How Are Pensions Handled in Company Insolvency?

In the event of a company’s insolvency or bankruptcy, employees' pension and retirement benefits are treated as part of the company’s liabilities. However, pension funds are given special protection under the Insolvency and Bankruptcy Code (IBC) of India. Employees have certain rights to recover their pension benefits during the insolvency process, and these claims are prioritized alongside other employee dues like salaries and provident funds.

How Pensions Are Handled in Company Insolvency

Pension as Part of Employee Claims

Pension liabilities are considered part of the employee claims in insolvency proceedings. Employees are priority creditors under the Insolvency and Bankruptcy Code (IBC).

Employees' pension dues are given priority over other unsecured creditors in the insolvency resolution process. This means that employees' pension contributions and retirement benefits must be paid before any payments are made to other creditors, such as suppliers or contractors.

Section 53 of the IBC – Priority of Claims

Under Section 53 of the IBC, employee dues, including salaries, severance pay, gratuity, and pension, are classified as priority claims.

The law ensures that pension benefits owed to employees are settled as a priority claim in the insolvency or liquidation process. This applies to both government-sponsored pension schemes (like EPF) and company-specific pension schemes.

Treatment of Pension Funds

Pension funds or retirement benefits that are due to employees are handled by the Insolvency Resolution Professional (IRP) or the Resolution Professional (RP) managing the insolvency process.

If the company is undergoing liquidation, the liquidation proceeds are used to settle the employee pension dues as part of their priority claim, along with other employee benefits like unpaid wages, severance, and provident fund.

Employee Provident Fund (EPF) and Pension

In cases where employees’ Provident Fund (PF) and pension contributions are not paid, these dues are prioritized under the IBC. The EPF (Employee Provident Fund) and pension schemes are treated as secured claims because these funds are meant to provide financial security for employees after retirement.

The Employee Provident Fund Organization (EPFO) manages these funds and ensures that employees’ pension entitlements are paid before any payments are made to unsecured creditors.

Pension Liabilities in Corporate Insolvency Resolution Process (CIRP)

During the Corporate Insolvency Resolution Process (CIRP), the Insolvency Professional appointed to the company has a responsibility to assess the pension liabilities and ensure that these amounts are considered while formulating the resolution plan.

A resolution plan that does not adequately account for employee pension benefits can be rejected by the Committee of Creditors (CoC) or the National Company Law Tribunal (NCLT).

Liquidation of Company

If the company is undergoing liquidation, the assets of the company are sold off, and the proceeds are used to settle outstanding claims. Employee pensions are treated as priority claims and are paid from the proceeds of the liquidation before any payments to unsecured creditors.

However, if the company’s assets are insufficient to meet the liabilities, employees may only receive a fraction of their pension dues.

Government Pensions and Insurance Schemes

If employees are part of a government pension scheme, such as the Employees' Pension Scheme (EPS) under the EPF, these pensions are not typically affected by the company's insolvency. The government pension is managed by the EPFO and remains outside the company's insolvency proceedings, ensuring that pensioners continue to receive their pensions.

Example

Let’s consider a scenario where a manufacturing company undergoes liquidation. Employees of the company have pension dues and provident fund claims. During the liquidation process, the company's assets are sold, and the proceeds are first used to pay employee salaries, pension liabilities, and provident fund dues. As a priority creditor, employees' pension funds are prioritized and are paid from the liquidation proceeds before any creditors like suppliers or banks are paid.

Legal Protections and Employee Rights

Employees have the right to file claims for unpaid pensions as part of their overall claims in the insolvency proceedings.

If employees do not receive their pension payments as part of the liquidation or restructuring process, they can approach the National Company Law Tribunal (NCLT) to seek relief and ensure their pension benefits are paid as per the priority rules outlined in the IBC.

Conclusion

Pension liabilities are prioritized in the event of a company’s insolvency. Under the Insolvency and Bankruptcy Code (IBC), employees' pensions are treated as priority claims, ensuring they are paid before other unsecured creditors in both corporate insolvency resolution and liquidation processes. Employee pension funds are safeguarded through this framework, allowing employees to receive their rightful pension dues, provided that the company’s assets are sufficient.