How Are Employee Dues Treated in Insolvency?

Employee dues are an important aspect of the insolvency process, as employees are often one of the most vulnerable groups during financial distress. Under the Insolvency and Bankruptcy Code (IBC), employee claims are treated with a high level of priority. This prioritization ensures that employees receive their due compensation before most other unsecured creditors, reflecting the critical role they play in a company’s operations. Whether the company undergoes a resolution or liquidation process, employee dues are given special treatment to safeguard their rights.

How Are Employee Dues Treated in Insolvency?

The treatment of employee dues during insolvency is primarily governed by the IBC, and employee claims are categorized as priority claims. The priority of such claims ensures that employees are paid before most unsecured creditors, but the exact treatment can vary based on whether the company is undergoing Corporate Insolvency Resolution Process (CIRP) or liquidation.

Priority of Employee Dues in Insolvency

• Workmen’s Dues: The IBC prioritizes employee dues, especially workmen’s claims, such as unpaid wages and severance pay. Under Section 53 of the IBC, workmen's dues are given top priority in liquidation proceedings. Workmen are considered a part of the first category of creditors, and their claims are paid before the claims of unsecured creditors and shareholders.
• Employee Dues: Employee dues (including unpaid salaries, bonuses, and other benefits) are treated as part of the second category of priority creditors. These dues are paid after workmen’s claims but before most unsecured creditors in the event of liquidation or resolution.

In the Corporate Insolvency Resolution Process (CIRP)

During CIRP, the Resolution Professional (RP) takes charge of the company’s assets and works with creditors to formulate a resolution plan. The RP ensures that employee claims for unpaid wages and other dues are acknowledged and dealt with as part of the resolution plan.

• Unpaid Salaries: Employees can submit their claims for unpaid salaries, wages, or other benefits to the RP. These claims will be verified by the RP, and the company’s resolution plan must address these claims.
• Employees’ Dues as a Priority: Employee dues are treated as priority claims in the resolution process. The resolution plan needs to allocate funds for these dues, or they may be paid in full before the remaining creditors receive their share.

In Liquidation

If the company is liquidated, employee dues are settled from the proceeds of the liquidation sale. The payment priority under IBC during liquidation is as follows:

• Workmen’s Dues: These are paid first, up to a maximum of 24 months of unpaid wages and benefits.
• Employee Dues: After workmen’s dues, employees’ claims for unpaid wages, gratuity, and other severance payments are addressed. Employee dues are paid before any unsecured creditors (e.g., suppliers, service providers).
• Remaining Creditors: After employees are paid, the remaining funds are used to settle unsecured creditors and other claimants.

Gratuity and Provident Fund (PF) Claims

Employee benefits such as gratuity and provident fund (PF) are treated separately and are generally not subject to the same priorities as unpaid wages. However, these benefits are still treated as priority claims:

• Gratuity: In case of liquidation, gratuity dues are considered a part of employee claims and are settled as part of the priority process.
• Provident Fund (PF): PF contributions are often managed separately and may not be impacted directly by the insolvency. However, if there are unpaid contributions owed to employees, these can be claimed during the CIRP or liquidation process.

Legal Protections for Employees’ Dues

Workmen’s Dues and Employee Rights

As mentioned earlier, workmen’s dues are given the highest priority under the IBC, ensuring that employees are compensated for their work. The payment of up to 24 months’ unpaid wages is prioritized over other unsecured creditors in the case of liquidation.

Timely Filing of Claims

Employees are encouraged to file their claims for unpaid salaries, severance pay, gratuity, and other dues with the Resolution Professional (RP) during the CIRP or with the Liquidator during the liquidation process. These claims must be filed within the timelines set by the insolvency authorities.

Salary Arrears and Severance Pay

Employees may claim their salary arrears, severance pay, and other dues directly from the RP during the CIRP. In liquidation, these dues are settled from the proceeds of the company’s assets.

Example

Suppose a company, ABC Ltd., undergoes insolvency proceedings under the IBC. Employees of the company have not received their salaries for the last three months, and they also have unpaid severance claims. ABC Ltd. enters the Corporate Insolvency Resolution Process (CIRP), and the Resolution Professional (RP) is appointed.

Steps employees should take:

• File Claims: Employees should immediately submit their claims for unpaid wages and benefits (such as severance, gratuity, etc.) to the Resolution Professional.
• Claim Priority: The Resolution Professional will verify the claims and prioritize them according to the IBC guidelines, ensuring that employee dues are paid before unsecured creditors.
• Monitor the Resolution Plan: The employees should stay informed about the progress of the resolution plan and ensure their claims are addressed in the final resolution proposal.

In Case of Liquidation:

If the company cannot be revived and enters liquidation, the Liquidator will sell the company’s assets and ensure that employee claims are settled from the proceeds, with workmen’s dues being prioritized.

Legal Protections and Consumer Actions

Protection Under IBC

Employees have the legal right to be paid their dues under the IBC. Their claims for unpaid wages and severance are treated with priority, ensuring that they are compensated even when the company is facing financial distress.

File Claims Within Time Limits

Employees should file their claims with the Resolution Professional or Liquidator within the prescribed time limit. Any delay in filing the claim may affect their ability to receive payment for unpaid wages and other benefits.