Preface About Employees Under Insolvency And Bankruptcy Code, 2016 Regime by CS Kiran Sharma


  1. How is an employee defined for the purpose of formal insolvency proceedings?

In India, the word “employee” is not defined in the Insolvency and Bankruptcy Code, 2016 (“Code”). However, the term ‘workman’ is defined under the provisions of Section 3(36) of the Code and has the same meaning as assigned to it in the Industrial Disputes Act, 1947[1], that is, as any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include personnel of the armed forces or those employed mainly in a managerial or administrative capacity; or who, being employed in a supervisory capacity, draw wages exceeding ten thousand rupees per mensem or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature.

Although the word “employee” is defined in a number of other legislations but the meaning provided to the word is limited to the context of such legislations and cannot be necessarily extended to the Code. It would be safe to state that all persons, other than workmen, in employment of a corporate debtor would be considered as employees.

  1. What are the entitlements provided to an employee within the framework of the Code, and to what extent are they given priority treatment during the formal insolvency proceedings?

The Code provides priority to the dues of the workmen and employees in insolvency resolution process and liquidation proceedings of a corporate person. In liquidation proceedings, workmen dues are treated in priority over the dues of employees.

In insolvency resolution process, employees and workmen are treated as operational creditors. An operational creditor is defined as a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. [2] The operational creditors have a right to submit claim to the Insolvency Professional appointed as interim resolution professional by the Hon’ble Adjudicating Authority and later appointed as Resolution Professional by the Committee of Creditors of the Corporate Debtor.

The claim can be submitted by the workmen basis permissible workmen's dues which, in relation to a company, means, the aggregate of the following sums due from the company to its workmen, namely (i) all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947; (ii) all accrued holiday remuneration becoming payable to any workman or, in the case of his death, to any other person in his right on the termination of his employment before or by the effect of the winding up order or resolution; (iii) unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company or unless the company has, at the commencement of the winding up, under such a contract with insurers as is mentioned in section 14 of the Workmen's Compensation Act, 1923 (19 of 1923), rights capable of being transferred to and vested in the workmen, all amount due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any workman of the company; (iv) all sums due to any workman from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the workmen, maintained by the company[3].

Employees can submit claim basis their contractual terms of employment in the prescribed form as per the provisions of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”).

After the claim is submitted by the employee or a workman before the Insolvency Professional as aforesaid against the Corporate Debtor, the same is verified on the basis of the books of accounts of the Corporate Debtor, and then the same amount which is admissible is admitted.

  1. How does the priority, if any given employee entitlements in formal insolvency proceedings compared to the priority (if any) given to secured creditors, insolvency administrators, professionals retained by the estate, unsecured creditors, and shareholders?

In the insolvency resolution process, the dues of operational creditors have to be paid on liquidation value in priority to any financial creditor (secured and unsecured) and paid in any event before the expiry of 30 days after the approval of the resolution plan by the Adjudicating Authority. Only the cost of insolvency resolution process (including the cost of administration, insolvency professional and other costs relating to corporate insolvency resolution process) ranks higher in priority from operational creditors in the corporate insolvency resolution process.

In the liquidation process, the dues of workmen for the period of 24 months preceding the liquidation commencement date rank equally with debts owed to secured creditors which relinquish their security interest in favour of liquidation estate. The wages and any unpaid dues owed to employees other than the workmen for the period of 12 months preceding the liquidation commencement date rank below the secured creditors and workmen dues as stated above in the waterfall. The dues for the period prior to 24 months preceding the liquidation commencement of workmen and for the period prior to 12 months preceding the liquidation commencement date of employees are treated as unsecured debt and have to be paid as dues of unsecured creditors. Only the unpaid cost of insolvency resolution process (including the cost of administration, insolvency professional and other costs relating to corporate insolvency resolution process) and liquidation process rank higher in priority.

  1. What (if any) personal liability do directors and/or others involved in the management of the company have with respect to unpaid employee entitlements or taxes or other duties owed in relation to employee entitlements?

The Code does not impose any liability for directors and others involved in the management of the company with respect to unpaid employee entitlements or taxes or other duties owed in relation to employee entitlements. Section 30(2)(b) of the Code provides that the resolution professional shall examine each resolution plan received by him to confirm that each resolution plan provides for the repayment of the debts of operational creditors in such manner as may be provided therein.

Recently, pursuant to The Insolvency and Bankruptcy Code (Amendment) Act, 2019 [Act No. 26 of 2019, sec. 6 (w.e.f. 16-8-2019)], the sub-section 30(2) (b) has been amended to safeguard the interests of the operational creditors. The extract of the same is reproduced hereunder for ready reference:

provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than-

 (i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or

(ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53,

whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.

Further, a resolution plan proposed by the resolution applicant (bidder) in the insolvency resolution plan can be approved only if it provides for payment dues of operational creditors on liquidation value in priority to any financial creditor (secured and unsecured) and paid in any event before the expiry of 30 days after the approval of the resolution plan by the Adjudicating Authority[4].

In the liquidation process, it is the obligation of liquidator to distribute proceeds of the sale of liquidation estate in accordance with the priorities mentioned in section 53 of the Code. The liquidator can be penalised for making payments in violation of the priorities.

However, there are provisions in various other legislations that hold the directors or management responsible for non-payment of dues of workmen and employees or depriving them of their lawful entitlements.

  • Industrial Disputes Act,
  • Industries (Development and Regulation) Act, 1951.
  • The Employees Provident Funds and Misc. Provisions Act, 1952
  • Employees State Insurance Act, 1948
  • Employers Liability Act, 1938
  • The Minimum Wages Act, 1948
  • The Payment of Bonus Act, 1965
  • The Payment of Gratuity Act, 1972
  • The Payment of Wages Act, 1936
  • Workmen’s Compensation Act, 1923
  • Employees' State Insurance (General) Regulations, 1950
  1. Is there any form of statutory, industry or government-funded “safety net” that serves to guarantee the payment of employee entitlements in an insolvency context?

There is no government scheme guaranteeing payment of employee entitlements in resolution or liquidation proceedings. However, in the corporate insolvency resolution process, the dues of employees and workmen are required to be paid on liquidation value in priority to any financial creditor (secured and unsecured) and paid in any event before the expiry of 30 days after the approval of the resolution plan by the Adjudicating Authority. There are liabilities on bidder for failure to implement a resolution plan. In the liquidation process, it is the obligation of liquidator to distribute proceeds of sale of liquidation estate in accordance with the priorities mentioned in section 53 of the Code.

  1. In the event of a sale by an insolvent company, whether in or out of a formal proceeding, of all of its assets as an ongoing business, would the acquirer be liable for employee claims on the basis of successor liability or otherwise?

This is treated as essentially a matter between the parties. During the Corporate Insolvency Resolution Process under the Insolvency & Bankruptcy Code, 2016, the Resolution Professional (RP) endeavors to find a suitable applicant for submitting a Resolution Plan for the revival of the Corporate Debtor[5]. The RP thereafter examines the Resolution Plans received by him after going through an evaluation process for the fulfilment of the conditions mentioned in the Code including Section 30(2)(b) of the Code and ultimately places successful resolution plans, before the Committee of Creditors for their approval of one such plan, which is ultimately submitted to the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016 for its sanction. In such cases of acquisition, the Adjudicating Authority while approving the final resolution plan ensures that accurate treatment has been provided by resolution applicant/acquirer towards employees. Such resolution plan, if approved by the Committee of Creditors and subsequently by the Adjudicating Authority, becomes binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan as per the provisions of Section 31 of the Code.

The Resolution Applicant submits one such plan which is on a going concern concept, and thus held responsible for employees’ rights, as the plan professes mandatory provides for payment of employee & workmen claims on atleast liquidation value in priority to any financial creditor (secured and unsecured) and paid in any event before the expiry of 30 days after the approval of the resolution plan by the Adjudicating Authority. Besides, the acquirer is also held liable in case of failure to implement resolution plan proposed by him.

In the Liquidation Process under the Insolvency & Bankruptcy Code, 2016, the Liquidator endeavors to liquidate the assets of the Corporate Debtor to the suitable buyer(s). One amongst many manners of sale is “selling the Corporate Debtor as a going concern”. In this process, the Liquidator fixes a suitable bid price and auctions the assets of the Corporate Debtor, as an ongoing business. The amount realised from such sale is ultimately distributed to the stakeholders of the Corporate Debtor according to the waterfall mechanism as envisaged under Section 53 of the Code.

The unpaid insolvency resolution and liquidation process costs are then paid in full, after which, the workmen's dues for the period of twenty-four months preceding the liquidation commencement date which ranks equally with the debts owed to a secured creditor who has relinquished his security in a manner set out in Section 52 of the Code are paid. Such workmen dues and debts of secured creditors are paid proportionately. If any amount remains after payment of the above dues, the wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date are paid.

[1] Section 3 (36) of the Insolvency and Bankruptcy Code, 2016

[2] Section 5(20) of the Insolvency and Bankruptcy Code, 2016

[3] Section 326 of the Companies Act, 2013

[4] Section 5(1) of the Insolvency and Bankruptcy Code, 2016

[5] Section 5(26) and 5(27)of the Insolvency and Bankruptcy Code, 2016

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