India File

Does IBC process spare a thought for employees?

Nandana James Forum Gandhi | Updated on November 05, 2019

Voices that need to be heard Employees of Jet Airways protesting in Bengaluru   -  SOMASHEKAR G R N

Distraught staff of Jet Airways and IL&FS feel that the bankruptcy apparatus is not concerned about what is due to them

It’s the deafening silence enshrouding the fate of over 20,000 Jet Airways employees like her that Tina John finds the most appalling. It has been almost half a year since she and her husband, both employees of Jet Airways, found themselves denuded of their jobs after the airline succumbed to mounting debt.

“Everyone is worried about banks’ NPAs and bidders’ rights. Aren’t there any provisions to protect employees who have dedicated years of work? Shouldn’t the government try and help?” she asks. Much like the fate of Jet’s employees, her questions hang in the air.

Unfortunately, With over 2,500 companies in the country finding themselves teetering on the brink of insolvency under the Insolvency and Bankruptcy Code (IBC), Jet’s employees are not the only ones reeling under the weight of their company’s losses and grappling to recover their dues.

Twist of fate

IL&FS is another case in point, with employees engaged in its various projects complaining of non-payment of their dues. SSTL or Srinagar Sonamarg Tunnel Ltd, a project under ITNL, IL&FS’ transportation arm, is one such example. Steve Smith (name changed) from South-West England and Richard Christenson from South Africa were two such employees, working for IL&FS to manage the construction of the Zojila Tunnel under this project.

“As a tunnel expert, you would want to take on big challenges,” says Steve, explaining his decision to leave behind his home in Cornwall and work with IL&FS on what was touted as the longest road tunnel in Asia. The location being Kashmir also served to lure him. In an ironic twist of fate, he still finds himself reeling under the impact of the challenges this set off, though of an unexpected kind: losing his house in England to the financial woes wrought by four months of no salary from IL&FS, dragging his wife and kids downhill as well.

“We lost our family house. We couldn’t make the payments because IL&FS didn’t pay me,” Steve says grimly.

Richard feels that employees definitely need to have a say in the IL&FS’ debt resolution process being carried under the IBC. Otherwise, employees will be “unrepresented and will be mostly written off, as in our case,” he adds.

Employees of ITNL-Elsamex JV Bure — a joint venture between IL&FS Transportation Networks Ltd and Elsamex SA — who were engaged in road projects for the Ethiopian Roads Authority, also find themselves beleaguered with a similar fate. Of the 44 employees under this JV, 42 haven’t been paid their salary dues amounting to €415,000.

Some of them were also held hostage by the Ethiopian staff of the JV for a couple of months, in an attempt to squeeze out their salary dues by IL&FS. Three other employees were also arrested by Ethiopian officials because of the ITNL-Elsamex JV defaulting on tax payments.

Rajesh — one of the three employees who were arrested — who was the finance manager at one of the projects in Ethiopia, says the payment of wages and salaries of employees deserve top priority under the IBC. In fact, salaries of employees need to be excluded from the resolution process and paid first, with the remaining money going under the waterfall mechanism, he adds.

“Employees also should have a say in the resolution process as they are best equipped to do what is needed to keep the company going, as their careers and prosperity are linked with the company’s well-being,” he explains.

Gaurav Gupte, partner at law firm Cyril Amarchand Mangaldas, however, says the rights of the employees are already protected under the IBC and it would not be prudent to include workers’ representatives on the Committee of Creditors. “Including employees will prolong the resolution process because not all employees are fully aware of what is happening in a company as a whole. Workers’ rights are assured by the law. That’s where the code has made a fine balance between the efficiency of resolution and the rights of employees and workmen.”

The IBC classifies creditors into three categories: financial creditors, operational creditors and other creditors. Since operational creditors are the ones who supply goods or provide services to the company, employees are part of the operational creditors. Under IBC provisions, workmen can claim part of their unpaid dues for the past 24 months and in the case of Empemployees, up to 12 months’ unpaid dues can be claimed. They get priority over the dues of unsecured operational creditors.

Employees’ issues

Countering this, Amit Kelkar, who is still employed with Jet Airways, says that it is not right to club employees with operational creditors. “ Unlike other categories of creditors, employees were not doing any kind of business. Business has its inherent risks involved. Financial creditors and other operational creditors are businesses,” he says. Employees of Jet Airways had even put in a bid to take over the airline, but the lenders did not give much credence to that plan.

“Employees could have turned around the airline because we know each function of the airline, and we know how to reduce cost and increase efficiency and productivity,” says Asish Mohanty, President, Jet Aircraft Maintenance Engineers Welfare Association.

In the past, there have been few instances where employees have taken over the management. For example, Larsen & Toubro’s shares were given to its employees to counter hostile takeover bids from the Ambanis and Birlas in the early 2000s. “L&T could pull it off because firstly, it was cash-rich; and secondly, it had a strong leader in AM Naik. Companies going under insolvency lack both, so a take-over by the employees may not work,” said an executive who worked closely with L&T’s Naik. Experts point out that employees of companies that are under insolvency, but still operational, are not impacted. For instance, Essar Steel has been under insolvency for over two years but employees regularly get their salaries and other payments as the steel factories continue to be operational. In the case of Binani Cement, employees got all their dues because the new owner — Ultratech — had offered to settle the company’s all outstanding debt. The problem arises for workers in cases where the company stops functioning as with Jet Airways.

“There are hardships for people who are not getting their dues and whose employment itself is in jeopardy, but that’s a different matter altogether,” says Gupte. “The problem is the enforcement of our other laws (including labour laws), which put you in that position,” he adds.

Shailendra Ajmera, Partner, Restructuring and Turnaround Services at EY, says that for a going concern, not paying salaries to employees is counter-intuitive. “There will be very few cases where the company goes into insolvency and the employees haven’t been paid for a long period of time. Resolution professionals make sure that these payments are made. Otherwise, how is he going to run the company if there is severe distress among the employees?”

Meanwhile, employees at companies like Jet Airways and IL&FS are trying to come to terms with the delays in the debt resolution process and complicated legal requirements. Finding new jobs isn’t easy either in a depressed economy. “When Jet Airways shut down, that was the worst phase of my life. We’ve passed through that storm now though,” says Mohanty.

Published on November 05, 2019

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