Approval of Layoffs by a Resolution Professional under the IBC, 2016

1. Introduction

The question whether a Resolution Professional (RP) can approve, order, or implement a layoff of employees during the Corporate Insolvency Resolution Process (CIRP) involves an important interaction between:

• the Insolvency and Bankruptcy Code, 2016 (IBC);
• the Industrial Disputes Act, 1947 (ID Act);
• the employment contracts and standing orders applicable to workers;
• the powers and duties of the Resolution Professional;
• and the rights of workmen regarding wages, retrenchment compensation, provident fund and gratuity.

The issue is particularly important because an RP is not the ordinary management of the company. Once CIRP begins, management of the corporate debtor is displaced and the RP takes control for the purposes of preserving the corporate debtor and attempting resolution.

A recent and highly relevant decision is Unitech Machines Karamchari Sangh v. Vivek Raheja, where NCLAT dealt directly with a layoff notice issued by an RP during CIRP. The matter has also reached the Supreme Court, making this a developing area of law.

2. Meaning of Layoff

Under Section 2(kkk) of the Industrial Disputes Act, a layoff generally means the employer's failure, refusal or inability to give employment to a workman whose name is on the muster rolls, for specified reasons such as:

• shortage of coal;
• shortage of power;
• accumulation of stocks;
• breakdown of machinery;
• natural calamity;
• or other connected reasons recognised by law.

A layoff is fundamentally different from termination.

Layoff

The employment relationship generally continues, but the employee is temporarily not provided work.

Retrenchment

The employment relationship is terminated, subject to the applicable statutory requirements.

Therefore, an RP cannot simply describe an actual termination as a "layoff" and thereby avoid statutory obligations.

3. Why the Issue Arises During CIRP

When CIRP begins, the corporate debtor may be:

• financially distressed;
• unable to pay salaries;
• operating below capacity;
• completely non-operational;
• suffering from lack of working capital;
• unable to obtain raw materials;
• or operating only to preserve assets.

The RP has a statutory responsibility to preserve the corporate debtor and, where possible, keep its business running as a going concern.

Section 25(1) of the IBC specifically requires the RP to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.

This creates a difficult balance:

Protection of the corporate debtor and its value vs. protection of employees' statutory rights.

4. Powers and Duties of the Resolution Professional

Important provisions include Sections 17, 20 and 25 of the IBC.

Section 17

After appointment of the IRP, management of the affairs of the corporate debtor vests in the IRP.

Section 20

The IRP must make every endeavour to protect and preserve the value of the property of the corporate debtor and manage its operations as a going concern.

Section 25

The RP must take measures for:

• preservation of assets;
• protection of value;
• continued business operations;
• representing the corporate debtor;
• obtaining necessary information;
• and taking steps necessary for resolution.

Therefore, an RP may have to make difficult operational decisions concerning employees.

However, this does not mean that the RP has unlimited power to terminate or lay off employees.

5. Does the RP Need Approval of the Committee of Creditors?

This distinction is important.

The CoC primarily exercises commercial decision-making authority in the CIRP, particularly regarding resolution plans and other matters specified under the IBC.

But the RP is responsible for day-to-day management and administration of the corporate debtor during CIRP.

Consequently, every operational employment decision does not automatically require a separate CoC resolution.

However, where a proposed employee-related measure:

• materially affects the viability of the business;
• creates substantial CIRP costs;
• requires significant expenditure;
• affects the resolution plan;
• involves closure of substantial operations;
• or requires an important commercial decision,

the RP should carefully consider the CoC's involvement and the applicable provisions of the IBC.

The RP should also document the reasons for the decision.

6. Leading Case: Unitech Machines Karamchari Sangh v. Vivek Raheja

NCLAT, 16 September 2025

This is presently one of the most directly relevant decisions on the subject.

The employees/workmen of Unitech Machines Ltd. challenged a layoff notice dated 1 February 2020 issued by the RP during CIRP.

They argued that:

• the layoff violated the Industrial Disputes Act;
• statutory procedure had not been followed;
• Sections 25C, 25F and 25M of the ID Act were violated;
• the RP had no authority to issue the layoff;
• and the notice was effectively a termination disguised as a layoff.

The RP argued that the corporate debtor was not operational and that continuing the workers without work would unnecessarily increase costs.

NCLAT ultimately upheld the position that the workmen were not entitled to wages for the period after the layoff where they had not actually worked, particularly where the approved resolution plan governed their claims.

The NCLAT relied, among other things, on the RP's statutory duties under Sections 17, 20 and 25 of the IBC.

Important principle

The decision demonstrates that:

An RP can take operational measures concerning employees when necessary to preserve the corporate debtor, particularly where the corporate debtor has ceased operations and employees are not actually working.

However, this decision should not be read as establishing that every layoff or retrenchment by an RP is automatically valid.

7. Supreme Court Status of Unitech Machines Case

This point is extremely important for a current legal answer.

The NCLAT decision was challenged before the Supreme Court in:

Unitech Machines Karamchari Sangh v. Vivek Raheja & Anr., Civil Appeal No. 12557/2025.

The Supreme Court issued notice in the appeal and the case raised significant questions concerning:

1. whether the IBC overrides the Industrial Disputes Act; and
2. whether an RP can retrench employees under the guise of a layoff during CIRP. 

The Supreme Court's 2026 cause-list material confirms that the appeal remains before the Court.

Therefore

The safest legal position is:

The NCLAT judgment provides important guidance, but the broader question concerning the precise relationship between the IBC and labour-law protections in the context of layoffs/retrenchment is subject to Supreme Court consideration.

This is especially important in an examination or legal memorandum.

8. Sunil Kumar Jain v. Sundaresh Bhatt

Supreme Court, 2022

This is another important case.

The Supreme Court examined the treatment of workmen and employees' wages during CIRP and considered Sections 20 and 25 of the IBC.

The Court emphasised the distinction between:

• employees whose services are actually utilised during CIRP; and
• employees who are not actually working during CIRP.

Section 25 requires the RP to preserve the corporate debtor and its continued business operations.

Relevance to layoffs

The principle is particularly important for determining whether employee wages constitute CIRP costs.

If workers actually provide services necessary for keeping the corporate debtor functioning, their wages can have a different status from employees who are not working because operations have stopped.

This reasoning was specifically relied upon in the Unitech Machines litigation.

9. Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia

NCLAT, 19 July 2024

This case arose from the CIRP of Jet Airways.

The corporate debtor's operations had stopped, and an Asset Preservation Team was constituted to undertake necessary activities for preservation of assets and compliance.

The case illustrates an important principle:

During CIRP, employees may be retained where their services are necessary for preservation of the corporate debtor, even where normal commercial operations have ceased.

The case therefore demonstrates that the RP should examine the actual necessity of employee services, rather than applying an automatic "all employees remain" or "all employees are laid off" approach.

10. Shree Gopal Paper Mill Labour Union v. Anuj Jain

NCLAT, 1 July 2024

The case concerned claims of employees/workmen relating to salary, provident fund and gratuity.

NCLAT upheld the resolution plan subject to ensuring payment of the full provident fund and gratuity amounts recognised under the applicable law and plan.

Importance

An RP cannot treat employees merely as ordinary unsecured creditors.

Certain statutory employee benefits receive special protection.

Therefore, even when layoffs are implemented, the RP must carefully account for:

• salary dues;
• provident fund;
• gratuity;
• other statutory employment dues;
• and amounts provided under the resolution plan.

11. Regional Provident Fund Commissioner v. Ashish Chhawchharia

This case involved substantial employee and workmen claims during the CIRP of a corporate debtor.

The employees argued that statutory rights could not simply be extinguished through a resolution plan.

The litigation demonstrates the importance of statutory employee protections, particularly concerning provident fund and gratuity.

The NCLAT proceedings specifically considered claims concerning approximately ₹1,254 crore of employee/workmen dues and the treatment of PF and gratuity under the resolution plan.

Principle

A resolution process does not give the RP or resolution applicant a free hand to disregard mandatory statutory employee benefits.

12. Drish Shoes Workers Union v. Drish Shoes Ltd.

This is another useful NCLAT decision concerning layoff and employee claims.

The corporate debtor had issued a layoff notice before commencement of CIRP and subsequently remained closed.

The workers argued that the layoff was illegal and that their salary claims should continue.

NCLAT examined the effect of the earlier layoff and the RP's responsibility to calculate the employees' claims.

Importance

The case demonstrates that an RP must carefully determine:

When exactly did the employee's entitlement to wages arise and when did it cease?

The RP cannot simply assume that every employee claim continues indefinitely throughout CIRP.

13. Automobile Products of India Ltd. v. Rukmaji Bala

Supreme Court

Although this case predates the IBC, it is important for understanding the traditional approach to retrenchment/employee protection.

The Court considered the requirement of governmental/tribunal permission for retrenchment and recognised that retrenchment must be examined in light of statutory safeguards and fairness to employees.

Relevance

The case reminds us that labour law traditionally imposes substantive and procedural protections before employees can be deprived of employment.

The existence of insolvency proceedings therefore creates a conflict that must be analysed carefully rather than assuming that all labour-law requirements disappear.

14. Section 238 of the IBC

Section 238 provides the overriding effect of the IBC.

It states, in substance, that where there is inconsistency between the IBC and another law, the IBC prevails to the extent of the inconsistency.

This provision played a significant role in the NCLAT's reasoning in Unitech Machines. The tribunal held that the IBC could prevail where inconsistent provisions of labour legislation interfered with the insolvency process.

But there is an important qualification

Section 238 does not mean:

"All labour laws become irrelevant once CIRP starts."

Rather, the correct approach is:

1. identify the IBC provision;
2. identify the labour-law provision;
3. determine whether there is an actual inconsistency;
4. apply Section 238 only to the extent of that inconsistency.

This distinction is especially important because the Supreme Court is examining the issue in the Unitech Machines appeal.

15. Layoff vs Retrenchment During CIRP

This is probably the most important practical distinction.

Layoff

Employee is not provided work but employment may continue.

Retrenchment

Employment itself is terminated.

Closure

The undertaking or establishment itself ceases operations.

An RP must not use the label "layoff" to accomplish what is legally a retrenchment or termination.

If the substance of the action is termination, the applicable statutory requirements must be considered.

16. Can the RP Simply Terminate All Employees?

No—not automatically.

The RP's powers are connected with the objectives and duties imposed by the IBC.

The RP should examine:

• whether the company is functioning;
• whether the employee's services are necessary;
• whether the employee is required for preservation of assets;
• whether operations are temporarily suspended;
• whether the company is being run as a going concern;
• whether the employee's services are required under the resolution strategy;
• whether the action amounts to layoff, retrenchment or termination;
• and what statutory payments become payable.

A blanket termination without legal analysis could be challenged.

17. Role of the CoC

The Committee of Creditors is primarily responsible for commercial decisions concerning resolution.

However, an RP should not assume that CoC approval cures every illegality.

For example:

If a statutory employee benefit is mandatory, merely obtaining CoC approval does not automatically extinguish that statutory entitlement.

This principle is particularly important for:

• PF;
• gratuity;
• statutory wages;
• other protected employee dues.

The employee-related consequences of a resolution plan must therefore be consistent with the mandatory provisions of law.

18. Practical Procedure for an RP Considering Layoff

A legally safer process would be:

Step 1 — Assess the operational position

Determine whether the corporate debtor is:

• operational;
• partially operational;
• temporarily shut;
• or completely non-operational.

Step 2 — Identify essential employees

Determine which employees are necessary for:

• asset preservation;
• security;
• accounting;
• statutory compliance;
• maintenance;
• regulatory obligations;
• resolution-process activities.

Step 3 — Examine employment law

Determine whether the proposed action constitutes:

• layoff;
• retrenchment;
• termination;
• closure;
• or mere suspension of work.

Step 4 — Calculate employee liabilities

Calculate:

• salary;
• layoff compensation where applicable;
• retrenchment compensation;
• notice pay;
• PF;
• gratuity;
• other statutory dues.

Step 5 — Consider the CoC

Where the decision has substantial financial or strategic implications, place the matter before the CoC as appropriate.

Step 6 — Document reasons

The RP should record:

• financial condition;
• operational necessity;
• employee requirement;
• alternatives considered;
• legal basis;
• financial impact.

Step 7 — Issue proper notice

Where statutory notice is required, it should be properly served.

Step 8 — Preserve employee rights

The fact that an employee has been laid off does not automatically eliminate accrued statutory benefits.

Step 9 — Update claims

Employee claims should be properly collated and admitted/rejected with reasons under the CIRP framework.

19. Six+ Important Case Laws at a Glance

20. Key Legal Position

The safest way to state the current legal position is:

A Resolution Professional has substantial authority to manage the corporate debtor and take operational measures necessary to preserve its value and continue or restructure its business during CIRP. This may, in appropriate circumstances, include reducing or suspending the workforce. However, the RP cannot treat the IBC as an unrestricted power to terminate employees or disregard mandatory labour-law protections. The precise extent to which the IBC overrides the Industrial Disputes Act in relation to layoffs and retrenchment is presently an important issue before the Supreme Court in Unitech Machines Karamchari Sangh v. Vivek Raheja.

The NCLAT's 16 September 2025 decision supports the RP in the particular circumstances of that case, especially where the corporate debtor was non-operational and employees did not actually work after the layoff.

But because the Supreme Court appeal raises the broader questions of IBC overriding labour law and whether retrenchment can be disguised as layoff, one should avoid presenting the NCLAT decision as an absolute rule.

Exam-ready conclusion

Approval of layoffs by a Resolution Professional is not an unrestricted managerial power. The RP derives authority from Sections 17, 20 and 25 of the IBC and must act to preserve the corporate debtor and maximise the possibility of resolution. Where the enterprise is non-operational and employees are not actually rendering services, recent NCLAT authority indicates that the RP may take steps to discontinue work and employees may not be entitled to wages for periods in which they did not work. At the same time, statutory employee benefits such as provident fund and gratuity retain significant protection, and an RP cannot merely label a termination as a "layoff" to bypass mandatory labour-law requirements. The continuing Supreme Court proceedings in Unitech Machines Karamchari Sangh v. Vivek Raheja make the IBC–labour-law interface a developing area of Indian insolvency jurisprudence.