Abstract:

The Insolvency and Bankruptcy Code (IBC), 2016, represents a transformative shift in India’s insolvency framework, aiming to resolve corporate distress through time-bound, market-driven mechanisms. However, the classification of workmen and employees under the IBC has emerged as a critical issue, particularly during liquidation, where workmen’s dues are prioritised over those of employees. This paper examines the legal and practical implications of this distinction, focusing on how corporate debtors may misclassify workmen as employees to reduce their priority claims under Section 53 of the IBC. By analysing judicial precedents, statutory provisions, and international insolvency frameworks, the study highlights the challenges faced by workmen in asserting their rights and the potential for exploitation through ambiguous classifications. The paper also proposes legislative and policy reforms, including clearer definitions, mandatory work logs, and specific criteria for temporary managerial roles, to strengthen protections for workmen and ensure equitable distribution during liquidation.

Keywords: Employee, Exploitation, IBC, Liquidation, Misclassification, Waterfall Mechanism, Workmen

Introduction

The ‘Insolvency and Bankruptcy Code (IBC), 2016’, was introduced to address the financial distress of corporate and individual entities, with the primary aim of reviving companies. As India’s comprehensive insolvency framework, the IBC replaced outdated laws and promotes time-bound, market-driven resolutions, emphasising fiscal discipline and shifting power from debtors to creditors.

In cases where resolution efforts fail, the entity may enter liquidation, making it crucial to understand the implications for workmen and employees. While the IBC defines “workman” under Section 3(36)[1], it does not provide a definition for “employee.” This distinction becomes critical during liquidation, where workmen’s dues are prioritised over those of employees. Both groups are classified as operational creditors during insolvency proceedings, yet their rights and recoveries differ significantly under liquidation[2].

This study examines the importance of distinguishing workmen from employees under the IBC, with a focus on how companies misclassify workmen to reduce their priority claims during liquidation. It highlights the financial and legal implications of this misclassification and the need for stronger protections for these essential contributors to the economy.

[1]See, § 3(36)Insolvency and Bankruptcy Code, 2016.

[2]See, M. Sabbani, Employee and Workmen Benefits Under the IBC (April, 2024), https://www.iiipicai.in/wp-content/uploads/2024/05/33-39-Article-Maruthi-Sabbani.pdf