Workmen and Employees' Dues under IBC: Priority and Funds

When a company fails, its workers are often its most vulnerable creditors: they depend on their wages, cannot diversify their risk, and may lose years of provident fund and gratuity. The Code protects them in several ways, while also limiting their priority to keep the system workable for secured lenders. This note explains how workmen and employees are treated at each stage, the meaning of workmen's dues, the exclusion of their statutory funds from the liquidation estate, and the leading cases.

1. Workers as Creditors

• Operational creditors. A claim in respect of employment is an operational debt (section 5(21)), so workmen and employees are operational creditors (Topic 9)
• Applications. A workman or employee may apply under section 9 after serving a demand notice, and in JK Jute Mill Mazdoor Morcha v Juggilal Kamlapat Jute Mills (2019), the Supreme Court held that a registered trade union may file one application on behalf of its members.
• Claims. Workmen and employees file claims individually in Form D, or through an authorised representative in Form E where many claims are involved (Regulation 9; Topic 33)
• Committee of creditors. Where the corporate debtor has no financial creditors, a representative of workmen and a representative of employees sit on the committee along with the eighteen largest operational creditors (Regulation 16; Topic 25)

Figure 1: Workers at each stage of the process

2. Salaries during the CIRP

• Process costs. Wages and salaries of those who work during the process, while the corporate debtor is run as a going concern, are insolvency resolution process costs and are paid in priority (section 5(13)(c))
• Sunil Kumar Jain v Sundaresh Bhatt, 2022. The Supreme Court held that only such wages are process costs; where the debtor could not be run as a going concern, wages claimed for the CIRP period are dealt with under section 53(1)(b) and (c) in liquidation (Topic 31)

3. Workmen's Dues

The Explanation to section 53 gives workmen's dues the meaning assigned in section 326 of the Companies Act, 2013. They include the following.

Figure 2: Components of workmen's dues

• Workman. Takes its meaning from the Industrial Disputes Act and its successor, the Industrial Relations Code, and broadly excludes persons employed mainly in managerial or administrative capacities, who are employees but not workmen.
• Employees. Other employees, including managerial staff, have their unpaid wages for the preceding twelve months protected under section 53(1)(c), at a lower rank than workmen.

4. Priority in Liquidation, Section 53

Figure 3: Where workers rank in the waterfall

• Section 53(1)(b). Workmen's dues for the period of twenty-four months preceding the liquidation commencement date rank equally with debts owed to secured creditors who have relinquished their security under section 52.
• Section 53(1)(c). Wages and unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date rank next.
• Older dues. Dues for earlier periods fall among the remaining debts and dues under section 53(1)(f)
• Moser Baer Karamchari Union v Union of India, 2023. Decided on 2 May 2023, the Supreme Court upheld section 327(7) of the Companies Act, which disapplies the preferential payment provisions of sections 326 and 327 in a liquidation under the Code; workers' dues therefore receive only the priority given by section 53, and the provision is not arbitrary or violative of Article 21.

5. Provident Fund, Pension and Gratuity

• Section 36(4)(a)(iii). Sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund are not part of the liquidation estate and cannot be used for recovery in liquidation.
• Effect. These sums are paid to the workers in full, outside the waterfall, so they are not reduced by the claims of secured creditors.
• Unremitted contributions. Where the employer deducted contributions but did not deposit them in the fund, tribunals have generally treated such amounts as held for the workers and outside the estate; where no separate gratuity fund was ever created, the position has been contested.
• Resolution plans. Plans commonly provide for full payment of provident fund and gratuity dues, and the NCLT examines whether these statutory dues have been properly treated.

6. Resolution Plans

• Minimum entitlement. As operational creditors, workmen and employees must receive at least what they would receive in liquidation, or under the section 53(1) order if the plan's payout were distributed in that order, whichever is higher (section 30(2)(b); Topic 41)
• Continuity of employment. Many plans provide for continued employment of the workforce, which is often more valuable to workers than payment of past dues.
• Extinguishment. Dues not provided for in the plan are extinguished on approval, so workers and their unions must file claims in time (Ghanashyam Mishra, 2021)

7. Frequently Asked Questions

Do workmen rank above secured creditors in liquidation?

No. Their dues for 24 months rank equally with the debts of secured creditors who relinquish their security under section 52, not above them. Secured creditors who enforce their security outside the waterfall are not affected.

Can provident fund dues be used to pay secured creditors?

No. Section 36(4) excludes sums due from the provident, pension and gratuity funds from the liquidation estate, so they are paid to the workers and not distributed under the waterfall.

Do the preferential payment provisions of the Companies Act apply in IBC liquidation?

No. Section 327(7) of the Companies Act disapplies sections 326 and 327 in liquidation under the Code, and the Supreme Court upheld it in Moser Baer Karamchari Union (2023).

8. Related Topics

• Topic 9: Operational Debt and Operational Creditors. Workers as operational creditors.
• Topic 55: Section 36. The liquidation estate.
• Topic 57: Section 53. The waterfall mechanism.