Can Employees Claim Salaries During CIRP? Supreme Court Clarifies Rights
Sunil Kumar Jain and others vs Sundaresh Bhatt and others
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• 4 min readKey Takeaways
• A court cannot deny employees' salary claims during CIRP merely because they did not work if it is established that the corporate debtor was a going concern.
• Section 5(13) of the IBC includes salaries of employees who worked during the CIRP as part of insolvency resolution process costs.
• Employees are entitled to provident fund, gratuity, and pension amounts outside the liquidation estate as per Section 36(4) of the IBC.
• Claims for salaries during CIRP must be substantiated by evidence of actual work performed by employees.
• The Liquidator must adjudicate claims independently, ensuring that employees' rights are protected under the IBC.
Introduction
The Supreme Court of India recently addressed critical issues surrounding the rights of employees to claim salaries during the Corporate Insolvency Resolution Process (CIRP) in the case of Sunil Kumar Jain and others vs Sundaresh Bhatt and others. This judgment clarifies the legal standing of employees in insolvency proceedings, particularly regarding their claims for wages and other dues.
Case Background
The case arose from the appeal of 272 employees and workmen of M/s ABG Shipyard Limited, who sought to claim their salaries for the period of the CIRP initiated on August 1, 2017, and ending with the order of liquidation on April 25, 2019. The employees contended that they were on the payroll during this period and had not been terminated or laid off. They argued that the Resolution Professional (RP) had instructed them to continue reporting for work, thus entitling them to their salaries.
The National Company Law Tribunal (NCLT) had initially dismissed their claims, leading to an appeal before the National Company Law Appellate Tribunal (NCLAT), which also upheld the NCLT's decision but allowed the employees to file individual claims with the Liquidator. The employees then approached the Supreme Court, seeking clarity on their rights under the Insolvency and Bankruptcy Code (IBC).
What The Lower Authorities Held
The NCLT had ruled that the employees were not entitled to their salaries during the CIRP period, as the corporate debtor was not operational, and the employees had not rendered any services during this time. The NCLAT affirmed this decision, stating that the employees could submit individual claims to the Liquidator, who would adjudicate them based on the evidence provided.
The Appellate Tribunal noted that while the employees could file claims, the claims would not automatically qualify as CIRP costs unless it was established that the corporate debtor was a going concern and that the employees had worked during the CIRP.
The Court's Reasoning
The Supreme Court examined the provisions of the IBC, particularly Section 5(13), which defines insolvency resolution process costs. The Court emphasized that salaries of employees who worked during the CIRP should be included in these costs, provided it is established that the corporate debtor was managed as a going concern during this period.
The Court highlighted that the RP is mandated to manage the corporate debtor as a going concern under Section 20 of the IBC. However, it clarified that this does not automatically imply that the corporate debtor was indeed a going concern; it must be proven with evidence. The Court noted that if the employees could demonstrate that they had worked during the CIRP and that the corporate debtor was operational, their claims for salaries would be valid and should be prioritized under Section 53(1)(a) of the IBC.
Statutory Interpretation
The Supreme Court's interpretation of the IBC is significant. It underscores the importance of establishing the operational status of the corporate debtor during the CIRP. The Court reiterated that the definition of insolvency resolution process costs includes costs incurred by the RP in running the business as a going concern, which encompasses employee salaries for those who actually worked.
Furthermore, the Court pointed out that amounts due to employees from provident funds, gratuity, and pension funds are explicitly excluded from the liquidation estate under Section 36(4) of the IBC. This provision protects these funds from being used to settle other debts, ensuring that employees receive their rightful dues.
Why This Judgment Matters
This ruling is crucial for employees in insolvency proceedings, as it clarifies their rights to claim salaries during the CIRP. It establishes that employees cannot be denied their wages solely based on the assertion that they did not work during the CIRP if they can prove that the corporate debtor was operational and that they were fulfilling their duties.
The judgment also reinforces the protective measures in place for employee dues, particularly regarding provident funds and gratuity, which are safeguarded from the liquidation process. This ensures that employees are prioritized in the event of a corporate debtor's insolvency, reflecting the legislative intent to protect workers' rights.
Final Outcome
The Supreme Court partly allowed the appeal, directing that the employees submit their claims to the Liquidator, who must adjudicate these claims based on the evidence provided. The Court mandated that if it is established that the corporate debtor was a going concern and that the employees worked during the CIRP, their salaries must be included in the CIRP costs and paid in full before any other claims are settled.
Case Details
- Case Title: Sunil Kumar Jain and others vs Sundaresh Bhatt and others
- Citation: 2022 INSC 438
- Court: IN THE SUPREME COURT OF INDIA
- Bench: Justice M.R. Shah, Justice Aniruddha Bose
- Date of Judgment: 2022-04-19