Employee Continuity After a Resolution Plan Closes in a Slump Sale

Vikrant D. Shetty

Sep 29

14 min read

Updated: Oct 21

Employee Continuity After a Resolution Plan Closes: Slump Sale Transfers and Statutory Dues for the Acquirer

Employees continue automatically only where an approved resolution plan preserves the corporate debtor as the employing entity, because the employment contracts then run on unchanged under the plan; where the plan instead routes the business through a slump sale, the workforce transfers to a new employer and the transaction is tested against the retrenchment safeguards in the Industrial Relations Code, 2020. Provident fund, pension and gratuity dues never enter the liquidation estate, because Section 36(4)(a)(iii) of the Insolvency and Bankruptcy Code, 2016 excludes them, a position the Supreme Court of India confirmed in Sunil Kumar Jain v. Sundaresh Bhatt. This article maps continuity, ranking and statutory dues across both structures.

Why Do Two Resolution Plan Structures Produce Different Workforce Outcomes?

Almost everything about the workforce turns on a single structural choice made in the plan: does the corporate debtor survive as the employing entity, or does the business move out of it into a transferee? Counsel reviewing a plan should settle that question before reading anything else in the employee schedules.

Where the Plan Preserves the Corporate Debtor

Most plans keep the entity and change the shareholding. The employment contracts sit between each employee and the company, and the company has not changed its legal identity, so those contracts run on without interruption. No consent is needed, nothing is novated, and fresh appointment letters are not merely unnecessary but positively unhelpful, since issuing them invites an argument that the old contract was terminated and a new one began. Continuity of service is a matter of plain fact rather than statutory deeming.

What the plan alters is the residual monetary liability attaching to the entity, not the employment relationship itself. The acquirer takes the payroll as it stands, together with every accrued entitlement that survives approval.

Where the Plan Routes the Business Through a Slump Sale

Some plans instead contemplate a business transfer or slump sale, moving the undertaking as a going concern to a transferee for a lump sum. Here the employment position changes completely. A contract of employment is a contract of personal service and cannot be assigned over the employee's head. Each individual has to be offered employment by the transferee and has to accept it. An employee who declines is not transferred, and remains an employee of a shell whose business has gone.

For the population that qualifies as workers, a transfer of the establishment is a compensation event unless three conditions are satisfied together: service is not interrupted by the transfer, the terms and conditions applicable after the transfer are no less favourable than those enjoyed before it, and the transferee is legally liable, on a retrenchment, to pay compensation calculated as though service had been continuous. Miss any one and the transfer itself triggers a liability that no plan valuation has provided for.

The workable answer is a tripartite letter signed by the transferor, the transferee and the employee, which records the acceptance, carries the original date of joining on its face, and states the three conditions expressly rather than leaving them to be inferred from a schedule.

Waterfall Ranking Versus Resolution Process Cost: The Distinction That Sets the Price

Employee money owed by a corporate debtor does not sit in one bucket. It sits in three, and each is paid on a different footing. Confusing them is the commonest error in a bid model.

The Twenty-Four Month and Twelve Month Windows

Section 53(1) of the Insolvency and Bankruptcy Code, 2016 (the Code) ranks workmen's dues for the twenty-four months preceding the liquidation commencement date alongside the debts owed to a secured creditor who has relinquished security, at clause (b)(i). Wages and unpaid dues owed to employees other than workmen get a narrower window, twelve months preceding the same date, and sit a rung lower at clause (c). Anything falling outside those windows drops into the residual tiers, where recovery is usually nominal.

A resolution has no liquidation commencement date, so the grid is applied notionally against liquidation value. It still matters a great deal, because the committee uses it as the reference framework for distribution, and because the 2026 Amendment now fixes a dissenting financial creditor's minimum entitlement by reference to the amount payable if resolution proceeds were distributed in that order. The practical consequence for an acquirer is that the workman and non-workman split is not a human resources classification exercise. It is a pricing input.

What Is the Twin Test for Wages Set Out in Sunil Kumar Jain v. Sundaresh Bhatt?

Wages accruing during the resolution process are a different animal. In Sunil Kumar Jain v. Sundaresh Bhatt [Civil Appeal No. 5910 of 2019, Supreme Court of India, decided 19 April 2022, 2022 INSC 437], the Court held that the wages and salaries of only those workmen and employees who actually worked during the corporate insolvency resolution process are to be included in the process costs. Where the corporate debtor was not run as a going concern, or where individuals did not in fact perform duties, their wages for that period are not automatically process costs and fall back into the waterfall.

Since resolution process costs come off the top and must be paid in priority under section 30(2)(a), the difference between the two characterisations is the difference between paying in full and paying at the plan's distribution rate. An acquirer that accepts a single lump sum process cost certificate from the resolution professional is accepting an unquantified transfer of value. Ask for the split, supported by dated attendance and payroll records rather than an assertion.

Provident Fund, Pension and Gratuity Never Enter the Estate at All

This is the point that most often breaks a bid model after signing, and it is worth stating without qualification. Section 36(4)(a)(iii) of the Code excludes from the liquidation estate all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund. An asset excluded from the estate is not available for distribution, which means section 53 simply does not operate on these sums. They are not senior in the waterfall. They are outside it.

The Supreme Court put this beyond argument in the same judgment, holding that section 36(4) gives outright protection to these dues, that the liquidator has no claim over them, and that section 53(1) has no application to them.

What This Does to the Arithmetic of the Bid

These liabilities cannot be haircut. A plan that offers workmen a percentage of admitted claims cannot apply that percentage to provident fund, pension and gratuity entitlements, and a plan drafted as though it can will attract an objection at the approval hearing or an application afterwards. The number has to be funded in cash, in full, from outside the distribution pool.

Diligence should therefore reconcile the electronic challan cum return filings against the payroll register for every month of the arrear period, obtain the trustee or scheme account statements for any exempted establishment, and treat the gratuity position as two separate questions: what the actuarial valuation says the liability is, and what is actually sitting in a funded arrangement against it. Where a company never constituted a gratuity fund at all, appellate reasoning has divided on whether the exclusion can operate on a fund that does not exist. An acquirer should price that uncertainty on the assumption that it will have to pay, because the downside is asymmetric.

The Acquirer's Entitlement Map

The table below is the working grid. It is worth reproducing in the diligence report, with the last column assigned to a named owner.

Employee entitlement	Treatment on plan approval	Statutory basis	Acquirer's action
Provident fund arrears	Outside the liquidation estate; payable in full and not subject to any plan haircut	Section 36(4)(a)(iii) of the Code	Reconcile return filings against payroll month by month and fund the arrear outside the pool
Gratuity	Outside the estate where a fund exists; contested where the company never constituted one	Section 36(4)(a)(iii); Payment of Gratuity Act, 1972	Obtain the actuarial valuation and the fund balance as two separate figures
Pension fund dues	Outside the estate; not distributed under the waterfall at any rank	Section 36(4)(a)(iii) of the Code	Confirm scheme trustee accounts and identify unremitted contributions
Pre-process wages of workmen	Rank in the waterfall for the twenty-four months preceding the liquidation commencement date	Section 53(1)(b)(i) of the Code	Price at the plan distribution rate, not at face value
Pre-process dues of other employees	Rank for twelve months only, one rung below workmen	Section 53(1)(c) of the Code	Separate the workman and non-workman populations before modelling the bid
Wages of those who actually worked during the process	Resolution process cost, payable in priority and in full	Sections 5(13) and 30(2)(a); Sunil Kumar Jain	Obtain a certificate splitting worked from not worked, backed by attendance records
Wages of those who did not work during the process	Not automatically a process cost; falls back into the waterfall	Sunil Kumar Jain, 2022 INSC 437	Resist a single undifferentiated process cost figure
Continuity of service on a slump sale	Preserved only where all three transfer conditions are satisfied together	Section 73, Industrial Relations Code, 2020	Reproduce the three conditions on the face of the transfer offer letter
Historic employee claims never filed or admitted	Extinguished on approval, subject to the carve-out for excluded statutory sums	Section 31(6) of the Code	Record the extinguishment expressly in the plan with the carve-out spelt out

What Does Section 31(6) Do to Claims That Were Never Filed?

The clean slate principle used to rest on judicial construction. It is now statutory. New section 31(6), inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2026 and in force since 26 May 2026, extinguishes all prior claims against the corporate debtor and its assets on approval of the plan. An employee who did not file, or whose claim was filed late and not admitted, has no surviving money claim against the company.

Two limits deserve attention before an acquirer relies on it too heavily. Extinguishment operates on claims, and the sums protected by section 36(4)(a)(iii) are not claims against a distributable estate at all; treating them as swept away by section 31(6) is an argument few would want to run before a bench. Second, a continuing employment contract is not a claim either. Section 31(6) does not rewrite terms of employment going forward, does not shorten notice periods, and does not convert a permanent workman into a contract hire. Everything that accrues from the approval date onward is simply the acquirer's ordinary employment liability.

Rationalising Headcount After Takeover: The Statute Has Changed

Plans drafted from older precedents still cite the Industrial Disputes Act, 1947. That reference is now wrong, and the error is not cosmetic.

What Do Sections 70 and 79 of the Industrial Relations Code, 2020 Require for Retrenchment?

The Industrial Relations Code, 2020 was brought into force on 21 November 2025, and the Industrial Disputes Act, 1947 stands repealed from that date, along with the Trade Unions Act, 1926 and the Industrial Employment (Standing Orders) Act, 1946. The Industrial Relations (Central) Rules, 2026 were notified and brought into force on 8 May 2026 for centrally regulated establishments, and state rules are following at their own pace.

Section 70 carries forward the familiar conditions precedent to retrenchment for a worker with not less than one year of continuous service: one month's written notice stating reasons or wages in lieu, compensation of fifteen days' average pay for every completed year of continuous service or any part beyond six months, and notice to the appropriate government in the prescribed manner. Section 71 preserves the last-in-first-out principle within a category unless the employer records reasons for departing from it. Section 79 is the successor to prior permission: an establishment employing three hundred or more workers on an average per working day in the preceding twelve months must apply for and obtain government permission before retrenching.

Any plan that assumes headcount rationalisation within the first year of implementation should be priced with that permission risk visible, not buried. Permission is a discretionary administrative decision. It can be refused, it can take months, and the approval of a resolution plan does not create an entitlement to it.

The Gratuity Clock and Why Reset Dates Generate Litigation

Continuity of service is not an abstraction. It fixes eligibility for gratuity under the Payment of Gratuity Act, 1972, which turns on five years of continuous service, and it drives retrenchment compensation, leave encashment and seniority in any future rationalisation. Where the entity survives the plan, none of this is in issue. On a slump sale it is entirely in issue, and the cheapest possible mistake is a transferee payroll system that records the transfer date as the date of joining.

Employees who see a reset date on a payslip file claims, and the claims are usually good. The integration checklist should include a data migration instruction that original joining dates carry across untouched.

What Belongs in the Plan Itself

A schedule that identifies workmen and other employees as separate populations, with dates of joining and amounts, rather than one consolidated head. An express statement of what is being paid on account of provident fund, pension and gratuity, funded outside the distribution pool and described as such.

A resolution process cost certificate that distinguishes wages of those who worked from wages of those who did not. Where the structure is a slump sale, the form of transfer offer letter annexed to the plan, carrying the three statutory conditions on its face.

An extinguishment clause that tracks section 31(6) while expressly carving out the sums excluded by section 36(4)(a)(iii), so that nobody can allege the plan attempted to defeat protected entitlements. And a representation from the resolution professional on unremitted statutory contributions, supported by a retention or escrow sized against the reconciliation gap rather than against the admitted claim figure.

Frequently Asked Questions

Do employees automatically continue after a resolution plan is approved?

Where the plan preserves the corporate debtor as the employing entity, yes. The employer has not changed, so the contracts continue without any act by anyone. If the plan instead moves the business to a transferee by way of slump sale, employment does not transfer automatically; each employee must be offered and must accept employment with the transferee.

Can an acquirer treat provident fund arrears as extinguished under the plan?

No, and you should not build a bid on the assumption that you can. Section 36(4)(a)(iii) of the Code keeps provident fund, pension fund and gratuity fund sums out of the liquidation estate entirely, and the Supreme Court has confirmed that section 53 does not apply to them. They are payable in full and have to be funded from outside the distribution pool.

Which employee wages count as resolution process costs?

Only the wages of those who actually worked during the process. If the corporate debtor was not run as a going concern, or if particular individuals did not perform duties, their wages for that period are not automatically process costs and rank instead in the waterfall. Ask for a split supported by attendance and payroll records before accepting a lump sum figure.

Is the Industrial Disputes Act, 1947 still the law for retrenchment after a takeover?

No. It was repealed on 21 November 2025 when the Industrial Relations Code, 2020 came into force. The conditions precedent to retrenchment now sit in section 70, the order of retrenchment in section 71, compensation on transfer of an establishment in section 73, and the prior permission requirement for establishments with three hundred or more workers in section 79. Plan documents still citing the 1947 Act should be corrected.

Does service continuity survive a slump sale for gratuity purposes?

It survives if the transfer satisfies the three statutory conditions: service uninterrupted by the transfer, terms no less favourable after it, and the transferee legally liable to pay retrenchment compensation on the footing of continuous service. Where those are met, the original date of joining governs the five year qualifying period for gratuity. Where they are not, the transfer is itself a compensation event.

How far back do pre-process employee dues rank in the waterfall?

Workmen's dues rank for the twenty-four months preceding the liquidation commencement date under section 53(1)(b)(i), alongside a secured creditor who has relinquished security. Wages and unpaid dues of employees other than workmen rank for twelve months under section 53(1)(c), one rung lower. Older amounts fall into the residual tiers. The distinction between the two populations should be settled at diligence, not after signing.

Does an employee's consent matter when a slump sale transfers the business to a new employer?

Consent is not a blanket requirement, but the terms on which continuity is offered determine whether the transfer counts as retrenchment for workers covered by the Industrial Relations Code, 2020. Where service is uninterrupted, the terms offered are not less favourable, and the transferee undertakes to treat prior service as continuous for retrenchment compensation, the transfer is not treated as a compensation event even without individual consent. Where any of those three conditions fails, the employee is entitled to notice and retrenchment compensation as if the employment had ended, regardless of whether the employee is willing to join the transferee.

What happens to an employee's leave encashment and provident fund account when a slump sale changes the employer?

Leave encashment accrued up to the transfer date is a liability that should be settled or expressly carried forward under the transfer agreement, since a slump sale ends the employment relationship with the transferor unless continuity is preserved on the statutory conditions. A provident fund account under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 can be transferred to the new employer's establishment using the standard transfer request process, preserving the accumulated balance and, where the scheme allows, continuity of service for eligibility purposes, but this requires an affirmative transfer request; it does not happen automatically merely because the business changed hands.

Can employees who do not qualify as workers under the Industrial Relations Code, 2020 claim the same continuity protection?

No. The continuity safeguard against treating a transfer as retrenchment applies specifically to the population that qualifies as workers under the Industrial Relations Code, 2020, broadly those engaged in manual, skilled, technical, operational or clerical work, subject to exclusions for supervisory and managerial staff drawing wages above the prescribed threshold. Employees outside that definition, typically senior management and highly paid supervisory staff, are governed by their individual employment contracts, and any continuity on a slump sale for them is a matter of contract rather than a statutory entitlement.

Does a resolution plan's extinguishment of claims under Section 31(6) reach unpaid bonus or ex gratia amounts owed to employees?

Ordinary bonus and ex gratia dues that arose before the insolvency commencement date and were not part of the protected categories under Section 36(4)(a)(iii) of the Insolvency and Bankruptcy Code, 2016 fall within the claims a resolution plan can extinguish under Section 31(6), provided the claim was capable of being filed and admitted in the resolution process. An employee who did not file a claim during the process cannot recover it from the acquirer after the plan is approved, since Section 31(6) binds all stakeholders including those who did not participate, which is why timely filing matters more for these amounts than for provident fund, pension or gratuity, which sit outside the estate altogether.

How is service continuity documented so that gratuity eligibility survives a slump sale transfer?

The safest method is a tripartite letter of transfer signed by the transferor, the transferee and the employee, recording that the employee accepts the transfer, stating the original date of joining, and confirming that the terms and conditions of service are not less favourable than before. This record is what an employer relies on later to establish, under the Payment of Gratuity Act, 1972, that the five years of continuous service required for eligibility runs from the original joining date rather than resetting at the transfer, and its absence is the most common reason gratuity disputes arise years after a takeover, once payroll systems have already been migrated and the original documentation is hard to locate.

Who is liable for wages that fell due but were unpaid in the period just before CIRP began?

Wages that accrued before the insolvency commencement date rank as ordinary workmen's dues under Section 53(1) of the Insolvency and Bankruptcy Code, 2016, sharing priority with secured creditors who have relinquished security for the twenty-four months preceding the liquidation commencement date, and as ordinary employee dues for the twelve months preceding it, rather than being paid in full as a cost of the process. They are the corporate debtor's liability, not the acquirer's, unless the resolution plan expressly assumes them, and an acquirer conducting diligence should confirm which pre-process wage claims have been admitted before assuming the workforce carries no historical wage exposure.

Does the acquirer inherit liability for an unfair labour practice or unlawful termination claim pending against the corporate debtor before CIRP?

Where the resolution plan preserves the corporate debtor as the employing entity, a pending claim continues against that same entity under new ownership unless it falls within a category the plan validly extinguishes under Section 31(6) of the Insolvency and Bankruptcy Code, 2016 and was capable of being filed in the resolution process. Where the plan instead routes the business through a slump sale, the claim ordinarily remains with the transferor corporate debtor rather than passing to the transferee, since a slump sale transfers the undertaking as a going concern but does not by itself assign the transferor's pre-existing litigation liabilities unless the transfer agreement expressly assumes them.