No automatic right to wages during insolvency resolution

By Aditya Vikram Dua and Parvathi Menon, SNG & Partners

There has been considerable discussion over whether salaries to employees should be treated as costs in the corporate insolvency resolution process (CIRP). If they are so regarded, those wages will assume priority over other debts. If not so classified, employees will have to prove in the insolvency as operational creditors. This issue is important in the finalisation of resolution plans. The Supreme Court, in its recent decision in the case of Sunil Kumar Jain and Ors. v Sundaresh Bhatt and Ors., resolved much-debated issues with respect to the rights of workmen and employees to claim wages and salaries earned during the CIRP of corporate debtors as CIRP costs under section 52(1)(a) of the Insolvency and Bankruptcy Code, 2016 (code) and the treatment of amounts due to the respective workmen and employees from the pension funds, gratuity funds and provident funds held by corporate debtors.

Aditya Vikram Dua
Aditya Vikram Dua
Associate partner
SNG & Partners

The adjudicating authority, the National Company Law Tribunal (NCLAT), had approved the liquidation of M/s ABG Shipyard Limited, the corporate debtor. The first respondent was appointed as the liquidator. In making the order for liquidation, the Adjudicating Authority had dismissed the application of the appellants, the workmen and employees of the corporate debtor, that they should be paid wages and salaries for the period of the CIRP and the period before that. The National Company Law Appellate Tribunal dismissed an appeal against the decision of the NCLT.

With regard to the wages and salaries claimed for the CIRP period, the Supreme Court analysed the relevant provisions of the code, those being sections 5(13), 20 and 33(1). Section 5(13) of the code defines insolvency resolution process costs as those costs incurred by the resolution profession in running the business of the corporate debtor as a going concern. Further, section 20(1) provides that the interim resolution professional shall make every endeavour to manage the operations of the corporate debtor as a going concern. Thus, any wages and salaries earned by the workmen and employees employed during the CIRP period shall be classified as CIRP costs and shall be paid first and in full in accordance with section 53(1)(a) of the code

Parvathi Menon
Parvathi Menon
SNG & Partners

The Supreme Court rejected the argument advanced by the appellants that, under section 20 of the code and as decided by the court in the cases of Swiss Ribbons Pvt. Ltd. v The Union of India and Gujarat Urja Vikas Nigam Ltd. v Amit Gupta the resolution professional is obliged to manage the affairs of the corporate debtor as a going concern. Section 20 does not mandate this but rather provides that the interim resolution professional shall make every endeavour to manage the operations of the corporate debtor as a going concern. The court held that there was no requirement that the resolution professional had to ensure that the corporate debtor was a going concern during the CIRP period.

Based on its analysis, the Supreme Court held that whether the corporate debtor was a going concern and whether the wages and salaries earned by the workers and employees were CIRP costs had to be ascertained on a case-by-case basis. There was no blanket presumption regarding the operation of the corporate debtor as a going concern and the CIRP costs incurred.

On the issue of the amounts due to the workmen and employees from provident funds, gratuity funds and pension funds the Supreme Court held that section 36(4) of the code protects amounts due to workmen and excludes provident, gratuity and pension funds from the assets available in the liquidation. Therefore, Section 53(1) of the code did not apply to such funds, which were to be considered as being outside the liquidation process and which were not liquidation assets under the code.

The Supreme Court has settled the matter and has laid out the tests to decide which employee cost will be treated as a CIRP cost. Only those amounts earned by workmen and employees who actually worked during the CIRP of a corporate debtor managed by the insolvency professional as a going concern will be included as a CIRP cost. Two conditions must be satisfied. The resolution professional should have managed the operation as a going concern during the CIRP and the employees should have worked during that period. This decision will only strengthen the code and its implementation.

Aditya Vikram Dua is an associate partner and Parvathi Menon is an associate at SNG & Partners.

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