Employees cannot club individual dues to meet Rs. 1 crore threshold for Section 9 CIRP initiation

NCLAT dismissed appeal challenging rejection of Section 9 application filed by employees against corporate debtor. Tribunal held that minimum threshold of Rs. 1 crore default under Section 4 of I&B Code is mandatory for initiating CIRP. Each employee constitutes separate operational creditor and individual dues cannot be clubbed to meet threshold requirement. Since individual dues of each appellant were below Rs. 1 crore threshold, none qualified to initiate CIRP proceedings. Adjudicating Authority correctly rejected the application as statutory minimum default amount was not satisfied by any individual appellant.

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1. ISSUES PRESENTED and CONSIDERED

- Whether multiple operational creditors, specifically workmen/employees, can jointly file an application under Section 9 of the Insolvency and Bankruptcy Code (IBC) to initiate Corporate Insolvency Resolution Process (CIRP) by aggregating their individual dues to meet the minimum threshold prescribed under Section 4 of the IBC.

- Whether the Note appended to Part V of Form 5 under Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, permitting workmen/employees to file applications in joint capacity, allows aggregation of dues for satisfying the threshold requirement.

- The interpretation of Sections 8 and 9 of the IBC regarding the filing of demand notices and insolvency applications by operational creditors, particularly the distinction between joint applications permissible for financial creditors under Section 7 and operational creditors under Section 9.

- The applicability of precedents, including the Tribunal's judgment in Sadashiv Nomaya Nayak & Ors. Vs. Gammon Engineers & Contractors Pvt. Ltd., and the Supreme Court's ruling in JK Jute Mill Mazdoor Morcha Vs. Juggilal Kamlapat Jute Mills Company Ltd., to the issue of joint applications and threshold aggregation.

- Whether the Adjudicating Authority erred in rejecting the Section 9 application on the ground that the appellants did not individually meet the minimum threshold for initiating CIRP.

- The scope and effect of pre-existing disputes and limitation bars under the IBC on maintainability of the Section 9 application.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether operational creditors can file joint applications under Section 9 by aggregating their dues to meet the threshold.

Relevant legal framework and precedents: Sections 8 and 9 of the IBC govern operational creditors' initiation of CIRP. Section 8 requires delivery of a demand notice by the operational creditor to the corporate debtor, and Section 9 allows filing an application if payment is not received after 10 days. Section 4 prescribes a minimum threshold amount of default, currently Rs. 1 crore, for initiating CIRP.

Section 7 explicitly permits financial creditors to file joint applications, but Sections 8 and 9 do not contain such express provisions for operational creditors. The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, particularly Rule 6 and Form 5, include a Note allowing workmen/employees to file applications in individual or joint capacity.

In Sadashiv Nomaya Nayak & Ors. Vs. Gammon Engineers & Contractors Pvt. Ltd., the Tribunal held that operational creditors cannot aggregate their individual dues to meet the threshold for filing a joint application under Section 9. The Supreme Court dismissed an appeal against this judgment without reasons, but the Tribunal held that such dismissal does not render the judgment binding precedent.

The Supreme Court's decision in JK Jute Mill Mazdoor Morcha recognized that registered trade unions can act as operational creditors on behalf of their members and file joint applications, but this is a distinct category from individual employees filing jointly.

Court's interpretation and reasoning: The Tribunal emphasized the clear legislative distinction between financial creditors and operational creditors in the IBC. While financial creditors can file joint applications under Section 7, operational creditors must file separate notices and applications under Sections 8 and 9 respectively. The statutory scheme does not allow aggregation of individual operational debts to meet the threshold.

The Note in Form 5 permitting joint capacity filing by workmen/employees was interpreted narrowly as allowing a single authorized person to file on behalf of others, not permitting multiple operational creditors to combine their claims to meet the threshold.

Key evidence and findings: The demand notice submitted by the appellants showed individual dues, none of which met the Rs. 1 crore threshold individually. The Adjudicating Authority relied on the precedent of Sadashiv Nomaya Nayak, which was affirmed by the Supreme Court's refusal to interfere, to reject the Section 9 application.

Application of law to facts: Since none of the appellants individually met the minimum threshold, and the statutory scheme and precedents do not permit aggregation of dues for operational creditors, the Section 9 application was rightly rejected.

Treatment of competing arguments: The appellants argued that the Note in Form 5 allowed joint filing and aggregation of dues, and that the Supreme Court's dismissal of the appeal in Sadashiv Nomaya Nayak was a non-speaking order not binding on the Tribunal. The Tribunal rejected these contentions, holding that the Note only permits joint filing by one authorized person, not aggregation of claims, and that the statutory scheme and binding precedents govern the issue.

Conclusions: Operational creditors cannot file joint Section 9 applications by aggregating their dues to meet the threshold. Each operational creditor must individually meet the threshold for maintainability.

Issue 2: Interpretation of Sections 8 and 9 vis-`a-vis Section 7 regarding joint applications and demand notices.

Relevant legal framework and precedents: Section 7 explicitly permits financial creditors to file applications jointly. Sections 8 and 9 require operational creditors to deliver individual demand notices and file applications after expiry of the notice period. The statutory language and scheme differ for financial and operational creditors.

Court's interpretation and reasoning: The Tribunal noted the express provision for joint applications by financial creditors under Section 7, absent in Sections 8 and 9 for operational creditors. The demand notice under Section 8 must be issued by each operational creditor individually, and the application under Section 9 must be filed accordingly. This distinction reflects legislative intent and statutory design.

Key evidence and findings: The company's reply to the joint demand notice objected to joint notices and applications by operational creditors, citing the statutory scheme and threshold requirements. The Tribunal found this objection consistent with the law.

Application of law to facts: Given the statutory framework, the appellants' joint Section 9 application was not maintainable.

Treatment of competing arguments: The appellants contended that the rules and Form 5 Note allow joint filing by workmen/employees. The Tribunal distinguished between joint filing by one authorized person and joint applications aggregating claims, rejecting the latter.

Conclusions: The statutory provisions and scheme do not permit joint applications by multiple operational creditors aggregating their claims under Sections 8 and 9.

Issue 3: Effect of pre-existing dispute, limitation, and other statutory bars on maintainability.

Relevant legal framework and precedents: Section 8(2)(a) permits the corporate debtor to raise existence of a dispute or pendency of suit/arbitration as a bar to insolvency proceedings. Section 10A bars initiation of insolvency during specified COVID-19 related period. Limitation laws apply to bar stale claims.

Court's interpretation and reasoning: The company raised pre-existing dispute and limitation objections. The Tribunal noted these grounds but primarily focused on threshold non-fulfillment. The presence of dispute or limitation bars would independently justify rejection, reinforcing the decision.

Key evidence and findings: The company's detailed reply to the demand notice cited pre-existing disputes and limitation. The Adjudicating Authority and Tribunal considered these in rejecting the application.

Application of law to facts: The appellants failed to overcome these statutory bars, further justifying rejection.

Treatment of competing arguments: The appellants did not substantially dispute these grounds, focusing instead on threshold and joint filing arguments.

Conclusions: Pre-existing disputes, limitation, and statutory bars further supported rejection of the Section 9 application.

Issue 4: Whether the judgment in Sadashiv Nomaya Nayak and Supreme Court's dismissal of appeal therein are binding.

Relevant legal framework and precedents: The Tribunal's judgment in Sadashiv Nomaya Nayak held that operational creditors cannot aggregate claims to meet the threshold. The Supreme Court dismissed the appeal without reasons.

Court's interpretation and reasoning: The Tribunal held that a non-speaking dismissal by the Supreme Court does not constitute binding precedent overruling the Tribunal's judgment. The Tribunal found no reason to depart from Sadashiv Nomaya Nayak.

Key evidence and findings: The appellants failed to demonstrate any error in the Tribunal's reasoning or statutory interpretation.

Application of law to facts: The Tribunal followed its prior binding precedent.

Treatment of competing arguments: The appellants argued that the doctrine of stare decisis does not apply due to the non-speaking dismissal. The Tribunal rejected this, emphasizing the need for consistency and adherence to statutory scheme.

Conclusions: Sadashiv Nomaya Nayak remains good law and binding on the issue of aggregation and joint filing by operational creditors.

Issue 5: Whether trade unions can file joint applications on behalf of workmen under Section 9.

Relevant legal framework and precedents: The Supreme Court in JK Jute Mill Mazdoor Morcha held that trade unions are persons under Section 3(23) of the IBC and can file joint applications on behalf of members.

Court's interpretation and reasoning: The Tribunal acknowledged that trade unions have a distinct status and can file joint applications, unlike individual operational creditors.

Key evidence and findings: The Supreme Court emphasized procedural flexibility and the interest of justice in allowing trade unions to represent members collectively.

Application of law to facts: The appellants were individual employees, not a registered trade union, and thus the trade union exception did not apply.

Treatment of competing arguments: The appellants sought to extend the trade union principle to themselves, which was rejected.

Conclusions: Only registered trade unions can file joint applications under Section 9 on behalf of members; individual employees cannot aggregate claims.

3. SIGNIFICANT HOLDINGS

"The contrast in the provisions of Section 7 and 9 clearly indicate that legislature while permitted the Financial Creditors to jointly file application, it has not been provided for the Operational Creditor in scheme under section 8 and 9."

"The Note appended to Form 5 permitting application to be made either in an individual capacity or in a joint capacity by one of them only entitled for filing of the application by one person in joint capacity. The said Note cannot be read to mean that Note permits Operational Creditors to also jointly file the claim."

"There is no merit in the present appeal because the Judgment relied upon by Counsel for the Appellant in the case of JK Jute Mill (supra) does not apply to the facts and circumstances of the present case because the issue here in this case is as to whether all the workmen can together by adding their amount which is being claimed against the Corporate Debtor can cross the threshold set up under Section 4 of the Code."

"Each employee is a different Operational Creditor and are required to give separate notice under Section 8(1) and any clubbing of operational debts cannot be done to complete threshold for Corporate Debtor to make payment within 10 days."

"The minimum threshold of default prescribed under Section 4 of the Code is mandatory and debts of lesser amount cannot be basis for initiating any CIRP against the Corporate Debtor."

"A registered trade union which is formed for the purpose of regulating the relations between workmen and their employer can maintain a petition as an operational creditor on behalf of its members."

"The Adjudicating Authority did not commit any error in rejecting Section 9 application filed by the Appellants."

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