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Right Of Employees Under Insolvency And Bankruptcy Code, 2016

Since the workers have lower socio-economic standards, there was always the requirement to pay their dues both legally and socially. During resolution process of the companies, the debtors used the employees lack of knowledge of their rights and made their payments through strategic bankruptcy. Hence, proper laws were needed for protection of their rights. The Insolvency and bankruptcy code 2016 had opened a new door for such employees.

This article attempts to explore and assess the entitlements provided to the employees under the Insolvency and Bankruptcy Code. Further the paper also analyses about the extent of priority given to them during the formal insolvency process. The paper concludes with some suggestions and possible ways to improve employee rights.

The Insolvency and Bankruptcy code 2016 is a significant code which deals particularly with two aspects that is Insolvency resolution and liquidation of corporate entities and bankruptcy of corporate firms and individuals. The code also opened a new horizon for employees working in companies that goes through insolvency process.

Now the employees can claim their payment dues through the National Company Law Tribunal in fast track manner. The Insolvency code strengthened the employee rights in a way that in the time of default, the person first in line to secure their rights are the employees.

Research Problem
The paper analysis the rights available for the employees under the Insolvency and Bankruptcy Code 2016 and also analysis about to what extent the are benefitted during insolvency process of their companies

  1. To study about the position of employees under Insolvency and Bankruptcy Code
  2. To study about the legal protection of employee rights under Insolvency and Bankruptcy Code
Research Methodology
Doctrinal research method is used for conducting the proposed research. Doctrinal research in the law field indicates arranging, ordering and analysis of the legal framework, legal structure and case laws to search out the new things by extensive surveying of legal literature but without any field work.

The Insolvency and Bankruptcy code empowers the employees with requisite legislature and help them to recover their unpaid salary during the resolution process of the companies.

Meaning Of Employees Under IBC

A person who is hired by the employer to do a specific job or particular labour is called an employee. Based on the work the employee does under the regulation and control of the employer he will be entitled to a specific wage or salary. The definition of the term �employee� is not found in Insolvency and Bankruptcy code but Section 3 of the code provides the meaning of the term �workman�.[1]

Section 3(36) - �workman shall have the same meaning as assigned to it in clause(s) of section 2 of the Industrial Disputes Act, 1947[2]

That is workman is a person who is employed to do any work that is manual, skilled, unskilled, technical, operational, supervisory, managerial or administrative. Even thought the term �employee� is defined under many other legislations, those definitions cannot be extended to the code. To sum up, all person who is employed by a corporate debtor would be considered as employees under this code.

Position Of Employees Under IBC

The insolvency application against the corporate debtor can be filed by two types of creditors namely financial creditor and operational creditor. Such application must be filed before the National Company Law Tribunal. Financial creditors are the people who have provided some financial aid to the corporate debtor at the time of need. The employees come under the category of operational creditors.

Section 5(21) of IBC provides the definition for operational debt that is any claim in respect of provisions of goods and services including employment or a debt. So, the payment due owed to the employee is considered as operational debt. Section 5(20) of IBC defines operational creditor as a person to whom an operational debt is owed. Therefore, according to these provisions, employees can be operational creditors under IBC

Rights Of Employees Under IBC

In case if the operational creditor wants to initiate insolvency proceedings against the corporate debtor, the IBC provides a two-step process. First a demand notice must be sent to the corporate debtor as provided under section 8 of the code. The corporate debtor is supposed to repay the debt within 10 days of receiving such demand notice.

If there�s no response from the corporate debtor, the operational creditor can file an application before the NCLT for initiating insolvency proceedings against the corporate debtor[3]. Within 14 days the NCLT has to accept or reject the application. If accepted the corporate resolution process will be initiated against the corporate debtor which should be completed within 180 days.

The provisions for payment of debts from the sale of liquidation assets is mentioned under section 53 of the code. According to the code, the priority is given to the dues of employees and workmen during the resolution process. The workmen dues are treated in priority over the dues of employees in liquidation proceedings. The distribution of money must be based on the order given under section 53 only. Sub section (1) clause (b) states that the salary dues of workmen for the period of 24 months preceding the bankruptcy commencement date should be treated equally with the debts that are owed to secured creditors.[4]

Clause (c) states that priority should be given to salary, wage and unpaid due owed to employees other than workmen for the period of 12 months preceding the commencement date of liquidation. Clause (d) mentions about unsecured debts and clause (e) mentions about dues unpaid to central and state government. According to this section, only after paying the due of first category in full, the rest of the amount will be distributed to other categories. Therefore employees and workmen gets priority over all other creditors.

Case Laws
Mr. N. Subramanian v Aruna Hotels Limited[5]
This was the first case that was proceeded under IBC for recovery of dues from their employer. The applicant who was a former employee of the company filed the application claiming the unpaid money before the National Company Law Tribunal in Chennai. The applicant attached a letter that was given by the respondent company assuring the payment of salary, a list of arrears and he also claimed 9% interest for late payment. After replying to the demand notice sent by the applicant, the respondent filed a suit in city civil court against the applicant demanding to null the letters and notices submitted by the applicant in NCLT. The court the rejected the plea on the ground since the suit was filed after the delivery of demand notice by the operational creditor. Hence the NCLT accepted the application of the operational creditor.

Nitin Gupta v Applied Electro-Magnetic Pvt. Ltd[6].
The application was filed for recovery of unpaid salary amount of Rs. 46,77,124/-. The court admitted the application on the ground of part admission of unpaid salary since only Rs. 28,84,160/- fell under the definition of operational debt mentioned under section 5(21). The application was admitted based on three things that is the claim amount was more than one lakh, existence of default was proved and the procedures for filing the application was properly followed.

Mr. Suresh Narayan Singh v Tayo Rolls Ltd.[7]
An application was filed under NCLT by Suren Narayan on behalf of 284 workers. The application was rejected on the ground that, according to section 9 of IBC the application must be filed individually and not jointly. The adjudicating authority also guided the workers to issue individual demand notices to the corporate debtor under section 8 of the code. The case was appealed to NCLAT where the counsel on behalf of the appellant argued that even though it is a joint application the due amount to each employee is more than one lakh so the application should be accepted by the NCLAT.

The NCLAT ruled that the adjudicating authority should have accepted the application instead of rejecting it because all the necessary requirements were fulfilled. There was a default, the steps for procedures were properly followed and the default amount of each worker is more than one lakh rupees.

Precision Fasteners Limited v Employees� Provident Fund Organization[8]
In this case the NCLT, Mumbai bench ruled that the employee�s provident fund should be paid before paying to any other creditors. According to section 36 (4)(iii) of the code, any sum that is due to the workman or employee from the gratuity, provident and pension will not be included under liquidation assets. Before IBC the EPF Act had an overriding effect on all dues including the dues that should be paid to unsecured and secured creditors. The court by interlinking the workmen dues with right to life ruled that the creditors cannot claim these payments as a matter or right

Alchemist Asset Reconstruction Company Ltd. v Moser Baer India[9]
In this case also the NCLT ruled that provident, pension, and gratuity fund as mentioned in section 53 will not be a part of asset of the corporate debtor. Further this case gave a fine comparison and distinction between the sec 53 (1)(b)(i) and section 326 of the Companies Act.[10]

The difference is that while the IBC provides 24 months period for workmen dues, the company Act does not provide any time limit. Citing the judgement of Precision Fasteners Limited v Employees Provident Fund organisation, the NCLT held that workmen dues are a part of employee�s property and not a part of assets of corporate debtor. This case also settled the position of aw by restricting the overriding effect of Section 268 of the Companies Act.[11]

  • There should be clear guidelines about the claims that are not to be entertained. Such guidelines will prevent the employee from misusing the provision.[12
  • Under section 53 there is no clear explanation about the components that are to be included under �workmen dues� and �wages and any unpaid dues. It should be mentioned whether such dues also include contractual bonus or not.
  • The code should try to amalgamate different proceedings of similar nature so that employees can benefit and claim all their dues under one provision itself.

This insolvency and bankruptcy code is an effective tool for protecting the rights of employees and workmen since they are the pillars of strength of the economy. It also gives provides them with a systematic and time bound manner for recovery of their dues from the corporate debtor. The adjusting authorities also put the provisions to good use which can be seen in recent judgements. Specific exceptions are laid down in the law which upholds the interest of equity and avoid misuse by employee. Thus, my hypothesis is proved right.

  • The Insolvency and Bankruptcy Code, 2016
  2. Enforced with effect from 1-11-2016
  5. CP/S97/(IB)/CB/2017
  6. Company petition no. (IB)-334(ND)/2017
  7. Company appeal (AT) (Insolvency) N0. 112 of 2018
  8. 2018 TaxPub( CL) 1154 (NCLAT-Mun
  9. Item No. 119 (IB)-378 (PB) /2017

    Award Winning Article Is Written By: Ms.Yamini L
    Awarded certificate of Excellence
    Authentication No: AP112052006994-30-0421

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