Rights of an Employee When Company Goes Bankrupt.

Employees are the most valuable asset of a company. But what happens when the company goes insolvent? What happens to the employees, their jobs and the money due to these employees?

Which is why the Government of India promulgated laws which state the rights of an employee when the company goes bankrupt. The Insolvency and Bankruptcy Code (the BCI) was enacted in order to promote the maximization of the value of assets in a time-bound manner. This code works towards effective protection and to put to Justice, the creditors against the unscrupulous debtors who may misuse the reason for insolvent in order to run away from their liabilities.

Under this code, the National Company Law Tribunal was enacted whereby the conductive and efficacious implementation of the IBC is being carried out, which has instilled confidence among the creditors for systematic and speedy reform. This remedy under the IBC is also available to the unpaid employees of the debtor which is now a growing concern and is being recognized by the judiciary as well.


The National Company Law Tribunal has in their recent case under IBC admitted a case of non-payment to the employees. As of the provisions of the IBC, employees are now considered as the operational creditors in respect of their pending salaries which would be considered as dues on the account of the employer.

Here Are Certain Rights Available to the Employees When the Company Goes Bankrupt

Rights of an Employee When Company Goes Bankrupt.
Rights of an Employee When Company Goes Bankrupt.

1. Employees to be Considered as Operational Creditors


Previously if a company went bankrupt, the employees were left jobless with dues in their salary. Such employees who support a big family and education of kids suffer when a company goes bankrupt and there is no recourse for their loss. But since the IBC was enacted, it gave the employees a chance to get paid off their unpaid hours and hard work in the company.


And hence now the National Company Law Tribunal under the provisions of the IBC, employees are now considered as the operational creditors in respect of their pending salaries which would be considered as dues on the account of the employer.

2. Speedy Trials for the Employees


Again previously the employees suffered years for their trials to come to conclusions and to get paid of their salaries. Some times the proceedings are stretched as long as 10-15 years, in which case most of the employees are already dead before the case came to a decision.


Hence under the IBC, the employees are now provided with rights for speedy trials. The employees of a number of companies including Zeal Global projects, Applied Electromagnetics Pvt. Ltd. and Phadnis Properties have initiated recovery proceedings under the IBC. A time limit of 180 days is been provided to come to a resolution which helps in early proceedings and conclusion which in turn restores the faith among employees in Justice.

3. Salaries to Innocent and Sincere Employees


With the advent of the IBC, there has been a shift in how employees feel about their jobs. Previously the employees used to be constantly scared of being terminated and thrown out of jobs with or without the reason of insolvency. But today this is changed, now the employees are provided Justice through the way of rights.


Where if they had been terminated innocent or the sincere employees who delivered their services during the tenure of their employment. These employees are provided with proper recourse when the employer tries to run away from his liabilities under the shield of insolvency.

4. Entitlement to Distribution of Sale Proceeds


Now under the laws of IBC, the employees are recognized are secured, creditors. Which means that the employer is liable to pay to his unpaid employees as he would to any other creditor. In the recent judgment, it has been stated that the employees acquire the standing of the secured creditors on and from the date of order of liquidation and become entitled to the distribution of sale proceeds.

Guy Wearing Tie showcasing his rights as an employee

This means that whenever the company is under liquidation the employees will be entitled to have their share in the distribution of sale of assets of the company. National Company Law Tribunal has made it rather easier for employees to get recourse and compensation for their damage.

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