- 19-Apr-2025
- Healthcare and Medical Malpractice
The bankruptcy or insolvency of a company can have significant consequences for its employees. It can lead to loss of jobs, unpaid wages, and uncertainty about the future. However, under the Insolvency and Bankruptcy Code (IBC) of India, employees are given certain legal protections and priority during insolvency proceedings to ensure that their rights are protected and they are treated fairly.
Job Loss: Employees of a company facing bankruptcy may lose their jobs, particularly if the company is liquidating or restructuring. In case of liquidation, the company ceases operations, and all employees are typically laid off.
Uncertainty: Employees may face an uncertain period before a final decision is made about the company's future, leading to stress and insecurity.
Wage Arrears: One of the major concerns for employees during bankruptcy is the possibility of unpaid wages, salaries, or bonuses. Employees may be owed wages for work performed prior to the commencement of insolvency proceedings.
Priority Claim: Under the IBC, employees have a priority claim over the assets of the company in insolvency proceedings. This means that employees' unpaid wages and other dues, such as severance pay or retirement benefits, are paid before other unsecured creditors.
Employees who are laid off during bankruptcy proceedings are entitled to severance pay (if applicable). Severance pay is compensation provided to employees when they are dismissed, especially if it is due to financial difficulties or bankruptcy. The amount depends on the employee's length of service and the terms of the employment contract.
Employees may also be entitled to redundancy pay if their jobs are terminated due to the closure of the business.
In bankruptcy proceedings, the company may terminate employment contracts, especially if it is restructuring or liquidating. In cases where the company is undergoing Corporate Insolvency Resolution Process (CIRP), the Insolvency Resolution Professional (IRP) may decide to retain employees to maintain business operations during the restructuring phase. However, if the company is liquidating, employees may face termination without severance or termination pay in some cases.
Employees are entitled to receive their Provident Fund (PF) and Pension dues, and these are treated as part of their priority claim during insolvency proceedings. These benefits are paid from the company’s available assets before payments are made to unsecured creditors.
If the company is liquidating, the employees' PF, gratuity, and pension contributions must be paid before creditors.
Employees are considered priority creditors under the IBC. Their unpaid dues, including salary, wages, and severance pay, are prioritized over other unsecured creditors. This ensures that employees have a higher chance of recovering their owed compensation during the insolvency proceedings.
The Insolvency Resolution Professional (IRP) is responsible for ensuring that employees’ rights are protected and that they receive their dues during the insolvency process. The Committee of Creditors (CoC) may include representatives for employees, especially in cases where large-scale layoffs are involved.
In some cases, employees may be retained if the company is undergoing corporate restructuring rather than liquidation. In such cases, the company may be restructured in a way that secures the jobs of its employees, although this is subject to the success of the insolvency resolution process and the decisions of the Committee of Creditors (CoC).
Employees who are laid off due to bankruptcy may receive a severance package or compensation as per their employment contract or local labor laws.
In some cases, employees may receive assistance in finding new employment, either from the government or as part of the company’s restructuring efforts.
Employees can file their claims for unpaid wages, severance, or other dues during the insolvency proceedings. The IRP or the Resolution Professional will review the claims and ensure the payment is made in accordance with the priority under the IBC.
If employees are unfairly terminated during the insolvency process, they can file a claim for wrongful termination or non-payment of dues before the National Company Law Tribunal (NCLT).
A large textile company files for bankruptcy, and its operations are suspended. Employees are laid off as part of the liquidation process. However, since the company is undergoing insolvency proceedings under the IBC, the unpaid wages for the last three months and their severance pay are prioritized and paid out first. The employees receive their provident fund and pension dues, and some employees who had their jobs terminated receive severance packages as part of the liquidation settlement.
The impact of bankruptcy on employees can be significant, ranging from job loss and unpaid wages to severance packages. However, the Insolvency and Bankruptcy Code (IBC) provides certain protections, such as priority payment for wages, provident funds, and severance pay. It ensures that employees’ rights are safeguarded during the insolvency process, and that their dues are paid before other creditors.
Answer By Law4u Team
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