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Rights of Employees of Insolvent Companies Under The Insolvency and Bankruptcy Code, 2016

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 operational debt.

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.

An Operational 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 debtor himself.

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 systematic manner.

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 unsecured debts.

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.

The employee 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.

The employee 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 Section 9.

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 March 2019
4. IBC- A Saviour For Employees’ (2018) accessed 9 March 2019
5. Wadhwa R,  Insolvency and Bankruptcy Code, 2016’ (2016) accessed 9 March 2019

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