Companies Act Section 378N

Companies Act, Section 378N: Continuity and Treatment of Officers and Employees of Inter-State Co-operative Society Upon Transformation into Producer Company

Section 378N of the Companies Act, 2013 governs the status, rights, and obligations of directors, officers, and other employees of an inter-State co-operative society upon its transformation into a Producer Company. The section provides a comprehensive legal framework to ensure a smooth human resource transition while safeguarding the interests of employees and protecting the company from unjustified claims. A detailed breakdown of the section is presented below:

1. Continuation of Directors for a Limited Period

Notwithstanding the general provisions relating to the governance of Producer Companies as specified in Section 378-O, this section provides a special rule for directors of the inter-State co-operative society. Upon transformation into a Producer Company:

All directors who were holding office in the inter-State co-operative society immediately before the date of incorporation of the Producer Company shall continue to serve as directors.
This continuation is limited to a period of one year from the date of transformation.
During this one-year period, their functioning and conduct shall be in accordance with the provisions of the Companies Act, 2013, thereby subjecting them to the corporate governance framework applicable to Producer Companies.
2. Transfer of Officers and Employees on Existing Terms

All officers and other employees (excluding the directors, Chairman, and Managing Director) of the inter-State co-operative society who were in active service immediately before the date of transformation shall, from that date:

Automatically become officers or employees of the newly formed Producer Company.
Continue to serve under the same terms and conditions of employment as before the transformation. Retain their existing tenure, salary, and benefits, including:
Leave and leave travel concession (LTC), Medical and welfare schemes, Insurance coverage,
Provident fund and other retirement benefits, Gratuity entitlements, and any other statutory or contractual benefit applicable to them.
Be deemed to be in continuous service, as if their employment had not been interrupted by the transformation of the society into a Producer Company.
This provision provides strong employment protection and ensures that employees do not suffer any disadvantage due to the transformation.

3. Option to Decline Employment with the Producer Company

While employment is automatically transferred, the law also provides flexibility to the employee:

If any officer or employee chooses not to accept the continued employment with the Producer Company, such an individual shall be deemed to have voluntarily resigned.
There is no requirement of formal resignation, as opting out of employment itself constitutes resignation under the law.
4. No Compensation for Transfer of Service

Importantly, the Act provides that the transfer of employment from the inter-State co-operative society to the Producer Company shall:

Not entitle the employee to any compensation under the Industrial Disputes Act, 1947, or under any other law that may be applicable.
Preclude the right to raise any legal claims in any court, tribunal, or authority for compensation or damages on the ground of transfer.
Thus, even though employment is transferred, it does not amount to retrenchment or termination, and therefore, no retrenchment compensation or severance pay is allowed merely on account of the transformation.
5. Rights of Retired Employees

For those employees who had retired before the date of transformation, their entitlements and accrued benefits such as pension, gratuity, or any other retirement-related privilege:

Shall continue to be honoured by the Producer Company.
These individuals shall be entitled to receive all such benefits from the Producer Company as they would have from the inter-State co-operative society had it not been transformed.
6. Continuation of Welfare Trusts and Funds

The law safeguards the continuity of welfare mechanisms, such as:

Provident fund and gratuity fund trusts, and other welfare bodies or schemes created for the benefit of employees. These bodies and funds shall:

Continue to operate within the Producer Company, performing the same functions as they did in the co-operative society.

Continue to enjoy any tax exemptions or fiscal benefits previously granted to them under existing laws, without the need for fresh registration or approval.
7. No Compensation for Loss of Office to Key Management Personnel

Section 378N explicitly provides that:

Directors, Chairmen, Managing Directors, or persons managing the business of the inter-State co-operative society are not entitled to any compensation for:
Loss of office, or Premature termination of any contract entered into by them with the inter-State co-operative society.
This applies notwithstanding anything to the contrary in the Companies Act, in any other law in force, or in the society’s own regulations.
The provision thus protects the Producer Company from contractual claims by high-ranking officials who may otherwise demand severance or damages for termination of managerial contracts upon transformation.