be made to amend the plan in the interest of rehabilitation if an amendment becomes necessary due to change in circumstances and developments that effect the successful implementation of the plan. 23.3 There should be a provision in law for termination of the plan and to liquidate the company. 23.4 The law should provide for a discharge or alternation of debts and claims that have been discharged or otherwise altered under the plan. Where approval of the plan has been procured by fraud, the plan should be subject to challenge, reconsidered or set aside. 23.5 Reorganization proceedings should conclude when plan is fully implemented or at an earlier date to be determined by the Tribunal. 23.6 Liquidation proceedings should conclude following final distribution or determination that no distribution can be made. The Tribunal (National Company Law Tribunal)(NCLT)
24.1 As per Companies (Second Amendment) Act, 2002, the National Company Law Tribunal (NCLT) is envisaged as the forum to address Insolvency issues. It is hoped that this forum is constituted speedily. The Committee however takes this opportunity to focus on some important aspects widely considered important for proper functioning of such a body. 24.2 The Insolvency Tribunal should have a general, non-intrusive and supervisory role in the rehabilitation and liquidation process. Greater intervention of the Tribunal is required only to resolve disputes by adopting a fast track approach. The Tribunal should adopt a commercial approach to dispute resolution observing the established legal principles of fairness in the process. 24.3 The Tribunal should set standards of high quality and be able to meet requisite level of public expectations of fairness, impartiality, transparency and accountability. Selection of President and Members of the Tribunal should be such so as to enable a wide mix of expertise for conduct of its work. 24.4 The Tribunal will require specialized expertise to address the issues referred to it. The law should prescribe an adequate qualification criterion for appointment to the Tribunal as well as training and continuing education for judges/members. 24.5 Rules should be made in such way that ensure ready access to court records, court hearings, debtors and financial data and other public information. 24.6 Standards to measure the competence, performance and services of the Tribunal should be framed and adopted so that proper evaluation is done and further improvements can be suggested. 24.7 The Tribunal should have clear authority and effective methods of enforcing its judgments. It should have adequate powers to deal with illegal activity or abusive conduct. Insolvency Practitioners
25. Currently, the law does not support effective participation of professionals and experts in the Insolvency process. There is no shortage of quality professionals in India. Disciplines of chartered accountancy, company secretaryship, cost and works accountancy, law etc can act as feeder streams, providing high quality professionals for this new activity. In fact, private professionals can play a meaningful role in all aspects of process. Insolvency practice can also open up a new field of activity for service professionals while improving the quality of intervention at all levels during rehabilitation/winding up/liquidation proceedings. Law should encourage and recognize the concept of Insolvency Practitioners (Administrators, Liquidators, Turnaround Specialists, Valuers etc). Greater responsibility and authority should be given to Insolvency Practitioners under the supervision of the Tribunal to maximize resource use and application of skills. Regulation, Supervision and Costs
26. The law should create the mechanism for debtor to meet the cost of rehabilitation and liquidation. In liquidation process, the law should facilitate quick disposal of assets to meet the balance cost of the insolvency. Efforts should be made to generate funds to meet the cost of restructuring by disposal of surplus assets, if any of the company. A view was expressed by the representatives of some banks/financial institutions that creditors should not be required to supplement the expense of rehabilitation / liquidation. The Committee examined this view and felt that businesses that were viable and could be rehabilitated should be provided a fair opportunity for the purpose. This may require all stakeholders including creditors to make sacrifices. In the interest of avoiding business failure and consequent distress, wherever possible, this would be well worth the effort. Besides, under the proposed framework, rehabilitation effort would be taken up in consultation with creditors in a manner that is not open ended. Internationally, banks have actively participated and have facilitated business rehabilitation. It was time that a comprehensive and a balanced approach was adopted in India as well. The banks/financial institutions should, therefore, approach the new framework, which was consistent with international practices in a positive manner and participate meaningfully in such exercises. The Insolvency Fund
27.1 The Committee noted that consequent to the Companies (Second Amendment) Act, 2002, a provision has been made for levy of rehabilitation cess by the Government, to be charged on the basis of turnover of a company. All companies would be subject to such cess which would be utilized for rehabilitation of sick companies. The Committee was of the view that such a modality resulted in efficient firms being penalized to the benefit of inefficient ones and as such was undesirable. Besides, the structure resulted on a tax on turnover rather than on income which tended to dis-incentivize growth. The Committee, therefore, recommended repeal of this provision. 27.2 The Committee, however, took into account the concerns associated with protection of vulnerable stakeholders who suffer the most during insolvency. Besides, the cost of the insolvency process would also have to be met. Therefore, the Committee took the view that an Insolvency Fund may be set up to meet the costs of the insolvency process. Companies may contribute to the Fund on their own option. The corpus of the Fund may also be enhanced by grants from the Government. Government should consider providing incentives, including tax incentives to encourage contributions by companies to such a Fund. 27.3 Contributions by companies to such a Fund should entitle them to certain drawing rights in the event of an insolvency. A company under restructuring and liquidation should be able to draw out of the Fund only in proportion of the contribution made by it to the Fund in the pre-restructuring and pre-liquidation period. This would enable high risk companies to decide on the optimum contribution to be made to the fund. 27.4 The application of the Fund to the insolvency/rehabilitation process should be subject to the orders of the Tribunal. The Tribunal may, in suitable circumstances allow an over draft from the Fund in the rehabilitation process, in which case the overdraft amount should be shown against the credit of the company and provision of its repayment should be made in the rehabilitation scheme. 27.5 Insolvency Fund should be credited to a separate account and not to the Consolidated Fund of India. The Fund should be managed by an independent Administrator appointed by the Government. International considerations
28.1 Insolvency laws should provide for rules of jurisdiction, recognition of foreign judgments, co-operation and assistance among courts in different countries and choice of Law. Many countries have already adopted the UNCITRAL Model Law on Cross Border Insolvency with or without modifications. Adoption of the Model Law by India may also be considered with suitable modifications keeping pace with its adoption by countries having significant trade / investment linkages with India. 28.2 The law should contain enabling provisions to deal with issues concerning treaties and arrangements entered into with different countries by India, present and future. India has developed commercial relationship with new countries in recent years and there would more new business relationships in future leading to treaties and arrangements from time to time. The law should facilitate recognition of jurisdiction, courts, judgments, cooperation and assistance from these countries.
Thanks , Arun,
The article is very informative,
Kindly can you also let me know the salary range for a person who has
4- 5 years of experience and half years in core hr in an MNC consultancy and the rest working as an assistant in the legal field with close to 2 years in employment and labour related case.
and has a Qualification of regular LLB and MDPM distance scheme.
It was a great article. Very very useful. can u please let me know what is the relevant form as per tamil nadu rules for retrenchment u/s.25f of the ID act, 1947
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