Managing insolvency costs or liquidation costs is one of the critical tasks of the liquidator. The liquidator must clearly delineate the costs that are part of the liquidation costs. Since liquidation costs are treated as a super-priority in the order of payment of debts, this has significant ramifications as to the debtor’s assets which will reduce creditors’ share – therefore careful consideration is important. Either the expenses are taken into account under Section 5(13) of the Insolvency and Bankruptcy Code (IBC), which deals with the costs of the insolvency resolution process, or under Section 53 , which deals with payment priorities.
Recently, in Sunil Kumar Jain v Sundaresh Bhatt, the Supreme Court ruled that under the costs of the insolvency resolution process, wages or salaries due only to employees who worked during the insolvency resolution process d’entreprise (CIRP) should be included in the liquidation. expenses under Article 5(13).
This is important because the liquidator has to incur several expenses to run the debtor company as a going concern. In a few industries, employees can be one of the greatest assets – to keep the business running, it is necessary to keep employees engaged in their roles.
The Supreme Court, however, held that for the purposes of including salaries in the costs of the insolvency resolution process, it is imperative that the debtor company has been in business during the relevant period. In the said case, it was ordered that the matter be first decided by the liquidator, and in the event that the liquidator found that the debtor company was in fact carried on as a going concern, wages and salaries were to be included in costs or otherwise under section 53.
The question to be answered is whether employees who become involuntary creditors and do not have sufficient bargaining power should be subject to such an assessment and a qualified judgment. On the other hand, it is also true that there have been many beneficial legislations that have been passed for the employees.
Whenever a company becomes insolvent, the problem of assets being less than what needs to be paid always arises. Since the adoption of the IBC, there is protection against seizure, ie insolvency proceedings are a collective action of creditors.
Therefore, creditors must take a hit on the original debt. Before even paying the creditors, the costs must be settled, otherwise no liquidator would be able to undertake the resolution process satisfactorily. At the same time, not everything can be included in the costs, since then the share of assets to be given to creditors will be significantly reduced.
Either way, salaries for employees in the last 24 months have a significantly higher priority than others – they even come before unsecured creditors and rank on par with secured creditors who waived their security. Moreover, it can be seen that Indian legislation favors the position of employees since even wages which have not been paid during the previous 12 months have priority over unsecured creditors.
Therefore, it can be seen that the imminent threat of employees being worse off when a business becomes insolvent only occurs when the debtor’s assets are not even sufficient to cover liquidation costs. In such a case, employees who have worked for the company to keep it going have priority. Otherwise, they are treated under the cascading mechanism according to the priorities set out therein and are always placed in a better position than other creditors.
UK based lawyer