When an insolvent company goes into liquidation, employees face a challenging period as the company ceases operations and ultimately stops all salary payments. During this time, understanding How Does Liquidation Affect Employees becomes crucial, as unpaid wages typically become a claim in the liquidation process. For employees, knowing their rights and exploring any available remedies can make a significant difference. Liquidation may also have long-term effects on an employee’s professional career, and seeking advice on steps to take during and after the liquidation process can be invaluable.
Who Is Considered an Employee?
Section 2(t) of the Occupational Safety, Health, and Working Conditions Code, 2020 defines an “employee”, in respect of an establishment, as a person employed on wages by an establishment to do any skilled, semi-skilled, unskilled, manual, operational, supervisory, managerial, administrative, technical, clerical or any other work, whether the terms of employment be express or implied and a person declared to be an employee by the appropriate Government.
Employee vs. Contractor
An employee serves in the company and performs their work as a representative of the company. They are considered preferential creditors entitled to unpaid wages, holiday pay, etc. An independent contractor provides services to a company, but their work is to further their own business and not only the company’s. They are usually paid for particular tasks and do not work for only one company. As they are not a part of the company, they do not have the rights employees enjoy during Company liquidation. If you are a contractor, you may be an unsecured creditor, not an employee. In short, an employee works in and is part of a company while contractors provide services to a principal’s company, hence employees are higher on the priority list for the distribution of assets of the company.
Purpose of Liquidation
Once the company is ‘liquidated’ the company is dissolved and ceases to exist. The main purpose of the liquidation process is to ensure a just distribution of the company’s assets among its members or stakeholders. An independent liquidator is appointed by the Adjudicating Authority and has the duty to take control of the company to wind it up in an orderly manner to benefit creditors. There are two types of liquidation, i.e.voluntary liquidation, and compulsory liquidation under the Insolvency and Bankruptcy Code, 2016 (IBC). Voluntary liquidation is opted by the creditors if the company fails to meet its liabilities. When a company enters voluntary liquidation, it typically convenes a meeting with creditors to discuss the proposed resolution plan.
If the plan is rejected, or if any bound party contravenes it, or if the Adjudicating Authority agrees with the Committee of Creditors to proceed with liquidation, the company moves toward liquidation. In this scenario, employees should understand How Does Liquidation Affect Employees, as it impacts their wages, employment status, and possibly even their career prospects. Knowing the implications of liquidation on their rights and exploring potential remedies is essential for employees navigating this challenging time.
The Liquidator’s Role and Responsibilities
Section 35 of the IBC lists the powers and duties of the liquidator to include the verification of claims of all creditors, taking custody or control of the company’s assets, property, effects, and actionable claims of the corporate debtor, evaluating the assets and property of the company, to protect and preserve the company’s assets, carry on the business of the company for its beneficial liquidation, sell the immovable and movable property or actionable claims of debtor by public auction or private contract.
The liquidator should also keep the appropriate authority informed through a reporting mechanism. Hence, the main role of the liquidator is to oversee the business operations of the corporate debtor until the assets are sold and the debts are repaid under the supervision of the Adjudicating Authority.
Understanding Liquidation and its Impact on Employees
During the liquidation of the company, the company usually terminates the employment of their employees. As per section 53 of the IBC, if the company has any assets left after paying the liquidator’s fees, employees have the right to be paid for their outstanding entitlements before unsecured creditors. The liquidator makes the employees redundant before selling the assets of the corporate debtor and distributing the funds to the stakeholders. The employee will be notified about their immediate redundancy on the company’s dissolution and any entitlements of their pay in writing.
Insolvent Liquidation and Employee Rights
- Automatic Redundancy: The liquidator during an insolvent liquidation will dismissed almost immediately. The company being in debt means that there may be insufficient funds left for the employees’ wages, holiday debt, pension contributions, etc.
- Employees as Creditors: Employees become creditors because they can claim what they are owed, such unpaid wages, holiday pay, and other entitlements under section 53 of the IBC, when the company enters into liquidation
- Preferential vs Unsecured Creditors: Employees can be preferential creditors or unsecured creditors, depending on the type of payment that they are due. Because of the priority basis under section 53 with other creditors and stakeholders on the list, there may not be funds left to pay the employees in full, and there may be a chance that the employees receive nothing at all.
Employee Redundancy Claims During Liquidation
Employees can claim redundancy pay during liquidation, but they may not be prioritised, and the likelihood of receiving full payment is low because of the company’s financial state. However, the employees can file a claim and attempt to recover some amount.
- Redundancy Payments: As per insolvency law in India, the entitlement to severance pay is dependent upon factors such as the terms of employment, the company policy, etc. It is not mandatory under the IBC, but during liquidation, employees can recover any unpaid wages or salary, and redundancy payments. India can introduce legal concepts from other countries to ensure that employees are not in a precarious position when the company is being wound up, as in the United Kingdom, employees can claim redundancy pay through the National Insurance Fund (NIF).
- Other Entitlements: As per section 53(1)(c), the employees may be paid for wages and unpaid salary. As per the NIF, employees can also submit a claim for holiday pay and other statutory entitlements.
- Claim Timeline: An insolvency professional should make a public announcement once appointed as an interim resolution professional. Section 38 of IBC and Regulation 12(2) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 provides that claims are to be submitted within 30 days from the liquidation commencement date to the liquidator. The liquidator should verify the claims within 30 days from the last date of the receipt of the claims. The creditor, or in this case, the employee does have a chance to withdraw his claim under section 38(5) of the IBC within 14 days of its submission.
The Role of the Redundancy Payments Service (RPS)
In the UK Government’s Insolvency Service, the Redundancy Payments Service (RPS) is the organisation that administers claims from the National Insurance Fund to the employees when the company that has employed them has gone into liquidation.
Voluntary Liquidation: A Better Option for Employees
Voluntary liquidation is a better option for employees because they have an opportunity to apply for redundancy earlier in the liquidation stages, compared to compulsory liquidation. Employees can also plan for the future without any uncertainty over them. Directors take control of the business operations of the company and proactively close down the company, terminating the employees, often without giving them their remaining wages or salary. When opting for voluntary liquidation, it is possible to avoid uncertainty and potential delays for creditor-initiated liquidation. It may be unlikely that the company will be able to pay these liabilities in its current financial position. In this case, the employees may have to claim from the National Insurance Fund (NIF).
How to Make a Redundancy Claim
When an employee is made redundant, they have certain entitlements, such as redundancy pay, a paid notice period, and any money their employer owes them. An employee can make an application for redundancy pay if they have been an employee for at least 2 years, holiday pay for any leaves that an employee has not taken, or other payments. An employee cannot make an application until the date of the insolvency and details which include their bank account details, National Insurance Number, e-mail address, start date of employment, date of redundancy, and other requisite information.
To make a redundancy claim under RPS, an employee has to apply online through the government website and submit the necessary information and their case reference number (CN) that will be received from the insolvency practitioner. To access this application, the employee should go to the government website complete the required columns, and submit their claims.
Why Professional Assistance is Crucial
Seeking professional assistance is important when the company is facing financial difficulty. Directors are available to trade wrongfully and protect the employees when they are facing financial distress and their employment is at risk due to liquidation. By accepting professional assistance, employees become aware of the entitlements that are available to them, such as outstanding wages and superannuation, outstanding leave of absence, etc., and with proving their claims.
Conclusion: How Does Liquidation Affect Employees
When a company goes into liquidation, the employment agreements have a high chance of being terminated. The liquidators have the duty to inform the employees of this liquidation as they may have statutory and financial entitlements. Employees who work for the company are one of the first that are affected by the company’s liquidation. Hence, it is important as an employee to understand what legal steps can be taken to ensure that they will be paid because of their unexpected termination, any rights that may be available to them, and the importance of seeking professional assistance when it is required.