Answer By law4u team
Yes, employee salaries are covered under the bankruptcy process in India, particularly under the Insolvency and Bankruptcy Code (IBC). Employees have specific rights to recover their unpaid wages, and the IBC ensures that their claims are prioritized over other unsecured creditors during insolvency proceedings.
How Salaries Are Covered in the Bankruptcy Process
Employee Rights Under IBC
The Insolvency and Bankruptcy Code (IBC) grants priority to employee claims, including unpaid salaries, during the insolvency resolution process.
Under Section 53 of the IBC, employee claims are classified as priority creditors and are paid before other unsecured creditors such as suppliers, contractors, and shareholders.
Priority of Employee Claims
Unpaid salaries and wages owed to employees are considered part of the company's priority debts and are given precedence in the order of repayment. This means that employees are among the first to be paid when the company's assets are distributed during insolvency proceedings.
Employee claims are treated as secured creditors for up to 24 months of unpaid wages and dues (up to a certain limit). The specific amount may be capped depending on the legal framework and terms of the insolvency.
Employee Claims in Insolvency Process
Employees who have not received salaries, wages, gratuity, or severance pay are entitled to file claims during the Corporate Insolvency Resolution Process (CIRP).
The Insolvency Resolution Professional (IRP) or Resolution Professional (RP) appointed in the insolvency process is responsible for verifying and approving the employee claims, ensuring that unpaid salaries are paid to employees as a priority before any payments are made to other creditors.
Severance and Benefits
In cases where employees are terminated due to insolvency or bankruptcy, they may be entitled to severance pay or redundancy compensation. These benefits, too, are given priority in the bankruptcy process.
Employees' Provident Fund (PF), gratuity, and pension benefits are also prioritized as part of their dues under the IBC. These benefits are protected and are paid before unsecured creditors.
Impact on Employee Claims
Secured vs. Unsecured Creditors
Although employees are prioritized, if the company’s assets are insufficient to cover all the liabilities, employees may still face a shortfall in recovering the full amount of their salaries and benefits. However, as priority creditors, they have a higher chance of getting paid before other unsecured creditors, such as banks or suppliers.
Wages for Unpaid Period
Employees are entitled to unpaid wages for the period prior to the initiation of insolvency proceedings. If the company is liquidating, employees can claim wages for up to the last 12 months of their employment, subject to certain legal limits and caps defined under the IBC.
Example
Consider a scenario where a company goes into liquidation and owes several months of unpaid salaries to its employees. During the liquidation process under the Insolvency and Bankruptcy Code (IBC), the company's assets are liquidated to repay its debts. Employees, being priority creditors, will be among the first to receive their unpaid wages, up to the prescribed limit, before the remaining assets are distributed to unsecured creditors.
Legal Actions and Employee Protection
Employees can file claims for unpaid salaries with the Insolvency Professional (IP) during the insolvency proceedings.
If the company has been liquidated, the National Company Law Tribunal (NCLT) ensures that employee claims are considered as priority and are paid first, before any distribution to unsecured creditors.
Conclusion
Under the Insolvency and Bankruptcy Code (IBC), employees' salaries and wages are covered during the bankruptcy process, with a priority claim on the company's assets. Employees are given priority over unsecured creditors, which increases the likelihood that their unpaid wages will be compensated during insolvency proceedings. Additionally, employee benefits such as provident fund, gratuity, and severance pay are also prioritized under the IBC.
