What is Insolvency?
A company is said to be insolvent when its financial debts supersede over company assets, in such cases of business distress the company may be forced to wind up to pay off debts. A company cannot initiate closure on the mere grounds of insolvency. i.e., Insolvency may lead to closure, but not all closures are due to insolvency.
Termination (liquidation) can be instituted voluntarily by a company, its members, creditors, or by the National Company Law Tribunal ( NCLT ). During termination the company ceases to exist and gets deregistered, its assets are sold to claimants to discharge debts.
Employees face a great deal of hurdles during insolvency, employees being the driving force of an organization as well as our economy calls for adequate legislation protecting their rights and interests is imperative. Therefore to ease things up for employees, the government of India came up with several welfare plans and policies backing employees’ interests.
IBC 2016 – Procedure
The Insolvency and Bankruptcy Code ( IBC ) is one such regime implemented in the year 2016 to ensure that employee’s claims are settled during insolvency. IBC prioritizes employee claims before any creditors, including debts due to the government. The code bestows employees with an opportunity to claim their unpaid dues from the company via the National Company Law Tribunal.
Under IBC employees are categorized as Operational Creditors. Operational Creditors are persons to whom operational debt is owed for goods or services done by them, and operational debt refers to the debts incurred in the course of employment. The person who owes the debt to the operational creditor is known as a corporate debtor.
Employee Rights
An employee is a person hired by the company to perform specific tasks in the course of employment, for a specific period, in consideration of salary or wage.
IBC states that employees’ dues or the period of twenty-four months preceding the insolvency commencement date shall be treated equally with the debts owed to secured creditors.
Employee wage dues are given priority over unsecured debts of central and state governments. The code further states that other categories of debts should be settled only after fulfilling employee dues in full.
Prerequisites for Applying
The applicant should be an employee of the organization
Applicants must owe an operational debt against the defaulter company.
The minimum amount of salary due to the applicant should be Rs1lakh.
Essential Documents
Application of IBC 2016
Insolvency and Bankruptcy Code prescribes a 2 step procedure for initiating insolvency proceedings against a corporate debtor:-
The employee should send a demand notice to the company in case of default. After receiving the demand notice the company is expected to repay the debt within 10 days.
In case of failure to respond from the side of the company, then the employee can proceed against the company by applying to the National Company Law Tribunal ( NCLT ). Further, the NCLT may accept or reject the application within 14 days, and if convinced NCLT shall accept and complete proceedings within 180 days.
Suppose, Y filed a complaint in NCLT against a company X Ltd. of which Y was a former employee. The complaint was filed for recovery of an unpaid sum due to the employee. Along with the application, the applicant submitted a letter from the respondent company guaranteeing salary payment, a comprehensive list of overdue amounts and additionally claimed 9% interest for delayed payment. Responding to the demand notice, the respondent initiated legal proceedings seeking to refute letters presented by the applicant.
The court dismissed the company’s plea because the suit was filed subsequent to the delivery of the demand notice by Y. Further applicant’s applications were accepted by NCLT.
Conclusion
Indian law had provisions to punish defaulters in case of Contracts, Civil liability, Criminal liability, etc. Later on, the government of India recognized the need for an extensive framework for resolving employee disputes during insolvency and passed The Insolvency and Bankruptcy Code, 2016 (IBC).
Under IBC Employees can file applications in NCLT for repayment of debt due from the company individually, or jointly representing other employees of the same company. During insolvency employees are given elevated priority over other creditors, i.e., employee’s claims are settled before others including the government. Before the implementation of IBC Insolvency laws were in fragments making it difficult for creditors and employees to recover their due debts. IBC has been successful in imparting efficient and time-bound solutions concerning insolvency in India.
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