Supreme Court of India Judgment on Conversion of ‘Sick’ Company into a Workers’ Cooperative

Supreme Court of India Judgment on Conversion of ‘Sick’ Company into a Workers’ Cooperative

Last night, I was reading some of the research articles presented at the recently concluded International Summit of Cooperatives (Quebec, Canada) and in a paper presented by Prof. Dr. Vrajlal Sapovadia, I came across a reference to an Indian Supreme Court decision from 1988 approving a workers’ scheme to take over a distressed factory (Kamani Tubes Ltd.) and its assets, with the hope of reviving its fortunes. After a little research I found the judgment in question: Navnit R. Kamani & Ors vs R.R. Kamani 1989 AIR, 9 1988 SCR Supl. (3) 123. The judgment makes for interesting reading in terms of how the Court sanctioned the dilution and transfer of shares from the owners (i.e. the Kamani family) to the workers, as well as the provision of the law (Sick Industrial Companies (Special Provisions) Act, 1985 a.k.a SICA) that enabled such transfers. In particular, note the wide-ranging schemes that the Board for Industrial and Financial Reconstruction can authorize to revive a ‘sick’ or ailing company in section 18. Section 18(2)(i)-(l) refers to the schemes that can be submitted by workers to revive a company, including through a sale or lease of assets or transfer of shares in the company.

However, aside from this interesting legal provision, the language of the judgment of Thakkar J is interesting in itself, recalling a bygone time when Supreme Court judges spoke unblushingly about workers’ struggles and trade union movements. Thakkar J concluded his judgment with this moving passage:

While the Act enacted in 1985 does envisage the revival of sick units by the workers who had been rendered unemployed, it is (as far as is known) for the first time that the legislative intent reflected in the relevant provisions of the Act to encourage workers’ schemes is being given a concrete shape in this manner. It is perhaps for the first time that such a Scheme sponsored by the suffering employees themselves has come to be sanctioned. Under the circumstances a very heavy burden rests on the shoulders of KEU and the concerned employees. Tens of thousands of similarly situated workers would be watching with anxious eves the outcome of this bold experiment undertaken by the workers of KTL. On their success or failure will depend the future hope and destiny of tens of thousands of similarly situated workers. Success of this venture will instil [sic] new confidence and enable the workers to try to build their own future with their own hands albeit at Some initial sacrifice. Failure will be visited with disastrous consequences. We, therefore, not only hope and trust that KEU and the concerned workers will make themselves fully aware of this crucial factor, but also beseech them to rise to the occasion and individually and collectively do their best to make it a success. They will have an opportunity to show to the world that the workers in New lndia are capable of managing their own affairs, shaping their own destiny, and building their own future. They will also have an opportunity to establish that when the workers are inspired by an ideal they can produce optimum quantity PG NO 140 as also the best quality. Because, they would be working for a great cause, and working for themselves instead of working for others who often deny to them their legitimate dues and even deprive them of such legitimate dues by appropriating to themselves the fruits of the worker’s labour. Be it also realized that the Trade Union Movement, in the event of the success of this exercise, will be stepping into a new creative phase in the struggle of the working class to assert its identity. One can almost hear the footsteps of the new era in the corridors of [the] future. The workers must therefore ensure the roaring success of this Scheme in this noble cause at any cost.

Unfortunately, the noble cause was ultimately doomed to failure. Sapovadia notes that after a brief period of financial success and optimism, managerial entrenchment and the disenchantment of workers led to the emergence of a rift among the two groups, causing the business  to suffer the business to be acquired by private investors in 2006. I would add that after 1 July 2016, following the passage of the Bankruptcy and Insolvency Code 2016, the Board for Industrial and Financial Reconstruction itself is beginning to winding up its activities as it gets subsumed by the National Company Law Tribunal. It goes without saying that the laws of market-friendly ‘shining India’ has a markedly less pro-labor tenor. In fact, while Section 18(2) of SICA explicitly mentions a revival/rehabilitation scheme involving employees and workers (‘workmen’) through a cooperative, Chapter XIX, Companies Act, 2013 does not. Sections 253 (1)-(4) and 254 places major secured creditors and the company itself (i.e the management and board of directors) in the front seat of the revival process. They are the ones who can submit a draft scheme for revial under section 254(2)(c), which if feasible, will form the basis of the final scheme prepared by the company administrator appointed by the National Company Law Tribunal. Thus, while Section 261(2)(e), which governs the substance of such revival schemes, leaves open the possibility for a sale of assets to any party – including employees I assume – it is only at the behest of creditors and management. In short, mention of employees and workers’ schemes have been expunged from statute leaving the option of consultations and employee buy-outs at the total discretion of creditors and the company.

Regardless of this, conversions to the (worker) cooperative form should not be deemed a lost cause. The law has not closed the door completely on such schemes and there have been salutary examples from India itself of how a distressed company can be successfully resuscitated through employee ownership for the long term – see the example of Kerala Dinesh Beedi mentioned in an earlier blog post. Rather than dwelling on the failures, I feel that it is more worthwhile focusing on the successful cases and considering what they have done differently. What lessons do they hold for aspiring cooperators? Can they be transplanted across borders, to new modes of production and non-industrial sectors of the economy? While I ponder on that, I hope you find the obiter statements of the judge to be as inspiring as I did.