What you need to know about employee rights in company insolvency

According to Ashutosh Srivastava, Counsel at SKV Law Offices, the employee’s claim under the Insolvency and Bankruptcy Code (IBC), 2016 is an ‘Operational Debt’.

With the National Company Law Tribunal (NCLT) admitting Byju's parent Think and Learn to the insolvency resolution process, the focus has shifted to the rights employees have when a company goes into bankruptcy proceedings.

From job security to wage protection, understanding these rights amidst the complex web of legal proceedings is prudent and essential for employees facing uncertain futures.

PF, gratuity are safe

Law experts say that when a company sets aside funds for the provident fund (PF), gratuity, and pension, these amounts are protected. This means that even if the company goes bankrupt and owes money to creditors, these funds cannot be used to pay off those debts.

“The Supreme Court has consistently held that the workmen/employees concerned shall be entitled to provident fund, gratuity fund and pension fund and these funds thus are specifically kept out of liquidation estate assets and cannot be used for recovery in the liquidation,” said Abe Abraham, Partner at Cyril Amarchand Mangaldas.

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According to Ashutosh Srivastava, Counsel at SKV Law Offices, the employee’s claim under the Insolvency and Bankruptcy Code (IBC), 2016 is an ‘Operational Debt’. Hence, it is prioritised if liquidation proceedings have begun.

“Notably,  the Code provides priority to wages and unpaid dues owed to employees for 12 months preceding the bankruptcy commencement days over the dues unpaid to Central or State Governments and unsecured debts or even the Operational Creditors, who can claim no priority in the process. This mechanism is termed ‘Waterfall Mechanism’ because the higher up you are on the list, the more priority you get to ‘collect the water’ or get your dues,” he said.

The resolution itself does not fire employees

In situations where a company is expected to continue operating despite financial difficulties, industry experts say there's a strong likelihood that employees will keep their jobs, even after a new owner takes over and a resolution plan is approved.

According to Shashank Agarwal, Advocate at Delhi High Court, upon commencement of the insolvency resolution process, the endeavour is first made by the resolution professional to continue managing the affairs of the company (the corporate debtor) as a ‘going concern’, thereby meaning that the company continues to function as it has been before the order of insolvency was passed.

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“Therefore, when a company goes into insolvency resolution process, the first and foremost right of employees is to remain employed with the company. The resolution professional cannot, on its own, lay off, retrench or terminate the services of any employee. This, of course, is also not an absolute right, but is subject to the decision of the committee of creditors or COC,” he added.

However, in case an employee had already been terminated before the proceedings, then such employees have the right to submit their claim for all outstanding dues about their salary and all other emoluments as had been promised by the company.

Salaries won’t be affected 

During the Corporate Insolvency Resolution Process (CIRP), the employees of the company continue to be entitled to their current benefits and salary against rendering of services to the company, said Jyoti Kumar Chaudhary, Partner at Hammurabi & Solomon Partners.

Section 14(2A) of IBC enjoins upon the resolution professional to keep making payments against availing of services which are critical to protect and preserve the value and manage the operations of corporate debtors as a going concern.

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“The employees continue to receive their subsistence and livelihood during the CIRP period, which protects them and their families against looming financial catastrophe. The concerned employee also gets a breathing period, to assess and decide whether to continue with the company if its likely resolution/revival is visible or to look for subsistence elsewhere subject to compliance/waiver of applicable notice period,” Chaudhary said.