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What happens to the Employees of an Insolvent/bankrupt company?

If you are an employee/creditor of a company that might go bankrupt or has already gone bankrupt, this article is for you! If you think the bankrupt company owes you nothing, think again because the law says otherwise.
Written by:
Abhishek Sahoo
Published on

Insolvency and Bankruptcy Code is considered as the game-changer for e debtors. Powers and rights are vested in favour of the creditors to initiate the insolvency proceedings against the debtor of an insolvent company for effective resolution. The key focus of the code is to identify the financial failure as soon as possible and maximize the asset value of an insolvent company.


What are the rights of the employees of an insolvent company?

If an individual or an employee has to take money from any debtor and the debtor of the company makes default as non-payment of the debt, or even on interest or any part of the debt, non-payment of the instalment due or if the company becomes insolvent then that specific individual or employee can take action against the debtor or an insolvent company by filling an application[1] before the NCLT.

What options do employees have under the Resolution Plan?

Employees of an insolvent company have an option to launch corporate insolvency resolution process against their ex-employer or the debtor of the insolvent company and compel him/her to pay their dues. For this, employees have to firstly send a demand notice to the insolvent company stating that they have not been paid yet.

If the company still does not pay the debt within ten days of sending the notice, then the employees can start the insolvency resolution process against the employer, provided that there are no pre-existing disputes. This resolution process can be started by filing an application with the adjudicating authority which is the National Company Law Tribunal or NCLT in this case

Can an employee pursue revisions in the Resolution Plan?

The employees don’t have any inherent power to revise the resolution plan but once he/she becomes an operational creditor and a part of the committee of creditors, they can pursue revisions in the resolution plan provided that there is no financial creditor. Further, this revised resolution plan has to be sent before the Committee of creditors by the insolvent professional. Now, this committee of creditors have to pass the revised resolution plan with 66% minimum voting. Finally, after passing the plan by the committee, this revised resolution plan will be taken before the court for the final approval.

What are new frameworks with respect to this?

Whenever a company defaults on making payment to its creditors or any employees, then the Insolvency and Bankruptcy Code, 2016[2] orders the National Company Law Tribunal to conduct and initiate the Insolvency resolution process. An application for the resolution process can be initiated before the NCLT by a financial creditor or by an operational creditor or by the corporate itself. Likewise, if a developer fails to provide the possession of a house in case of a housing project then the buyer can also approach NCLT for initiating Insolvency Resolution Process.

In the resolution process, an interim resolution professional shall be appointed, who is conferred with the power to take charge of an insolvent company; that has defaulted. He/she shall take necessary steps to revive the company in default. He/she can also raise fresh funds to continue operations. To find a resolution, Insolvency Resolution Process will be completed within 180 days, with a 90-day extension. Upon failure to find a resolution, the company is liquidated to pay the creditors.

External Links:

[1] Sitemap of the NCLT form- Login and fill in the application with NCLT

[2] Insolvency and Bankruptcy Code, 2016 - An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner.