This is the 1st article in a 2-part series on employment contracts vis-à-vis CIRP. The article examines whether a resolution professional can enforce an employment contract (for an employee, not a 'workman') during the moratorium period.
The Insolvency and Bankruptcy Code, 2016 (IBC) aims to inter alia preserve corporate debtors as going concerns during the corporate insolvency resolution process (CIRP). To that end, the resolution professional (RP) or liquidator is entitled to compel performance of certain contracts1 and to disclaim others.2
Section 14(2)3 of the IBC proscribes the termination, suspension, or interruption, of the supply of essential goods or services – electricity, water, telecommunication and information technology services4 – to the corporate debtor during the moratorium period.
In 2018, the Insolvency Law Committee (Committee) observed that the continued supply of 'essential goods and services' may, by itself, be insufficient for the survival of the corporate debtor as a going concern. The Committee, therefore, recommended that the IBC be amended to allow interim resolution professionals (IRPs), or RPs, as the case may be, to apply to the National Company Law Tribunal (NCLT) for the continued supply of goods and services not considered 'essential'.
Although the Committee's recommendation was not implemented, parties began approaching NCLTs for the continuation of 'critical' supplies outside the scope of 'essential' supplies.5 Section 14(2A) of the IBC was introduced6 on the recommendations of the Committee to address this and empowers an IRP or RP to require the continued supply of critical goods or service in a manner similar to essential goods or services. Per the Committee, the IRP or RP must consider factors including "...whether the supplies have a significant and direct relationship with keeping the corporate debtor running as a going concern, and whether the supplies may be replaced easily or efficiently...".7
Whether goods or services are critical must be determined on the facts. In the past, courts and tribunals have disallowed the termination of contracts for the supply of goods or services that the RP, and subsequently the court or tribunal, considered critical to the corporate debtor's survival as a going concern. Illustratively, in Sandeep Khaitan v. JSVM Plywood Industries Ltd.8, the Supreme Court of India, held that the supply of raw materials was critical to the corporate debtor and observed that:
"...No doubt under this provision goods or services not covered by Section 14(2) are also covered. The call however is to be taken by the IRP / RP. Raw material supply could fall within the provision. The IRP / RP must take a decision guided purely by the object of the IBC and the provisions and the factual matrix..." 9.
In another case,10 the NCLT held that record management services provided to the corporate debtor, "Cox & Kings", were critical to the corporate debtor's survival.
At present, the continued supply of critical goods and services is incapable of being enforced only where the corporate debtor has not paid the supplier for goods or services provided during the moratorium period.11 Under Section 14(2A) of the IBC, the Legislature may prescribe additional circumstances in which the supply of critical goods or services may be terminated, suspended, or interrupted; none have thus far been specified. Therefore, it appears that the contractual autonomy of a party providing critical goods or services to a corporate debtor may normally be curtailed.
The courts have also intervened to also disallow termination of critical contracts where the corporate debtor is the supplier and not the recipient of goods or services where the contract is critical to the corporate debtor's survival. In Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta,12 the Supreme Court injuncted Gujarat Urja Vikas Nigam Limited (GUVNL) from terminating a power purchase agreement merely on the basis of the corporate debtor's insolvency.13 The Supreme Court held that, when granting an injunction to prevent the termination, suspension or interruption of the supply of critical goods or services, courts and tribunals must consider whether the:
- supply of the relevant goods or services is central to the success of the CIRP – in this case, GUVNL was the corporate debtor's sole customer; and
- termination of such supply of goods or services would disable the corporate debtor from operating as a going concern.
The Court clarified that its decision was based on the peculiar facts of that case and, "...as such, in all future cases, NCLT would have to be wary of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor's sole contract...".14 (Emphasis supplied.)
More recently,15 the Supreme Court, heeding the note of caution in Gujarat Urja, refused to injunct the termination of a contract between a corporate debtor and Tata Consultancy Services (TCS) whereby the corporate debtor had entered into a build phase agreement and facilities agreement with TCS. Although the NCLT and National Company Law Appellate Tribunal had stayed the termination notice issued by TCS and directed it to adhere to the terms of the agreement to keep the corporate debtor as going concern, the Supreme Court held that the contract was not integral to the corporate debtor's status as a going concern.
It is, presently, unclear whether an IRP or RP can rely on section 14(2A) of the IBC to enforce the performance of an employment contract of an employee who is not a workman16 by classifying the service provided by that employee as critical to the corporate debtor's survival. On the 1 hand, employees are essential to the functioning of an organisation and this is more so for KMPs. On the other hand, an employment agreement is a personal contract in terms of Section 40 of the Indian Contract Act, 1872, and, as such, per Section 14 of the Specific Relief Act, 1963, cannot be specifically performed by an employer or employee, except where the employee is seeking reinstatement.17 In fact, the Supreme Court has affirmed18 that:
"...A judgement for specific performance of a contract for personal work or services is not pronounced, either at the suit of the employer or the employee. The court does not seek to compel persons against their will to maintain continuous personal and confidential relations...
Even if there was a contract in terms of which the plaintiff was entitled to seek relief, the only relief which was available in law was damages and not specific performance...".19 (Emphasis supplied.)
If, in fact, Section 14(2A) of the IBC empowers the IRP or RP to specifically enforce employment contracts of a critical nature, it is in direct conflict with the settled principle that a personal contract cannot be specifically performed. Given that the IBC is a separate and complete code by itself,20 in case of a conflict between the IBC and any other law, Section 238 of the IBC provides that provisions of the IBC will prevail.
From the Committee's reports and the jurisprudence, it appears that an IRP or RP may be able to argue that an employment contract is 'critical' if:
- the employee's services are integral to the success of the CIRP of the corporate debtor;
- the employee cannot be replaced easily or efficiently; and
- termination of the employment contract would disable the corporate debtor from operating as a going concern.
However, most employment contracts are unlikely to satisfy these criteria. In our view, a distinction may be made between regular employees who may not be considered critical, and senior management or those indispensable employees with niche qualifications who cannot be easily replaced. In some cases, it could be argued that lower-level employees like factory workers form the nerve centre of the manufacturing company and can be considered 'critical' to the survival of the corporate debtor, and the IRP or RP may seek to compel the performance of the employment contract.
The conflict between Section 14(2A) of the IBC and Section 14 of the Specific Relief Act, 1963 may well be largely theoretical especially in context of the Indian economy. Having said that, in our opinion, no employee should, or, in practice, can, be compelled to provide services to the corporate debtor. Nonetheless, to ensure that an appropriate balance is struck between contractual freedom and corporate rescue, the Legislature may consider using the flexibility under Section 14(2A) of the IBC to clarify the applicability of Section 14(2A) to contracts of personal service.
Originally published on 16 January 2024
Footnotes
1. Section 14 empowers the RP to compel performance of contracts 'essential' to the corporate debtor and, separately, contracts 'critical to preserver the value' of the corporate debtor.
2. Sections 43-51 of the IBC permit the RP-liquidator to avoid preferential, undervalued, and fraudulent, transactions.
3. Section 14(2) provides that "...the supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period."
4. Regulation 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
5. Report of the Insolvency Law Committee, 20 February 2020.
6. With retrospective effect from 28 December 2019.
7. Supra note 4 – para 8.17 on page 39.
8. Supreme Court Criminal Appeal No. 447 of 2021.
9. Ibid, para 22. JVSM Plywood clarifies that the RP's discretion under Section 14(2A) of the IBC is subject to Section 28 of the IBC that requires the RP obtain approval from the committee of creditors (66% voting share) prior to exercising specified powers viz. making any change in the management of the corporate debtor and making any change in the appointment or terms of contract of such personnel as specified by the committee of creditors.
10. Writer Business Services Pvt. Ltd. v. Ashutosh Agarwala Company Appeal (AT) (Insolvency) No. 956 of 2021.
11. Section 14(2A) of the IBC.
12. (2021) 7 SCC 209.
13. GUVNL had sought to terminate the agreement on the ground that the corporate debtor had been admitted to insolvency.
14. Supra note 9 at para 176.
15. Tata Consultancy Services v. Vishal Jain (2022) 2 SCC 583.
16. While 'employee' has not been defined in the IBC, the term 'workman' has been assigned the meaning given to it in Section 2(s) of the Industrial Disputes Act, 1947. In terms of this definition, a 'workman' will not include, amongst others, a person who is employed mainly in a managerial or administrative capacity, or in a supervisory capacity with wages exceeding INR 10,000 per month.
17. Vaish Degree College v. Lakshmi Narain (1976) 2 SCC 588; Please also see U.P. Warehousing Corporation Ltd. v. Chandra Kiran Tyagi (1969) 2 SCC 838; S. Dutt v. University of Delhi 1959 SCR 1236; S.R. Mehta v. District Board, Agra AIR 1964 SC 1680.
18. Nandganj Sihori Sugar Co. v. Badri Nath Dixit AIR 1991 SC 1525.
19. Halsbury's Laws of England, Fourth Edition, Volume 44 at page 407.
20. Innoventive Industries Ltd. v. ICICI Bank, AIR 2017 SC 4084.
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