Employee and Workmen Dues During CIRP and Their Priority Under the IBC

Vikrant D. Shetty

Sep 29

10 min read

Updated: Oct 21

Employee and Workmen Dues During CIRP: Treatment and Priority Under IBC

Employees and workmen owed wages, provident fund contributions and gratuity when a company enters Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016 are protected in two ways: wages for work performed during CIRP rank as resolution process costs under Section 5(13), payable ahead of nearly every other claim, while dues from before the insolvency commencement date fall into the distribution waterfall fixed by Section 53. Provident fund, pension and gratuity dues receive further protection under Section 36(4), excluded from the liquidation estate altogether. This article sets out how each category is treated in a resolution plan.

What Do Sections 36 and 53 of the IBC Establish for Employee Dues?

The IBC addresses employee and workmen dues at two distinct stages: during the CIRP itself and, if the process fails, during liquidation. The governing provisions are Section 36 (liquidation estate) and Section 53 (distribution of proceeds). Section 53 establishes the waterfall mechanism, the order in which proceeds from liquidation assets are distributed among stakeholders.

First, insolvency resolution process costs and liquidation costs are paid in full under Section 53(1)(a). Second, workmen dues for the twenty-four months preceding the liquidation commencement date rank pari passu with the dues of secured creditors under Section 53(1)(b). Third, dues owed to employees other than workmen, for the twelve months preceding the liquidation commencement date, come next under Section 53(1)(c). Only after these categories are satisfied do unsecured financial creditors and government dues appear in the waterfall.

CIRP Costs vs. Pre-CIRP Dues: The Critical Distinction

One of the most consequential distinctions in IBC jurisprudence concerns whether employee salary claims fall within CIRP costs, which receive first priority, or constitute pre-CIRP dues that join the waterfall. The Supreme Court settled this question in Sunil Kumar Jain & Ors. v. Sundaresh Bhatt & Ors., (2022) SCC OnLine SC 467. In that case, 272 workers and employees of ABG Shipyard Ltd. sought to have their unpaid salaries, including arrears from before the CIRP commenced, classified as CIRP costs and thus entitled to first-priority treatment.

The Court held that only those employees who actually worked during the CIRP, in the context of managing the corporate debtor as a going concern, are entitled to have their salaries treated as CIRP costs under Section 5(13) of the IBC. Two conditions must both be satisfied: the Resolution Professional must have managed the corporate debtor as a going concern during the CIRP; and the particular employee must have actually worked during that period. Pre-CIRP salary arrears, regardless of how long they remain unpaid, fall outside CIRP costs and must be addressed through the waterfall mechanism or the resolution plan.

Protected Funds Outside the Liquidation Estate: Section 36(4)

Section 36(4) of the IBC carves out certain assets from the liquidation estate entirely. Among these, Section 36(4)(a)(iii) excludes all sums due to any workman or employee from the provident fund, the pension fund, and the gratuity fund. These amounts are ring-fenced, they do not form part of the assets available for distribution among creditors under Section 53. The practical implication is significant: even if the corporate debtor is entirely insolvent and all other creditors receive nothing, these fund dues must be returned to the employees or their trusts. The liquidator has no power to apply them toward creditor claims.

This protection is not absolute in every scenario. Where a corporate debtor has deducted provident fund contributions from employee salaries but not deposited them with the Employees' Provident Fund Organisation (EPFO), a live tension exists between the IBC's liquidation estate exclusion and the EPFO's claim under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. NCLT benches have addressed this on a case-by-case basis, and the matter continues to generate litigation.

Treatment in the Resolution Plan: Statutory Floor Under Section 30(2)(b)

A resolution plan must address the claims of all creditors, including workmen and employees. Section 30(2)(b) of the IBC requires that a resolution plan provide for the payment of debts of operational creditors, which includes workmen and employees, in a manner that is not less than the amount payable to them in a liquidation scenario under Section 53. Since workmen dues rank highly in the waterfall (pari passu with secured creditors for the twenty-four-month window), this provision acts as a statutory floor for what a resolution plan can offer workers. Any plan that breaches this minimum cannot be approved by the Committee of Creditors or the NCLT.

The treatment of employees also has a labour law dimension. A resolution plan, once approved by the NCLT under Section 31, binds all stakeholders including employees. However, the plan cannot override statutory rights under labour legislation, such as the Industrial Disputes Act, 1947, or the Payment of Gratuity Act, 1972, in so far as those rights attach to accrued entitlements. Resolution applicants who plan to continue the business as a going concern must account for existing workforce obligations as part of their valuation and plan structuring.

Claims Filing: Form D, Timelines, and the RP's Verification Role

Workmen and employees must submit their claims to the Resolution Professional using Form D under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The claim must generally be filed within thirty days of the public announcement under Section 15 of the IBC. The Resolution Professional has discretion to accept claims filed within fourteen days of the last date set for receipt of claims. Claims must specify the nature and amount of the due, the period for which it is owed, and must be supported by documentary evidence, wage slips, appointment letters, employment records, or bank statements showing salary credits.

The Resolution Professional verifies each claim and, if disputed, must pass a reasoned order. Employees dissatisfied with the RP's decision on their claims may approach the NCLT under Section 60(5) of the IBC, which vests the Adjudicating Authority with jurisdiction to entertain all questions relating to the insolvency resolution process. Disputes involving the classification of a claimant as a workman versus an employee, which directly affects priority, are also adjudicated by the NCLT.

How Does the Section 53 Waterfall Rank the Different Categories of Dues?

The table below summarises the treatment of various employee-related claims under the Section 53 waterfall mechanism and Section 36(4):

What Principle Did the Supreme Court Lay Down on Distribution in Essar Steel?

The treatment and priority of employee and workmen dues in insolvency are governed by the statutory distribution scheme, the operation of which the Supreme Court explained in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta [(2020) 8 SCC 531]. The Court confirmed that distribution among creditors follows the framework of the Code, with the committee of creditors exercising commercial wisdom over a resolution plan and the statutory waterfall governing a liquidation, and that the plan must respect the minimum entitlements the Code guarantees. Within that framework, workmen and employees occupy a specifically protected position, and understanding where their dues sit is essential both for the workforce of a distressed company and for the professionals administering the process.

Wages During CIRP Versus Pre-Insolvency Dues

A crucial distinction runs through the treatment of employee dues: wages and salaries for work actually done during the corporate insolvency resolution process, while the company is run as a going concern, are treated as insolvency resolution process costs and enjoy the highest priority, being paid in full ahead of other claims. Dues that accrued before the insolvency commenced, by contrast, are claims that rank in the statutory waterfall according to their character. This means that employees who continue to work during the process for the benefit of the going concern stand in a far stronger position for that period than they do for their pre-insolvency arrears, a distinction that resolution professionals and employees alike must keep clearly in mind.

Priority in the Waterfall and Protected Funds

In a liquidation, the waterfall gives workmen's dues for a defined period a high rank, alongside the dues of secured creditors who have relinquished their security, ahead of other unsecured creditors and government dues. Separately, and importantly, certain funds are kept out of the liquidation estate altogether: sums due to workmen and employees from a provident fund, a pension fund, and a gratuity fund do not form part of the estate available for distribution and are to be paid to the workers, reflecting a policy that these hard-won social-security entitlements should not be consumed by the general body of creditors. Employees and their representatives should therefore distinguish carefully between ordinary dues that rank in the waterfall and these protected funds that stand outside it.

Frequently Asked Questions

Are all employee salaries during CIRP treated as CIRP costs?

No. The Supreme Court in Sunil Kumar Jain v. Sundaresh Bhatt (2022) SCC OnLine SC 467 clarified that only salaries of employees who actually worked during the CIRP, in the context of managing the corporate debtor as a going concern, qualify as CIRP costs. Pre-CIRP arrears do not qualify regardless of how long they remain outstanding.

What is the difference between workmen and employees under the IBC?

The IBC does not independently define 'workman.' Section 3(36) of the IBC incorporates the definition under Section 2(s) of the Industrial Disputes Act, 1947, which broadly covers manual, unskilled, skilled, technical, operational, clerical, and supervisory workers. Managerial and administrative employees typically fall into the 'employee' category, which carries lesser priority in the Section 53 waterfall, twelve months versus twenty-four months for workmen.

Are provident fund and gratuity dues paid even if the company has no assets?

Provident fund, pension fund, and gratuity fund dues are excluded from the liquidation estate under Section 36(4)(a)(iii). They do not form part of the assets distributed under Section 53. If the corporate debtor deducted these amounts from salaries but never remitted them to the relevant fund or trust, those amounts remain a specific obligation outside the waterfall. In practice, recovery depends on whether separate trust assets exist and whether the EPFO can enforce independent proceedings.

Can a resolution plan reduce workmen dues below what liquidation would yield?

No. Section 30(2)(b) prohibits a resolution plan from offering operational creditors, including workmen and employees, less than what they would receive in a liquidation scenario under Section 53. This statutory floor is non-negotiable. Any plan breaching this minimum will be rejected by the Committee of Creditors and cannot receive NCLT approval.

What is the deadline for employees to file claims during CIRP?

Claims must generally be filed within thirty days of the public announcement under Section 15 of the IBC using Form D of the CIRP Regulations. The Resolution Professional has discretion to accept belated claims up to fourteen days before the date of submission of the resolution plan to the CoC. After that cutoff, unsubmitted claims may be extinguished upon approval of the resolution plan.

Can employees approach a labour court for unpaid dues once CIRP begins?

No. Once CIRP commences, Section 14 of the IBC imposes a moratorium that stays all proceedings against the corporate debtor, including those before labour courts and industrial tribunals. Employees cannot initiate or continue such proceedings during the moratorium. Their remedy is to file claims with the Resolution Professional and, if aggrieved by the RP's decision, to approach the NCLT under Section 60(5).

What happens to employees whose claims exceed the waterfall priority window?

Dues falling outside the priority windows, for example, workmen dues older than twenty-four months from the liquidation commencement date, or employee (non-workmen) dues older than twelve months, lose their preferential status and are treated as unsecured claims. They rank below financial creditors and above only equity shareholders in the distribution hierarchy.

Does the moratorium under Section 14 of the IBC stop pending labour court or industrial tribunal proceedings?

Yes. Section 14 of the Insolvency and Bankruptcy Code, 2016 imposes a moratorium on the institution or continuation of suits and proceedings against the corporate debtor, including proceedings before a labour court or industrial tribunal, from the date the National Company Law Tribunal admits the CIRP application until the process concludes. An employee with a pending claim must instead lodge it with the Resolution Professional for adjudication within the insolvency process itself.

Does leave encashment owed to a workman count as part of workmen's dues in the Section 53 waterfall?

Yes. Section 53 of the IBC borrows the definition of workmen's dues from Section 326 of the Companies Act, 2013, which includes accrued holiday or leave remuneration alongside wages and salary. Leave encashment for the twenty-four months preceding the liquidation commencement date therefore ranks pari passu with secured creditor dues in the second tier of the Section 53 waterfall, the same tier as unpaid wages for that period.

Can the Resolution Professional terminate employees during CIRP, and what compensation applies?

The Resolution Professional may restructure the workforce where continuing every employee is not viable for running the corporate debtor as a going concern, but termination must still comply with applicable labour legislation such as the Industrial Disputes Act, 1947, including retrenchment compensation and notice requirements. The IBC does not suspend substantive labour law protections during CIRP even though it stays court proceedings brought to enforce them.

Are dues owed to managerial or supervisory staff treated the same as workmen's dues?

No. Only employees who satisfy the statutory definition of workman, broadly those engaged in manual, skilled, technical, clerical or supervisory work below a specified wage or supervisory threshold, receive the higher second-tier priority under Section 53(1)(b) of the IBC. Managerial and supervisory staff who fall outside that definition are treated as other employees, whose dues for the twelve months preceding liquidation rank lower, in the fourth tier of the waterfall alongside unsecured financial creditors.

Does a resolution plan need Committee of Creditors approval to alter workmen dues, and do employees vote on the plan?

Workmen and employees ordinarily hold operational creditor claims and do not have voting rights on the Committee of Creditors, which is composed of financial creditors under Section 21 of the IBC. The plan nonetheless requires the Committee's approval by the requisite majority under Section 30(4) before submission to the National Company Law Tribunal, and Section 30(2)(b) obliges the plan to pay workmen and employees an amount not less than what they would receive in liquidation.

What happens to workmen's dues in liquidation if the liquidation estate has insufficient funds to pay them in full?

Where realised assets are insufficient to satisfy the second-tier claims under Section 53(1)(b) of the IBC in full, workmen's dues for the twenty-four month window and the dues of secured creditors who have relinquished security abate proportionately, since both categories rank pari passu at that tier. Any shortfall is not carried forward as a preferential claim against later tiers in the waterfall.

Is interest payable on delayed disbursement of CIRP-period wages to employees?

The IBC does not prescribe a statutory interest rate on CIRP costs, but wages for the CIRP period must be paid as and when they fall due as part of running the corporate debtor as a going concern. A Resolution Professional who defers payment without justification risks a direction from the National Company Law Tribunal under Section 60(5) to release the amounts owed, since delayed payment undermines their first-priority status under Section 53(1)(a).