NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

(IX SEMESTER 2023-24)

Topic: Intersection and Dissension between

Labour Law and Insolvency Law

SUBMITTED BY- SOUMYA VERMA

SUBMITTED TO – PROF. MAHENDRA SONI

ROLL NO. – 2019BALLB35

ENROLMENT NO. - A-2077

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 TABLE OF CONTENTS

S. No. Contents Pg. No.

1. Introduction 3
2. Employer- Employee Relationship under Insolvency and 4-5
Bankruptcy Code, 2016
3. Contemporary Concerns 5-6
4. Considerations and Issues relating to Policies 6-7
5. International Scenario 7-8
6. Social Protection and Insolvency: Entitlements in case the 11-12
Employer goes into Insolvency
7. Insurance Funds 13
8. Concerns relating to Transfer of an Undertaking 14
9. Conclusion 14

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 ACKNOWLEDGEMENT

I take immense pleasure in presenting this piece of project work for it provided me an
opportunity not only to gain in-depth knowledge about the concerned topic but also helped
me in developing research skills.

I would like to express my gratitude to Prof. Mahendra Soni, under whose guidance I have
been able to present this project, on the topic, “Intersection and dissention between
insolvency and labour law”.

Lastly, I would like to thank my family and friends for giving constant aid and succour
directly and indirectly in preparing the project in trying times like these.

Thank you.

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 INTRODUCTION
Employee rights and interests may be treated unequally in a corporate rescue due to the
competing purposes of employment law and bankruptcy law in the framework of corporate
insolvency. Although bankruptcy law strives to rehabilitate and rescue insolvent but viable
enterprises, employment law works to safeguard and preserve the employer-employee
relationship. This disparity in policy aims produces conflict between the two statutes.
Workers are a country's most important asset, and a country's economic growth and
development are dependent on long-term job possibilities. In today's global economy,
businesses face immense competitive pressures to reduce costs and increase profits, which
may come at the expense of local labour.1
Bill C-55 was enacted by the Canadian Parliament, establishing the Wage Earner Protection
Program Act, amending the Insolvency Act and the Companies' Creditors Arrangement Act,
and making corresponding adjustments to other Acts. One of the primary goals of this
legislation was to improve the protection of wage employees impacted by the bankruptcy of
their companies.2
In recent years, numerous prominent organisations, including Asia Pulp & Paper, WorldCom,
Calpine and Collins & Aikman, have gone bankrupt due to competition, market instability,
bad management, or other factors. Concerns concerning employee rights in the case of
company bankruptcy were raised following the fall of Enron, the largest corporate insolvency
in American history. The Enron scandal resulted in a huge number of employees terminating
their employment and unable to obtain their work-contract benefits. Many people who had
invested their entire savings in the stocks of Enron and pension fund, were left with nothing,
while Enron's top executives received large bonuses & severance payments or traded their
Enron shares before the firm went bankrupt. In retrospect, the tragedy prompted reform
measures in corporate governance, accounting, and auditing methods, which had both
beneficial and negative consequences. Company bankruptcies and financial difficulties have
prompted politicians to reconsider the procedures that protect employee safety in the event of
their employer's financial collapse.3

1
Gordon W. Johnson, Insolvency and Social Protection: Employee Entitlements in the Event of Employer
Insolvency, April 27-28 2006, available at
https://www.oecd.org/daf/ca/corporategovernanceprinciples/38184691.pdf (Last visited on March 10, 2023).
2
Bill C-55, An Act to amend the Oceans Act and the Canada Petroleum Resources Act, 1st Sess, 42nd Parl,
2017.
3
Houston Business Journal, Enron employees file class action suit, available at
https://www.bizjournals.com/houston/stories/2002/01/28/daily5.html (Last visited on March 09, 2023).

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 STATEMENT OF PROBLEM
Exploring the conflicts and harmonization challenges arising at the intersection of Labour
Law and Insolvency Law.
RESEARCH QUESTIONS

1. How can the conflicting provisions of Labour Law and Insolvency Law be effectively
reconciled to protect the rights of employees during insolvency proceedings?
2. What are the practical implications of the intersection between Labour Law and Insolvency
Law, and how can legal frameworks be adapted to address issues of dissension and ensure
fair treatment of both employees and insolvent entities?
RESEARCH OBJECTIVES
1. To analyze the legal framework governing the intersection of Labour Law and Insolvency
Law and propose strategies for resolving conflicts and enhancing employee protections.
2. To investigate case studies and precedents to assess the practical challenges and opportunities
for aligning Labour Law and Insolvency Law, with the aim of promoting equitable outcomes
for all stakeholders involved.
HYPOTHESIS
Effective reconciliation mechanisms and alignment of Labour Law and Insolvency Law can
mitigate conflicts and ensure equitable treatment of employees during insolvency
proceedings.
REVIEW OF LITERATURE
BOOKS
1. “Principles of Corporate Insolvency Law" by Sir Roy Goode and Kristin van Zwieten
This book is a comprehensive and authoritative guide to the intricate world of corporate
insolvency. The authors' deep expertise shines through as they navigate the complex legal
principles and practices governing corporate financial distress. This book is an indispensable
resource for legal practitioners, scholars, and policymakers seeking a thorough understanding
of corporate insolvency law. It combines insightful analysis with practical application,
making it a valuable reference for anyone involved in corporate restructuring and insolvency
proceedings.
2. "Corporate Insolvency Law: Perspective and principles" by Vanessa Finch
Vanessa Finch offers a novel perspective on corporate insolvency laws & practises in this
volume. Her interdisciplinary talk centres on two questions. Are English laws and procedures

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 effective, expert, responsible, and fair? Should insolvency law be rethought to serve corporate
and social goals?" This comprehensive study examines company financing, corporate failure,
and rescue-friendly process design. Alternative means of sharing failed companies' assets,
insolvency risk allocations, and the effects of insolvency on directors and employees are also
addressed. Finch proposes a shift in strategy to make insolvency law coherent and purposeful.
This approach is outlined in Corporate Insolvency Law: Perspectives and Principles.

RESEARCH PAPERS
1. Mitchell, R., O'Donnell, A., & Ramsay, I. (2005). Shareholder value and employee interests:
intersections between corporate governance, corporate law and labor law. Wis. Int'l LJ, 23,
417.
The scholarly article titled "Shareholder value and employee interests: intersections between
corporate governance, corporate law and labour law" authored by Mitchell, O'Donnell, and
Ramsay (2005) presents a stimulating analysis of the intricate dynamics that exist among
corporate governance, corporate law, and labour law. This analysis explores the inherent
conflicts that arise from the dual objectives of maximising shareholder value and
safeguarding employee rights inside the corporate structure. The authors offer unique insights
about the legal and regulatory dynamics that impact the equilibrium between these conflicting
interests, so offering a noteworthy contribution to the realm of corporate governance and
labour law.
2. Dal Bó, E., & Finan, F. (2016). At the intersection: a review of institutions in economic
development.
The scholarly article authored by Dal Bó and Finan (2016), titled "At the intersection: a
review of institutions in economic development," offers a succinct and perceptive
examination of the pivotal influence that institutions exert on the results of economic
development. The authors' thorough examination highlights the complex characteristics of
institutions and their influence on diverse dimensions of economic growth, rendering it a
significant scholarly tool for scholars and policymakers in the realm of development
economics.
STATUTES
1. Insolvency and Bankruptcy Code, 2016
The code has simplified the definitions to understand its concept via labour code. The code
prevails and provides an insight into the leftover definitions which are explained in terms of
industrial disputes.

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2. Industrial Disputes Act, 1947
This act is the epitome of understanding the initiatives taken for the benefits of an
unrepresented strata of the society. The culmination of the definitions about the labour,
employees makes it easy to understand the situation the manifold situations that exist under
different codes.

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 EMPLOYER-EMPLOYEE RELATIONSHIP UNDER INSOLVENCY AND
BANKRUPTCY CODE, 2016
The goal of the Insolvency and Bankruptcy Law (Code) is to give a reasonable and equitable
solution to all parties concerned. This includes workers of a company, whose concerns should
be treated equally with those of other creditors. A financial creditor may apply for corporate
insolvency resolution under Section 7 of the Code if the corporation owes them financial or
operational debt.4 A financial creditor is defined in Section 5(10) of the Code as a person
toward whom any financial debt is due, legitimately assigned, or transferred. 5 Similarly, an
operational creditor is defined in Section 5(20) of the Code as an individual to whom a debt
due is operational in nature, lawfully assigned, or transferred. 6 The Code acknowledges
employee dues in line with these requirements.

 Recognition of Employees in The Insolvency and Bankruptcy Code, 2016-

The 2016 Insolvency and Bankruptcy Law emphasises the significance of giving equitable
settlement to all parties, including employees. If a corporation owes a financial or operational
debt to a financial creditor, Section 7 of the Code authorises them to petition for corporate
insolvency resolution.7 Unpaid dues owing by employees are covered by section 5(21) of the
Code, which identifies operational debt as demands for repayment of dues under any
legislation for Products, Services, Employment, and Debt payable to the Central, State, or
local government.8
Although the term "employee" is not defined in the Code, section 53(1)(c) acknowledges pay
and dues owing to workers (except labourers) for the previous twelve months. 9 Workmen are
recognised as creditors under the Code, as established by the Industrial Disputes Act of 1947,
and their dues are prioritised above non-workmen workers. Clause 53(1)(b) puts workmen's
dues for the preceding twenty-four months second in line, after obligations owing to a
secured creditor (if they have waived security) and, in the case of the sale of liquidation
assets, after payment of insolvency and resolution fees.10
As a result, under the Insolvency and Bankruptcy Act, 2016, both workers and labourers can
submit a petition for unpaid wages. However, as per Section 4(1) of the Code, their dues shall

4
Insolvency and Bankruptcy Code, 2016, under section 7.
5
Insolvency and Bankruptcy Code, 2016, under section 5(10).
6
Insolvency and Bankruptcy Code, 2016, undersection 5(20).
7
Supra note, 2.
8
Insolvency and Bankruptcy Code, 2016, § 5(21).
9
Industrial Disputes Act, 1947, § 53(1)(c).
10
Industrial Disputes Act, 1947, § 53(1)(b).

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be in the range of one lakh rupees (INR 1,00,000) as a least sum and not surpass one crore
rupees (INR 1,00,000) as a maximum amount.11

CONTEMPORARY CONCERNS

 CONCERNS RELATED TO EMPLOYEES-

While the Code appears to meet the principal issues of employees about the payment of their
salary and dues, several problems remain unresolved. Workers have highlighted many
concerns with the Code, including:

a. Unequal Interest-

Prior to the Code's adoption, the debt owing to workers in the event of insolvency was
considered similarly with that payable to secured creditors under Section 326 of the
Companies Act.12 However, as previously discussed, under the Code, workers are ranked
second in line, and their primary focus is equal to that of a secured creditor only if the latter
forfeits their interest in liquidation and concurs to receive proceeds from the liquidator's sale
of assets, resulting in an unequal interest among stakeholders.

b. Benefits other than salary-

The handling of statutory benefits other than pay is the second source of employee complaint
about the Code. The Code is silent on how statutory benefits like as provident fund, gratuity,
and leave encashment would be handled throughout the bankruptcy resolution process.
According to the Code, the highest amount of dues that an employee can claim is INR
1,000,000. This sum may not be adequate to satisfy the statutory benefits owing to
employees, particularly if the company is in financial hardship for an extended period of
time. In the event of insolvency, employees may lose a major amount of their statutory
benefits, which can have a severe impact on their financial well-being.

c. Contractual Benefits-

Employees may confront challenges with contractual perks other than wage in addition to
statutory benefits. For example, some perks, like as stock options or commissions, may have
been contractually agreed upon but not yet paid to employees. It is uncertain whether these
contractual perks would be deemed dues owing to employees under section 53 of the Code in
11
Insolvency and Bankruptcy Code, 2016, § 4(1).
12
Companies Act, 2013, § 326.

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the event of bankruptcy proceedings.13 Employees may experience uncertainty and financial
instability as a result of this lack of transparency.14

 CONCERNS RELATED TO EMPLOYERS-

a. Subjugation of labour and employment laws by employees-

Businesses are afraid that employees may utilise the NCLT mechanism to collect unpaid
wages, provident fund contributions, and social security payments. Employees may bring
their claims directly before the NCLT rather than pursuing the relevant Industrial Tribunals or
Labour Courts. These might include demands for underpaid pay, undeposited contributions
under the Workers Provident Fund and Miscellaneous Provisions Act of 1952, and other
similar issues.

b. Applying to the NCLT in response to dismissal as a consequence of disciplinary

proceedings-

Businesses are afraid that disgruntled workers who were terminated due to disciplinary action
may use the NCLT under the Code to initiate unneeded litigation for the company. This worry
is especially pertinent since such workers are more prone to file for the beginning of
proceedings under the Code without a valid basis.15

CONSIDERATIONS AND ISSUES RELATING TO POLICIES

Should workers' rights take precedence over the interests of other creditors? Workers may
have a contractual term right to make statements depending on their employment agreements,
but their proportional priority is identical to that of any unsecured creditors with contractual
payment claims. Unlike secured creditors, who are granted in rem rights that enable them to
be fulfilled from specific assets in the event of a default, both types of creditors have equal
legal standing when it comes to being repaid from the company’s assets.
In the recent case of N. Krishan v Aruna Hotels Ltd,16 the National Company Law Tribunal
(NCLT) in Chennai accepted an employee's claim. Although the National Company Law
Appellate Tribunal (NCLAT) rejected the employee's claim for dues on the grounds that no
demand notice had been given pursuant to section 8 of the Code, 17 which requires an
operational creditor to deliver a demand notice of an unpaid operational debtor and a replicate
13
Insolvency and Bankruptcy Code, 2016, § 53.
14
Supra Note, 1.
15
Id.
16
N. Krishan v Aruna Hotels Ltd, IND/892/ (IB)/CB/2017.
17
Insolvency and Bankruptcy Code, 2016, § 8.

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of the invoice demanding the amount involved in default, the NCLAT accepted the appellant
Aruna Hotels' arguments and assured them that they would pay any arrears of salary and
post-employment benefits.

INTERNATIONAL SCENERIO
There are several interpretations and implementations of the ILO and EU's social protection
standards. The following discussion gives a comprehensive overview of four various systems
and variants on models that have been implemented globally, all with the goal of addressing
the social protection challenges that occur as a result of employer insolvency.

 International Labour Organisation (ILO)-

The International Labour Organization (ILO) established the Protection of Wages Agreement
in 1949 to address the impact of insolvency on employee compensation. According to Article
11.1 of the convention, if an organisation declares bankruptcy or goes into legal liquidation,
its employees should be treated as preferred creditors in terms of wage payment for the
period preceding the bankruptcy or liquidation, as ascertained by the relevant statutory laws
or regulations. Conversely, workers should be recognised as favoured creditors for wages up
to a certain limit, as set by national laws or regulations.18
The order of prioritization for such debts is to be set by national laws and regulations,
according to Article 11.3 of the Wage Protection Convention. 19 Nevertheless, if a guarantee
institution safeguards the employees' claims, they may be demoted to a lower privileged
position. The ILO may have given up some of its clout over workers' rights by permitting
individual governments to limit the protected character of employee claims. The International
Labour Organization (ILO) published a convention on job termination in 1982. Employers
are required by Section II, Article 11,20 to provide employees on the brink of being laid off
either with fair notification or recompense for the absence of such notice. The ILO also
emphasises the importance of strong and direct worker participation in employment
termination, particularly in cases of severe reorganization, downsizing, or terminations owing
to firm insolvency.

 The European Union (EU)-

18
International Labour Organization, Protection of Wages Agreement, art. 11.1.
19
International Labour Organization, Protection of Wages Agreement, art. 11.3.
20
International Labour Organization, Termination of Employment Convention, 1982, art. 11.

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Directives of the European Union (EU) vary from ILO rules in that they are obligatory on
member states. The Council of the European Communities passed a regulation in 1980
concerning employee protection in the event of the insolvency of their employer. In 2002, the
European Parliament revised this regulation. Section II, Article 3.1 21 requires guarantee
organizations to protect employees' outstanding claims arising from their employment,
whereas Section II, Article 4.222 requires member states to settle outstanding claims arising
from their employment from the preceding 18 months. Part II, Article 4.3, 23 on the other
hand, permits member states to reduce their commitment for outstanding employee
complaints as long as they inform the Commission of the approach adopted. Employers are
required under Council Directive 98/59/EC24 to confer with workers' representatives before
contemplating collective dismissals in order to establish an agreement and therefore reduce
the necessity for such proceedings.25

SOCIAL PROTECTION AND INSOLVENCY: ENTITLEMENTS IN CASE THE

EMPLOYER GOES INTO INSOLVENCY
Approaches by different nations-

1. Pro-employee approach-
To address social protection concerns presented by employer insolvency, the pro-
employee strategy entails successful in passing that go beyond monetary compensation.
China has taken this route by instituting mandatory unemployment insurance, which is
funded equally by businesses and employees. This insurance, however, does not cover all
workers. Austria has also created a sector-specific training programme funded by
unemployment insurance, which has greatly enhanced participants' employment
chances.26
Despite its pro-employee stance, the present Chinese insolvency system has been
criticised. Several opponents have urged for the system to be transformed since it is not

21
Council Directive 80/987/EEC of 20 October 1980, as amended by Council Directive 2002/74/EC of 23
September 2002, art. 3.1.
22
Council Directive 80/987/EEC of 20 October 1980, as amended by Council Directive 2002/74/EC of 23
September 2002, 4.2.
23
Council Directive 80/987/EEC of 20 October 1980, as amended by Council Directive 2002/74/EC of 23
September 2002, art. 4.3.
24
Council Directive 98/59/EC of 20 July 1998.
25
Supra Note, 1.
26
"Restructuring and Insolvency Laws and Regulations - Austria." ICLG, 2022,
https://iclg.com/practice-areas/restructuring-and-insolvency-laws-and-regulations/austria (Last visited on March
10, 2023).

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 always consistent in its attempts to settle worker grievances and achieve pacification.
Furthermore, trade creditors' claims are sometimes neglected owing to lax contract law
enforcement, and there is a lack of consistency in the payment of employee rehabilitation
costs, which can result in increased inequity amongst employees of the same firm.27

2. No insurance approach (Priority to Bankruptcy)-

The Mexican system, on the other hand, represents the polar opposite of the pro-
employee attitude. In contrast to China, Mexico lacks an insurance policy to cover the gap
between employee rights and the value of assets obtained in the case of business
insolvency.

3. Guarantee Fund approach (Priority to Bankruptcy)-

Unlike the Chinese and Mexican systems, most industrialised nations use a hybrid
strategy that combines predetermined employee rights with unemployment insurance.
Salary, pay, and other employee benefits claims are often given priority among unsecured
creditors in bankruptcy, frequently trailing administrative costs. Employee claims, for
example, have the greatest priority among unsecured creditors in Denmark, with a
guarantee fund in place to offer a safety net if assets are insufficient to satisfy outstanding
rights.

4. Guarantee Fund approach (No priority)-

The German method classifies all unsecured creditors, including workers, equally, which
implies that they all have equal access to a bankrupt company's residual assets. If worker
entitlements are not completely met as a result of bankruptcy, they may be compensated
from a national insolvency fund. This technique provides a predictable structure for
German creditors.28

INSURANCE FUNDS

27
"China's Enterprise Bankruptcy Law: An Assessment." The World Bank, February 2012,
https://documents1.worldbank.org/curated/en/255601468216974974/pdf/
639490WP0China00Box0361533B0PUBLIC0.pdf (Last visited on March 10, 2023).
28
German Law Archive, Insolvency Statute, Insolvenzordnung, InsO, October 5, 1994 available at
https://germanlawarchive.iuscomp.org/?p=773 (Last visited at March 10, 2023).

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Creating an insurance fund is one way to ensure employee benefits are paid while retaining
market trust. While insurance funds can help to lower the state's cost for temporary social
assistance, they may not be able to completely replace the requirement for unemployment and
retraining payments. From an economic viewpoint, insurance funds can provide better market
stability while simultaneously offering increased employee security in support of social goals.
The models that establish a guarantee fund as a safety net for settlement of employee claims
after bankruptcy are obviously the most successful of the four analysed.
Nevertheless, these models are unsatisfactory since guarantee fund methods require
employees to undergo a period of time (sometimes months and perhaps even years) before
getting the shortfall in their compensation from the guarantee fund. As a consequence of this
postponement, employees and their dependents may experience financial difficulty. This
problem might be exacerbated if there are more lags in the settlement of back wages and
entitlements. Rather than subjecting employees to a potentially lengthy liquidation process in
which assets must be identified, realised, and distributed, it may be better to establish an
instant entitlement to reimbursement from the insurance fund to settle worker claims up front.
Numerous countries have restricted compulsory insurance to companies with a lowest
number of employees (e.g., enterprises larger than 20 employees) or limited payouts to a
predetermined amount or a percentage of entitlements owed in order to reduce the cost of
such a plan to businesses (especially small businesses).

 Other Considerations-

Another thing to consider is the effect of unpaid contributions to retirement/pension

programmes. This begs the issue of what will happen to employees who have invested in
their previous employer's equities, which are now meaningless, or in a company-managed
pension plan that is being liquidated. As a result, if a government decides to establish an
insurance plan, it must consider whether the strategy should cover outstanding payments to
pension funds or if doing so would be prohibitively expensive.29

CONCERN RELATING TO TRANSFER OF AN UNDERTAKING

29
Supra note, 1.

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In the case of a company sale or asset transfer involving employees, Indian labour regulations
require employers to get the approval of their employees prior to transferring their contract to
a buyer. Furthermore, if the new buyer does not provide the same terms of employment as the
previous employer, including continuity of service and credit for past service, employees who
meet the requirements as 'workmen' under the ID Act are entitled to one month's statutory
notice or salary in lieu thereof, as well as retrenchment recompense at a rate of 15 days' salary
for each finished year of service.30

CONCLUSION
Insolvency professionals who conduct bankruptcy procedures may confront tough decisions
and might benefit from the Code's guidance and clarifications on employee debts. Setting
clear guidelines for when employee claims should be accepted or rejected, as well as
specifying that assertions should not be entertained if the employee's dues have already been
settled or if the employee has been dismissed in accordance with due process, could lead to
more efficient adjudication.
Also, the components covered in "workmen's dues" and "wages and any outstanding dues"
under section 53(1) should be clarified, such as whether bonuses under the Bonus Act are
included. Lastly, diverse processes of a similar type should be combined under the Code to
settle the numerous obligations and claims of workers, including craftsmen. Unpaid
contributions under the Workers Provident Fund and Miscellaneous Provisions Act, for
example, should be deemed unpaid debts under the Code.

BIBLIOGRAPHY
30
Key Labour and Employment Issues in M&A Transactions, July 20, 2022, available at
https://www.lexology.com/library/detail.aspx?g=703c682c-5805-414f-a715-11d44091f63b (Last visited on
March 10, 2023).

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1. Primary Sources - Statutes
 Insolvency and Bankruptcy Code, 2016
 Industrial Disputes Act, 1947
2. Secondary Sources - Books
 Principles of Corporate Insolvency Law" by Sir Roy Goode and Kristin van
Zwieten
 Corporate Insolvency Law: Perspective and principles" by Vanessa Finch
3. Secondary Sources – Articles
 Key Labour and Employment Issues in M&A Transactions, July 20, 2022,
available at https://www.lexology.com/library/detail.aspx?g=703c682c-5805-
414f-a715-11d44091f63b
 China's Enterprise Bankruptcy Law: An Assessment." The World Bank, February
2012, https://documents1.worldbank.org/curated/en/255601468216974974/pdf/
639490WP0China00Box0361533B0PUBLIC0.pdf
 "Restructuring and Insolvency Laws and Regulations - Austria." ICLG, 2022,
https://iclg.com/practice-areas/restructuring-and-insolvency-laws-and-
regulations/austria
 Gordon W. Johnson, Insolvency and Social Protection: Employee Entitlements in
the Event of Employer Insolvency, April 27-28 2006, available at
https://www.oecd.org/daf/ca/corporategovernanceprinciples/38184691.pdf
 Houston Business Journal, Enron employees file class action suit, available at
https://www.bizjournals.com/houston/stories/2002/01/28/daily5.html

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