Employee Priority Payments.
What Are Employee Priority Payments?
“Employee Priority Payments” refer to the ranking and treatment of amounts owed to employees (such as wages, salaries, provident fund, gratuity etc.) when an employer becomes insolvent under the Insolvency and Bankruptcy Code, 2016 (IBC) or during company winding‑up under the Companies Act, 2013.
These rules determine:
Which employee dues are paid first
What amounts are excluded from the corporate debtor’s estate
Whether payments are made before, with, or after other creditors
The relevant legal framework includes:
IBC Section 53 (Waterfall mechanism for distribution in liquidation)
IBC Section 36(4) (Exclusion of certain employee dues from liquidation estate)
Companies Act provisions on preferential payments
Statutory labour obligations such as EPF & MP Act, 1952 and Payment of Gratuity Act, 1972 (which survive insolvency)
Under IBC:
Workmen’s dues (24 months) rank with secured creditors if security is relinquished.
Employees’ wages/unpaid dues (12 months) rank just after in priority.
Provident Fund, gratuity, pension funds are excluded from the liquidation estate and must be paid to employees regardless of the IBC waterfall.
📌 2. Legal Framework (Plain Explanation)
🔹 IBC Waterfall (Section 53)
Under IBC, once assets are sold in liquidation:
Priority in Payment
CIRP costs (expenses of insolvency process)
Workmen’s dues for up to 24 months before insolvency
Wages and unpaid dues of employees (other than workmen) for 12 months
Dues payable to government
Unsecured creditors
(Secured creditors who relinquish security share with workmen for 24 months’ dues)
🔹 Section 36(4)
Provides that amounts due to employees from provident fund, pension fund, and gratuity fund are excluded from the liquidation estate — meaning they must be paid directly and do not form part of assets available for distribution.
🔹 Companies Act (Preferential Payments)
Under Section 327 of the Companies Act, in winding up, certain employee dues (wages, salaries, accrued holidays) are given priority among debts of the company.
📌 3. Key Case Laws (India)
Here are 6 important judicial precedents that explain employee priority payments:
📌 (1) Sunil Kumar Jain & Others v. Sundaresh Bhatt & Others (Supreme Court – 2022)
Key Held:
Salaries of employees who worked during the Corporate Insolvency Resolution Process (CIRP) are classified as CIRP costs and hence have the highest priority under Section 53(1)(a).
Salaries to employees who did not work during CIRP are not CIRP costs and rank lower under Sections 53(1)(b) and (c).
Provident fund, gratuity, and pension fund dues are excluded from liquidation estate under Section 36(4).
Significance:
Clarifies that only actively working employees during CIRP get top priority for salary payments.
📌 (2) State Bank of India v. Moser Baer Karamchari Union (NCLAT – 2019)
Key Held:
Provident fund and gratuity dues are considered employee assets, lying with the corporate debtor but outside the liquidation estate.
They must be paid to employees with priority and not treated as distributable assets.
Significance:
Recognises provident fund/gratuity rights outside the waterfall mechanism.
📌 (3) Ravi Kapoor, RP of Arya Filament Pvt. Ltd. v. Branch Manager, State Bank of India (NCLT/NCLAT)
Held:
Dues under the EPF & MP Act (provident fund) are statutory dues and excluded from the liquidation estate under Section 36(4)(a)(iii) of IBC.
Significance:
Strengthens statutory priority of provident fund claims even over secured creditor claims.
📌 (4) Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia (NCLAT – 2022)
Held:
Employees and workmen are entitled to full payment of provident fund and gratuity dues till insolvency commencement.
This liability continues even after resolution/plan if resolution plan doesn’t satisfy statutory dues.
Significance:
Confirms full payment of retirement benefits regardless of IBC waterfall.
📌 (5) Central Board of Trustees v. Shree Kumar Rajan & Another (NCLAT – 2023)
Held:
EPF and Gratuity funds are to be paid in full by corporate debtor as per statutory Acts and are not part of liquid assets.
Significance:
Reaffirms statutory nature and priority of employee retirement funds.
📌 (6) Supreme Court Upholding IBC/Companies Act Priority Framework (2023)
Held:
Validates Section 327(7) of the Companies Act and the IBC’s priority (waterfall) mechanism.
Workmen’s dues are protected and rank above unsecured creditors but do not get absolute priority outside statutory framework.
Significance:
Affirms constitutional validity of the priority scheme governing employee dues.
📌 4. Practical Takeaways for Employees
✅ Wages and unpaid dues up to 12/24 months have priority over unsecured creditors under IBC.
✅ Salaries of employees who worked during CIRP qualify as CIRP costs with highest priority.
✅ Provident fund, gratuity, pension obligations are outside liquidation estate and must be paid fully, irrespective of termination/insolvency.
✅ Workmen’s dues for 24 months may rank pari passu with secured creditors if they relinquish security.
✅ If the company is being wound up under the Companies Act, wages, accrued holiday pay etc., get preferential status among debts.
📌 5. Conclusion
“Employee Priority Payments” is a blend of labour rights and insolvency law. The jurisprudence today ensures that:
Active employee dues get high priority
Statutory retirement benefits are protected
Liquidation distribution follows a structured waterfall
Courts maintain a balance between creditor interests and employee protections within the IBC framework
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