The Insolvency and Bankruptcy Code, 2016 has been enacted with an objective
of consolidating and amending the laws relating to re-organisation and
insolvency resolution of corporate persons, partnership firms and individuals in
a time bound manner.
It aims at maximization of value of assets of such
corporate persons, partnership firms and individuals, promoting
entrepreneurship, ensuring availability of credit and balancing the interests of
all stakeholders. The Insolvency and Bankruptcy Code, 2016 (hereinafter referred
as the Code) defines debt as any liability or obligation in respect of a
claim that is due from any person. It includes both financial as well as
Section 5 (7) of the Code defines a financial creditor as
any person to whom a financial debt is owed or is legally assigned or
transferred to and Section 5 (8) defines financial debt’ as a debt along with
interest, if any, which is disbursed against the consideration for the time
value of money.
A financial debt arises purely out of the financial contracts
entered into by the corporate debtor with the financial creditor. Operational
debt has been defined under Section 5 (21) of the Code as a claim in respect
of the provision of goods and services including employment or a debt in respect
of dues arising under any law for the time being in force and payable to the
Central Government, State Government or any local authority.
Creditor under Section 5(20) of the Code shall include any person to whom an
operational debt is owed or has been legally assigned or transferred. Chapter II
of the Code which contains provisions relating to the Corporate Insolvency
Resolution Process (hereinafter referred to as CIRP) mentions that where a
corporate debtor commits a default, the CIRP in respect of such corporate debtor
can be initiated by a financial creditor, operational creditor or the corporate
Thus the code provides that all employees and workmen must be
considered within the ambit of the definition of operational creditors and any
due arising in the course of employment shall be considered as operational debt.
This strengthens the position of employees and workmen under the Insolvency
regime in India as they can initiate a CIRP under Section 9 of the Code against
the corporate debtor if it fails to repay the debt within ten days from when the
demand notice under Section 8 of the Code had been delivered demanding payment
of the amount involved in the prescribed form and manner. The Code enforces the
concept of creditor in control’ instead of the debtor in possession in its
full spirit and the very apprehension of losing control over the company has
prompted various employers to settle or resolve their dues in a time bound and
The author, in this project aims to cover the provisions related to the rights
of employees under the Insolvency and Bankruptcy Code to recover their unpaid
wages and salaries from the corporate debtor and bring out a picture about how
it acts a boon for them with the help of judicial pronouncements in this regard.
Employees and workmen are one of the strongest pillars of the economy and they
need the required safeguards from becoming helpless victims in situations of
insolvency and bankruptcy of their employees. It is of utmost importance that
they are empowered with the necessary rights to recover their unpaid salaries
and wages in the course of resolution process of the corporate debtors.
Meaning of Employees or Workmen for the purpose of this Code
An employee is a person who is hired by the employer to perform a particular job
or specific labour of the employer. The employee is entitled to a specific wage
or salary and performs the work under the control or regulation of the employer.
Section 3 (36) of this Code mentions that the term workmen shall have the same
meaning as provided under the Industrial Disputes Act, 1947 which under its
Section 2(s) defines a workman as a person who is employed in any industry to do
any manual, unskilled, skilled, technical, operational, clerical or supervisory
work, for hire or reward, terms of employment be express or implied and includes
any such person who has been dismissed, discharged or retrenched in connection
with, or as a consequence of dispute.
Initiation of CIRP by an Operational Creditor under the Code
The Insolvency and Bankruptcy Code provides the Operational Creditors with a
“two-step process” for the initiation of insolvency proceedings against the
Corporate Debtor. An operational creditor shall on the occurrence of default
have to demand payment of the unpaid debt from the corporate debtor as provided
under Section 8 of the Code provided that the minimum salary that is due amounts
to Rs. 1,00,000/-.
The Corporate Debtor on being delivered such demand notice
may either dispute the debt or repay the unpaid debt within the prescribed time
of 10 days. The term dispute’ includes the pendency of any suit or arbitration
proceedings relating to the existence of the amount of debt, the quality of
goods or service or the breach of representation of warranty. In case, the
corporate debtor does not reply to the notice or repays the debt within such 10
days, the operational creditor can file an application before the National
Company Law Tribunal (NCLT) for initiating a CIRP against the corporate debtor.
The NCLT has to pass and order within 14 days of receipt of such application by
the operational creditor, for either accepting or rejecting such application
along with the reasons of its order. The Code also provides that the corporate
resolution process should be completed within 180 days from the date of
admission of the application but the NCLT is empowered to extend the period
beyond 180 days on the application of the resolution professional.
Priority of payment of debts
Section 53 of the Code contains provisions for priority of payment of debts from
the proceeds from the sale of the liquidation assets. It reads that
notwithstanding anything to the contrary to any law for the time being in force,
while distributing the assests, the order of priority as mentioned in Section 53
has to be followed.
Sub-section (1) clause (b) mentions that the workmen’s dues
for the period of twenty four months preceding the bankruptcy commencement date
shall be treated equally with the debts owed to secured creditors. Clause (c)
provides priority to wages and unpaid dues owed to employees other than workmen
of the bankrupt for the period of twelve months preceding the bankruptcy
commencement days over the dues unpaid to Central or State Governments and
Unless the first category is paid in full, the second or
subsequent category does not get any amount if the assets of the bankrupt
company are insufficient to meet them. The claimants as specified in the same
category or rank will be taking it pari passu.
Recent Judgments upholding the Rights of Employees of Insolvent Companies
For the matters relating to insolvency and bankruptcy proceeding against
companies, the National Company Law Tribunal (NCLT) and the National Company Law
Appellate Tribunal (NCLAT) are the competent adjudicating authorities under the
Code. The following orders of the adjudicating authorities in matters pertaining
to initiation of insolvency proceedings against the employers provide us with an
insight regarding the empowerment of the employees and workmen under the
Insolvency and Bankruptcy Code, 2016.
Mr. N Subramanian vs. M/s Aruna Hotels Limited
This was the first case where the employee approached the adjudicating
authorities under this Code for recovery of their dues against the former
employer. The application in this case had been filed by a former employee of
the respondent company claiming arrears before the NCLT in Chennai.
had left his job in the year 2013 and in spite of multiple assurances by the
respondent company regarding the payment of the dues, the amount had not been
settled. The applicant attached a letter by the respondent company along with
his petition where the respondent company has assured the payment of the salary,
a list or arrears and an interest of 9 per cent for late payment.
sent a demand notice to the respondent company on 29.06.2017 and the respondent
company replied to it on 06.07.2017 stating that the salary had been paid by it
and only a gratuity amount of Rs. 5, 85, 577/- was due as on that date. The
respondent company in this case approached the City Civil Court in Chennai on
06.07.2017 and filed a suit against the operational creditor to declare the
previous letter and notice communications as null and void and also grant a
permanent injunction on the operational creditor for relying on those letters.
The Court rejected this plea on the ground that the Suit had been filed after
the delivery of the Demand Notice by the operational creditor to the respondent
company. Therefore the court held that such a suit was instituted by the
respondent company in order to circumvent the initiation of the CIRP by the
operational creditor against the corporate debtor. Therefore the claim of the
operational creditor was admitted by the adjudicating authority for the payment
of the unpaid due against the corporate debtor.
Nitin Gupta vs. M/s Applied Electro-Magnetic Pvt. Ltd.
This case deals with the admissibility of an application under section 9 by an
employee for non-payment of salary by the respondent company. In this case an
application had been filed by an employee of the respondent company under
Section 9 of the Code for non- payment of salary amounting to Rs. 46, 77, 124/-.
The respondent company accepted the non-payment of salary amounting to Rs. 28,
84, 160/- but raised objections regarding the balance amount. The Court admitted
the application by the employee on the ground of the part admission of the
unpaid salary by the respondent company. It held that the dues in this case fall
under the definition of operational debt as mentioned under Section 5 (21) of
the Code and in such a case the employee is an operational creditor as mentioned
under Section 5 (20).
The Code provides for admission of claim of Rs 1, 00,
000/- and thus the current claim in this case was much above the provided limit
and hence it was liable to be admitted. The NCLT while admitting the application
rejected the issue of existence of dispute’ as contended by the respondent
company as it could not substantially prove a case which was pending before the
Deputy Labor Commissioner.
Therefore the adjudicating authority held that mere
repudiation of the claim in the reply by the respondent company without material
evidence cannot be used as a tool for evasion of liability. The Court admitted
the application on the grounds that firstly, the claim is above the prescribed
limit, secondly, there is existence of a default and lastly, the manner of
application as provided under Section 9 had been complied with.
Mr. Suresh Narayan Singh vs. Tayo Rolls Ltd.-NCLAT
The appeal in this case was filed by Mr. Suresh Narayan Singh, who was an
Authorized Representative of 284 workers of “Tayo Rolls Limited” (hereinafter
referred to as the “corporate debtor”) against an order dated 03.01.2018 passed
by the NCLT, Kolkata.
The NCLT had rejected an application filed by the
appellant under Section 9 of the Code against the corporate debtor on the ground
that the application under Section 9 of the Code has to filed individually and
not jointly. The NCLT also noted that it is not practicable for more than one
operational creditor to file a joint petition as they will have to issue
individual demand notices under Section 8 of the Code.
The learned counsel
appearing on behalf of the appellant contended that even if the individual claim
of the workmen is taken into consideration, the amount of dues which remain
unpaid to each individual worker would amount to more than Rs 1, 00, 000 and
even then, an individual workman in this case would have the right to file a
separate application under Section 9 of the Code. If Section 8 and 9 of the code
are read with Form 5, it becomes clear that the person authorized to act on
behalf of the operational creditor is entitled to file an application under
The NCLAT held that there is a clear existence of all the required
factors, i.e., a debt’ and a default’, which were not disputed by the
corporate debtor, and the application made under section 9 was complete,
therefore, the adjudicating authority should have admitted the application
instead of rejecting it on a technical ground that it was filed by the
authorized representative on behalf of 284 workmen. It held that as it is
evident that the unpaid due to each workman is more than the minimum amount of Rs 1, 00, 000 and there is a default on part of the corporate debtor, the
application under section 9 is fit to be admitted for the initiation of CIRP
against the corporate debtor.
The Insolvency and Bankruptcy Code is a great measure in the corporate arena to
empower the employees and workmen and mitigate their losses in adverse
situations like insolvency and bankruptcy of their employers. It is an effective
tool for preventing the loss of livelihood of the affected employees and workmen
and safeguarding them from a financial catastrophe.
The Code provides the
workmen and employees of the companies with an opportunity to recover their
unpaid dues by approaching the NCLT from the corporate debtor in a systematic
and time bound manner. With a strict time limit of 180+ 90 days of resolve-or-liquidate diktat, the Code is an effective means to reform debtor
behavior in India.
It empowers them with the right to initiate a CIRP against
the corporate debtor as an operational creditor, as specified under the Code,
and places them in a higher priority during the payment of the unpaid debts from
the liquidation of assets of the bankrupt company. The adjudicating authorities
have also regarded this empowerment as a necessary measure and this has been
reflected in the progressive and positive decisions upholding the rights and
interests of the workmen and employees in the recent judgments.
1.The Insolvency and Bankruptcy Code,2016
2. A Primer on the Insolvency and Bankruptcy Code, 2016’ accessed 10 March 2019
3. Decoding the Code: Survey on Twenty One Months of IBC in India’ accessed 9
4. IBC- A Saviour For Employees’ (2018) accessed 9 March 2019
5. Wadhwa R, Insolvency and Bankruptcy Code, 2016’ (2016) accessed 9 March 2019