IBC Proceedings Initiated by Former Employees for Unpaid Dues

Vikrant D. Shetty

Aug 14

10 min read

Updated: Aug 26

Former employees can initiate insolvency proceedings against a defaulting company under Section 9 of the Insolvency and Bankruptcy Code, 2016, by applying to the National Company Law Tribunal as operational creditors once the unpaid operational debt meets the prescribed threshold. Individual dues below the threshold may be aggregated with other employees' claims to qualify. Workmen receive materially higher priority than other employees in the Section 53 liquidation waterfall. This article explains how employees file claims, what protections apply during resolution, and how dues rank in liquidation.

Classification of Employees Under the IBC

Operational Creditors: The General Category

The IBC classifies employees and workmen as operational creditors. Section 5(21) defines an "operational debt" to include a claim in respect of the provision of services. Employee salaries, wages, and other service-related dues fall within this definition. A former employee owed unpaid salary, for example, is an operational creditor with an operational debt.

This classification has significant implications. Operational creditors do not vote in the Committee of Creditors (CoC). Their claim in a CIRP is protected by the Section 30(2)(b)(i) floor (they must receive at least liquidation value in any resolution plan) and by the Section 53 waterfall in liquidation (certain workmen dues rank ahead of unsecured financial creditors). But they are not CoC members and have no direct say in the approval of a resolution plan.

Workmen Versus Other Employees: A Critical Distinction

Not all employees are treated alike. Workmen (as defined in the Industrial Disputes Act, 1947) enjoy a specific statutory protection in liquidation under Section 53(1)(b) of the IBC: their wages and dues for 24 months preceding the liquidation commencement date rank pari passu with secured creditors who relinquish their security interest. This is a high ranking in the Section 53 waterfall. Other employees (non-workmen) receive a different treatment: their dues for 12 months preceding the liquidation commencement date rank third in the waterfall, below secured creditors and workmen.

In CIRP (as opposed to liquidation), there is no equivalent differential treatment embedded in the statute itself; the resolution plan must simply meet the Section 30(2) minimums. However, the Insolvency Resolution Process Costs, which include costs incurred in running the corporate debtor as a going concern during CIRP, are paid first, and employee salaries falling due during CIRP are typically treated as part of these costs.

Initiating CIRP for Unpaid Dues: The Operational Creditor Route

Section 9: Application by Operational Creditors

Under Section 9 of the IBC, an operational creditor may file an application before the NCLT to initiate CIRP against the corporate debtor if the operational debt is Rs. 1 crore or more (the threshold has been revised by central government notification over the years; practitioners should confirm the current threshold) and the debt is due and payable. The operational creditor must first deliver a demand notice under Section 8, giving the corporate debtor 10 days to pay the debt or raise a dispute. If no response is received, or if the debt is not paid, the Section 9 application may be filed.

Can Multiple Employees Aggregate Claims to Meet the Section 9 Threshold?

The minimum threshold for triggering CIRP is Rs. 1 crore. Individual employees owed amounts below this threshold cannot, by themselves, meet the threshold. However, a group of employees may jointly file a Section 9 application, aggregating their individual dues to cross the threshold. Courts have taken a pragmatic view on this, recognising that the IBC should not be unavailable to aggrieved employees merely because individual dues are modest. Some NCLT benches have permitted joint applications by multiple employees.

Can a Company Defeat a Section 9 Claim by Alleging a Pre-Existing Dispute?

The corporate debtor can defeat a Section 9 application by demonstrating a pre-existing dispute: that the claimed dues were disputed before receipt of the Section 8 demand notice. If the company argues that the employee was not entitled to the claimed amount, or that the employment was terminated for cause, or that a deduction was contractually permissible, and if this dispute arose before the demand notice, the NCLT may reject the application. The existence of a genuine pre-existing dispute is a complete defence to a Section 9 application, unlike under Section 7 (financial creditor applications), where no such dispute defence is available.

Dues Provable During CIRP

Filing Claims with the Resolution Professional

Once CIRP commences (whether on an employee's application or that of any other creditor), employees must file their claims with the Interim Resolution Professional (IRP) or the Resolution Professional (RP) in the prescribed form. The claim covers all dues owed up to the insolvency commencement date: unpaid salary, pending provident fund contributions, pending gratuity, bonus, leave encashment, and any other employment-related amounts. Dues that accrue after the insolvency commencement date are treated as CIRP running costs.

The Forms and Deadlines

The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 prescribe specific forms for claim submission. Employees submit their claims in Form C (for dues other than those as a financial creditor, using Form A) or in a form that the RP may direct, depending on the category. The claim must be accompanied by proof of employment, salary slips, and any other documentation supporting the amount claimed. The CIRP Regulations prescribe a claims deadline, and employees who miss it risk having their claims excluded from the resolution plan.

Protection in the Resolution Plan

The Section 30(2) Floor

Section 30(2)(b)(i) of the IBC requires a resolution plan to provide for payment to operational creditors (which includes employees) of at least the amount they would receive in liquidation under Section 53. For workmen, this liquidation value is typically higher (given their second-ranking position under Section 53(1)(b)) than for other employees. For employees below the workmen threshold, the liquidation value depends on the total asset pool and the claims ranking ahead of them.

In many CIRP resolutions, the liquidation value available for operational creditors is negligible. This means the resolution plan may lawfully provide very low or even zero recovery to employees other than workmen, as long as this matches the liquidation floor. Employees who believe the liquidation value calculation is incorrect may raise this before the NCLT when the plan is placed for approval.

Are Employees Paid Their Salary During CIRP?

Where the corporate debtor continues to operate as a going concern during CIRP, the RP manages its affairs. Employees who continue to work during CIRP are entitled to their regular salary as part of the CIRP running costs, which rank first in priority. The RP cannot simply stop paying salaries to employees working during CIRP. Employees who are retrenched during CIRP are entitled to statutory retrenchment benefits, which are also CIRP costs.

Section 53 Waterfall: Employee Priority in Liquidation

If CIRP fails and the corporate debtor enters liquidation, employees' dues are distributed under the Section 53 waterfall in the following priority: first, insolvency resolution process costs; second, pari passu with secured creditors, workmen's wages and dues for 24 months prior to the liquidation commencement date; third, other employees' dues for 12 months; fourth, unsecured financial creditors; fifth, central and state government dues; sixth, remaining debts. This ranking reflects a legislative judgment that the vulnerability of workmen justifies priority treatment.

The 2025 amendments to the IBC proposed adding illustrations to Section 53 to clarify which contractual arrangements will be disregarded for priority purposes. Specifically, contracts between workmen and secured creditors that would subordinate workmen dues to the secured creditor's claim are not given effect. Contracts among creditors within the same class continue to govern the distribution within that class.

Frequently Asked Questions

Can a single employee initiate CIRP for unpaid salary?

Yes, provided the unpaid salary meets the minimum threshold (currently Rs. 1 crore). A single employee owed less than this threshold cannot independently trigger CIRP. However, multiple employees may file a joint application, aggregating their claims to meet the threshold. Each employee should take legal advice on whether their individual or collective claim qualifies.

What is the difference between a workman and an employee under the IBC?

The IBC borrows the definition of "workman" from the Industrial Disputes Act, 1947. A workman is a person employed in any industry to do manual, unskilled, skilled, technical, operational, clerical, or supervisory work. Managerial or administrative employees are generally excluded. This distinction matters because workmen receive higher priority under Section 53(1)(b) in liquidation.

Does the Section 8 demand notice requirement apply to employees?

Yes. Before filing a Section 9 application, an employee who is an operational creditor must deliver a demand notice (or a copy of the invoice) to the corporate debtor under Section 8, demanding payment and giving 10 days to respond. If the corporate debtor pays, or raises a valid pre-existing dispute, the CIRP application cannot proceed. If the debt is genuinely disputed, the employee's recourse lies in the appropriate labour forum rather than the NCLT.

Are provident fund contributions a debt recoverable under the IBC?

Employer contributions to the Employees' Provident Fund (EPF) that have not been deposited with the EPFO constitute a statutory dues owed by the corporate debtor. These amounts are part of the employees' claims in CIRP. The IBC does not override the provisions of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, and EPFO claims are recognised as priority dues. The EPFO may also independently enforce its dues, though enforcement against the corporate debtor is stayed during CIRP by the moratorium.

Can employees claim gratuity in CIRP?

Yes. Gratuity due under the Payment of Gratuity Act, 1972 is an employment-related due and may be claimed as part of an employee's operational creditor claim in CIRP. The gratuity must have crystallised before the insolvency commencement date (i.e., the employee must have already completed the minimum qualifying service). Gratuity accruing during CIRP, for employees who continue in service, is a CIRP cost.

What happens to employees if the resolution plan results in a change of management?

An approved resolution plan may include changes to the corporate debtor's management, workforce, or terms of employment. The plan may provide for retrenchment of employees, revised wage structures, or continuation of all employees on existing terms. The terms applicable to employees post-resolution are governed by the plan. Employees who are retrenched on implementation of the plan are entitled to statutory retrenchment compensation and notice pay, which are obligations of the resolved corporate debtor under the resolution plan.

Can an employee challenge a resolution plan that provides no recovery to them?

An employee may challenge the resolution plan before the NCLT on the ground that it violates Section 30(2)(b)(i) by providing less than the liquidation value due to them. The challenge must show that the liquidation value calculation was incorrect or that the plan's distribution to operational creditors is below the Section 53-based floor. A challenge to the commercial wisdom of the CoC in setting recovery rates, without a Section 30(2) violation, will not succeed.

Can unpaid bonus or leave encashment be claimed in IBC proceedings?

Yes. Bonus, leave encashment, and other employment-related dues that accrued before the insolvency commencement date form part of an employee's claim in the corporate insolvency resolution process. These amounts are claimed together with unpaid salary and provident fund dues in the prescribed form filed with the Resolution Professional. Amounts falling due after the insolvency commencement date, for employees who continue working, are instead treated as insolvency resolution process costs rather than pre-CIRP claims.

What form should a former employee use to file an IBC claim?

A former employee who is not a financial creditor ordinarily files a claim in Form C prescribed under the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, supported by proof of employment, salary slips, and documentation of the amount claimed. The Resolution Professional or Interim Resolution Professional may direct a different form depending on the nature of the claim. Claims must be filed within the deadline set, or the claim risks exclusion from the resolution plan.

Does the IBC moratorium affect labour court proceedings for unpaid dues?

Once CIRP commences, Section 14 of the Insolvency and Bankruptcy Code, 2016 imposes a moratorium prohibiting the institution or continuation of suits and proceedings against the corporate debtor, including proceedings before labour courts or industrial tribunals for recovery of dues. Employees must instead file their claims with the Resolution Professional within the CIRP itself. The moratorium does not extinguish the underlying claim; it channels recovery through the insolvency process for the duration of CIRP.

Which NCLT bench has jurisdiction over an employee's Section 9 application?

Under Section 60(1) of the Insolvency and Bankruptcy Code, 2016, the National Company Law Tribunal bench having territorial jurisdiction over the place where the registered office of the corporate debtor is located is the adjudicating authority for a Section 9 application, including one filed by a former employee as an operational creditor. Filing before a bench without this jurisdiction risks the application being returned or transferred, delaying an already time-sensitive claim, so confirming the registered office address from the Ministry of Corporate Affairs records before filing is a useful preliminary step.

Can an employee appeal an NCLT order rejecting a Section 9 application?

Yes. Section 61 of the Insolvency and Bankruptcy Code, 2016 allows an appeal to the National Company Law Appellate Tribunal against an NCLT order admitting or rejecting a Section 9 application, filed within thirty days of the order, extendable by a further fifteen days if the appellant shows sufficient cause for the delay. Beyond this forty-five day outer limit, the NCLAT has no power to condone delay, so an employee whose application is rejected should not treat the appeal window as flexible.

Is there a ceiling on the gratuity a former employee can claim in a CIRP claim?

Yes. The Payment of Gratuity Act, 1972 currently caps statutory gratuity payable to an employee at Rs. 20 lakh, a limit last revised by government notification in 2018. A former employee filing a claim with the resolution professional during CIRP can claim gratuity up to this statutory ceiling as part of their operational debt. Any contractual entitlement above the statutory cap is not protected in the same way, and its recoverability depends on the specific terms of employment and the company's own gratuity scheme, if one exists.