Wages of employees during insolvency process

Whenever a company becomes insolvent, the problem of the assets being less than what has to be paid always arises.

Published: 02nd June 2022 02:00 AM  |   Last Updated: 02nd June 2022 02:00 AM   |  A+A-

Rs 2000

For representational purposes (File Photo | AFP)

Managing insolvency costs or liquidation costs is one of the critical tasks of the liquidator. The liquidator has to clearly demarcate what costs form a part of the liquidation expenses. Since liquidation expenses are treated as a super-priority in the order of paying the debts, this has significant ramifications regarding which assets of the debtor will reduce the share of the creditors—therefore, careful consideration is important. Either the expenses are considered under Section 5(13) of the Insolvency and Bankruptcy Code (IBC), which deals with the insolvency resolution process costs, or Section 53, which deals with priorities of payment.

Recently, in Sunil Kumar Jain vs Sundaresh Bhatt, the Supreme Court ruled that under the insolvency resolution process costs, the wages or salaries that are due of only those employees who worked during the  Corporate Insolvency Resolution Process (CIRP) should  be included in the  liquidation  expenses under Section 5(13). 

This is important because the liquidator has to incur several expenses to manage the corporate debtor as a going concern. In a few industries, the employees might be one of the biggest assets—to keep the business as a going concern, it is necessary to keep the employees engaged in their roles.

The apex court, however, held that for the purposes of including salaries in the insolvency resolution process costs, it is imperative that the corporate debtor was running as a going concern for the corresponding period. In the said case, the question was ordered to be adjudicated by the liquidator first, and in case the liquidator found that the corporate debtor was in fact being run as a going concern, the wages and the salaries were to be included in the costs or otherwise under Section 53.

The question that needs to be answered is whether the employees who become involuntary creditors and do not have sufficient bargaining power should be subjected to such an assessment and qualified judgement. On the other hand, it is also true that there have been a lot of beneficial legislations that have been passed for the employees.

Whenever a company becomes insolvent, the problem of the assets being less than what has to be paid always arises. Since the passing of the IBC, there is grab protection, i.e., the insolvency procedures are a collective action of the creditors.

Therefore, the creditors have to take a hit on the original debt. Even before paying the creditors, the costs have to be settled—otherwise, no liquidator would be able to undertake the resolution process in a satisfactory manner. At the same time, not everything can be included under the costs because then the share of the assets to be given to the creditors will be reduced significantly.

In any case, the employees’ wages for the past 24 months have a significantly greater priority than others—they come even before the unsecured creditors, and rank equally with the secured creditors who have relinquished their security. Moreover, it can be seen that the Indian legislation favours the position of the employees as even wages that have not been paid for the 12 preceding months have a priority over the unsecured creditors.

Therefore, it can be seen that the imminent threat of employees being in a worse position when a company becomes insolvent happens only when the debtor’s assets are not even sufficient to cover liquidation costs. In such a case, the employees who worked for the company to keep it up and running get priority. Otherwise, they are dealt with under the waterfall mechanism according to the priorities stated therein and are still placed in a better position than the other creditors.

Kavya Lalchandani

Legal scholar based in the UK

(lalchandani.kavya@gmail.com)


TAGS
Insolvency

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