[2020] 

120 taxmann.com 220 (Article)
Date of Publishing: October 13, 2020

Winding Up of Company: Employee’s Right to Petition

MANASI SINGH
Introduction

The registration of a company results in the transformation of business or management of company

into a legal entity, having certain legal rights and obligations. A company's existence as well demise is
brought about by the legal machinery in place. The mechanism by which the life of a company is put to
an end is referred to as winding up whereas dissolution is the process of removing a company from the
register of companies. The purpose behind winding up of a company is to realise its assets to make good
the company's debts. The Companies Act, 1956 provided for different modes of winding up but soon it
was realised that the procedure provided under this act was time consuming and cumbersome.
According to the report1 of Justice Eradi Committee, formulated in the year 2000, 473 cases relating to
winding up were pending before the court for more than 25 years. To expedite the process, the
Companies Act, 2013 was legislated but its winding up provisions only came into effect on 15th
December, 2016, after the enactment of Insolvency and Bankruptcy Code, 2016 ("Code"). The Code
amended and consolidated the winding up laws and provided a favourable and comprehensive
framework for companies and Limited Liability Partnerships ("LLPs").

The process of winding up maybe initiated in a lot of circumstances but generally it is set in motion due
to company's inability to pay its debts. In such a situation, the assets of the company are realised and
debts are paid off. The acts and the Code provide for the entities who can file a petition of winding up.
One such category contains employee(s) of the company, not explicitly but under the group of creditors.

Employee as Creditor

A creditor can file a petition for winding up of a company.

A. Can salary and other dues to be paid to employee be considered debt?

According to Black's Law Dictionary, debt is an amount of money that is due by certain express
agreement. One person owes certain amount of money to another, involving not just the obligation of
the debtor to pay but the creditor's right to enforce and receive such payment.

The Supreme Court defined the term 'debt' in Kesoram Industries & Cotton Mills Ltd. v. CWT2
as "a debt means a sum of money which is now payable or will become payable in future by reason of
present obligation deplume in praesenti, Solved in future. A debt involves an obligation incurred by
the debtor and the liability to pay a sum of money in present or future. The liability must, however, be
to pay a sum of money i.e., to pay an amount which is determined or determinable in the light of
factors, existing on the date when the nature of the liability is to be ascertained."

In contrast to the above-mentioned view, the Madhya Pradesh HC in Pawan Kumar Khullar v.
Kaushal Leather Board Ltd.3, distinguished between debt and salary. It was held that salary that is
paid to an employee is the remuneration in lieu of the services rendered whereas debt is something that
is borrowed on certain terms and conditions and rate of interest and which can be re-negotiated by the
parties. However, the Andhra Pradesh HC in Capt. B.S. Demagry v. Airways Ltd.4 held that the
outstanding salary would also constitute a debt.

Nevertheless, Supreme Court's judgment in Kesoram Industries & Cotton Mills Ltd. Case (supra) was
relied upon and it was held that the employer has an obligation to pay employee's unpaid salary for the
services rendered and the employee has a right to recover the same from the employer.

B. Is Employee/Ex-employee a creditor?

A creditor is a legal entity that provides money, goods or services to a company with an expectation to
be paid at a later date; accordingly, it can be a bank or supplier or any other person. Thus, a company
owes money to its creditors and a creditor can present a petition before the court/tribunal for the
winding up of company.

It has been duly noted above that debt includes unpaid salary due to an employee by an employer. Thus,
an employee or ex-employee, for payment of his unpaid wages can file a petition for winding up of
company as a creditor.

The winding up button cannot be pressed by an employee every time he/she wishes to recover the
payment of unpaid salary and other dues. The court may avoid the order of winding up at the instance
of an existing employee on the ground that one should not attempt to bury his employer. But this is not
a general rule. For instance, if a worker has been terminated or has resigned but his salary or other dues
are not paid, then he, in the capacity only of a creditor can file a petition for winding up of company to
recover his legitimate dues.

Petition by an Employee

The Insolvency and Bankruptcy Code, 2016 provides for one of the types of creditors as Operational
Creditors. An operational creditor is a person to whom the company owes an operational debt and
includes any other person to whom such debt has been transferred or assigned legally. Operational debt
refers to the claim with respect to the provision of goods or services including employment or a debt
concerning the repayment of dues arising under any law for the time being in force and which is payable
to the Central Government, State Government or local authority.

Thus, all the employees/workmen are considered operational creditors under the Code.

In Swiss Ribbons (P.) Ltd. v Union of India5, the Supreme Court held contracts with operational
creditors is related to supply of goods or services during the operation of business.

In case of default in payment of unpaid debt, an operational creditor may initiate the insolvency
resolution process by serving a notice to the corporate debtor demanding payment of sum involved in
default. The corporate debtor shall bring to the notice of the operational creditor, within a period of 10
days of the receipt of notice, that there exists a dispute regarding such debt or send a record of
repayment of debt.6

On the expiration of 10 days from the date of delivery of notice, if the payment or notice of dispute is
not received by the operational creditor from the corporate debtor, the operational creditor may then
file an application to initiate corporate insolvency resolution process ("CIRP") before the Adjudicating
Authority.7

An employee will be able to file a petition for winding up of company before the tribunal if the company
owes debt to the employee in the form of unpaid salary and other dues and the amount consists of at
least one crore rupees8.

In J.K. Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Co. Ltd. 9, petition was
filed by the trade union before the National Company Law Tribunal under section 9 of the Insolvency
and Bankruptcy Code, 2016 for the recovery of outstanding dues of workers. It was held that trade
union falls under the category of operational creditors and it can sue on behalf of employees for the
purpose of initiating CIRP under the Code for the payment of debts owed by the company to its
employees.

The petition may not be admitted if there is a bona fide disputed debt or there is any suit pending in any
other court.

In Aruna Hotels Ltd. v.. N. Krishnan10, the honourable court held that the application by the
employee as an operational creditor under section 9 of the Code was not maintainable as there existed a
bona fide dispute relating to arrears of salary of employee.

Recently, the Ministry of Corporate Affairs vide its notification dated 24th January, 2020, notified the
Companies (Winding Up) Rules, 2020 which came into effect from 1st April, 2020. It laid down the
procedure for winding up on grounds other than inability to pay debts u/s 271 of the Companies Act,
2013. Now, winding up on the ground of inability to pay as well as voluntary winding up are dealt with
under the Code.

Conclusion

After evaluation of the provisions of winding up as well as the right of an employee to present an
application as a creditor, it appears that they are a weapon in the hands of the employees to recover the
alleged legitimate debts from the employer company i.e. the corporate debtor. The Code not only gives
the existing employees but also the ex-employees and trade unions representing its members, to recover
dues by approaching the tribunals against the corporate debtor.

The various decisions of the honourable courts have clearly adjudicated in favour of the employees i.e. a
right to maintain petition against the company to recover its debts in the form of outstanding salary and
wages. Every employee has to be given the same treatment as that of the creditors, disallowing any
preferential conduct.

However, it must be kept in mind that an employer can always take the defence of bona fide disputed
debts to avoid the winding up of company.

■■

1. Report of the High Level Committee on Law Relating To Insolvency and Winding Up of
Companies
2. AIR 1966 SC 1370
3. AIR 1996 MP 85
4. [1998] 16 SCL 349.
5. [2019] 101 taxmann.com 389/152 SCL 365 (SC)
6. Section 8, Insolvency and Bankruptcy Code, 2016
7. Section 9, Insolvency and Bankruptcy Code, 2016
8. Increased from Rupees 1 lakh to Rupees 1 crore, vide MCA Notification No. S.O.1205(E)
9. C.P. No. (IB) 36/ALD/2017
10. Company Appeal (AT) (Insolvency) No. 290 of 2017