272 workers didn't work for 20 months. They still wanted full salary.
Supreme Court says only wages of those who actually worked during insolvency count as top-priority costs. Others fall lower in the payment queue.
20
months.
Supreme Court says only wages of those who actually worked during insolvency count as top-priority costs. Others fall lower in the payment queue.
A shipyard went bust. For 20 months, 272 workers were asked to stay home. Then they demanded full salary — as top priority.
The Dahej yard of ABG Shipyard Limited had been silent since 2015. The rusting hull of a half-built ship sat in the dry dock, untouched, as weeds crept through the cracked concrete. No welding torches. No cranes. No steel plates being cut. In August 2017, the company formally entered insolvency — a legal process where a financially failed company's affairs are taken over by a professional to find a buyer or repay creditors. The resolution professional (the person appointed to run the company during this period) told the workers to keep reporting. There was nothing to do. The yard was dead.
For 20 months, they showed up. Or they didn't. The empty guard booth at the Dahej gate collected dust. No real work happened. When the company finally went into liquidation (selling off assets to pay debts) in April 2019, the workers had a single question: did those 20 months of waiting count as work? And if so, should their wages be paid first — ahead of banks, suppliers, and other creditors?
When the NCLT said no
The National Company Law Tribunal (NCLT — the specialised court that handles insolvency cases) had directed the resolution professional to deposit Rs 2.75 crores towards worker dues in April 2018. But when liquidation came a year later, the NCLT refused to give the workers the priority they wanted. Their wages, the tribunal said, would not be treated as "insolvency resolution process costs" — the category of expenses that gets paid first, before everyone else.
The workers appealed to the National Company Law Appellate Tribunal (NCLAT — the appeals court for insolvency matters). That court also dismissed their case in May 2019, telling them to file individual claims before the liquidator instead. The workers then approached the Supreme Court.
The core question: what counts as a cost of keeping the company alive?
The Insolvency and Bankruptcy Code (IBC — the law that governs how failed companies are wound up or revived) has a clear payment hierarchy. Section 53 of the IBC creates a "waterfall mechanism" — a strict order in which money from selling a company's assets flows to different creditors. At the very top, paid first, are the costs of the insolvency resolution process itself: the fees of the resolution professional, the expenses of running the company during the process, and the wages of workers who actually kept the business going.
Below that come workmen's dues for the 24 months before liquidation, then employee wages for 12 months, then secured creditors, then unsecured creditors, and finally shareholders at the bottom.
The workers argued that their wages during the 20-month insolvency period should sit at the very top of this waterfall — as insolvency resolution process costs under Section 5(13)(c) of the IBC. The company's creditors argued they should fall lower down, under Section 53(1)(b) or (c), where they would compete with other claims and likely recover far less.
Why the distinction mattered — and what the workers lost
This was not a small difference. If the wages were classified as insolvency resolution process costs, they would be paid in full before any other creditor saw a rupee. If they fell under Section 53(1)(b) or (c), they would share the available money with other workmen and employees — and in a company that had been failing since 2015, there might not be much left. The stack of attendance registers with no signatures on them told the story: no work had been done.
The workers also raised a second claim: that their provident fund, gratuity, and pension dues should be kept entirely outside the liquidation process. These funds, they argued, were not the company's assets to distribute to creditors — they belonged to the workers.
What the Supreme Court decided
The Supreme Court bench — Justice M.R. Shah and Justice Aniruddha Bose — delivered its judgment on April 19, 2022. The court partly allowed the appeal, drawing a sharp line between workers who actually worked during the insolvency period and those who did not.
The court held that wages and salaries of workers who actually worked during the insolvency resolution process — when the resolution professional managed the company's operations as a "going concern" (a business that is still operating, even if struggling) — would qualify as insolvency resolution process costs under Section 5(13). These workers would be paid first, in full, under Section 53(1)(a).
But for workers who did not actually work during those 20 months, their wages would not automatically become top-priority costs. Instead, they would fall under Section 53(1)(b) — workmen's dues for the 24 months before liquidation — or Section 53(1)(c) — employee wages for the 12 months before liquidation. These categories sit lower in the payment hierarchy.
The court also made clear that even though the resolution professional is required by Section 20 of the IBC to manage the company's operations as a going concern, this does not mean the company was actually a going concern. Whether it was depends on the facts of each case. At ABG Shipyard's Dahej yard, the facts showed a yard that had been idle since 2015.
A direct quote from the court's reasoning
In its judgment, the Supreme Court stated that "dues towards wages/salaries of only those workmen/employees who actually worked during the CIRP when the RP managed operations as a going concern are to be included in CIRP costs under Section 5(13)." The court added that "wages of workmen who did not actually work during CIRP shall not be automatically included in CIRP costs." This was the core of the ruling — a clear, fact-based test for when workers get top priority.
What happened to the provident fund and gratuity
On the second issue, the workers won completely. The Supreme Court held that provident fund, gratuity, and pension dues are not part of the liquidation estate — the pool of assets that gets sold and distributed to creditors. Under Section 36(4) of the IBC, these funds are kept outside the liquidation process entirely. The liquidator has no claim over them. They belong to the workers, and must be paid to them in full, regardless of the waterfall mechanism.
The court explicitly ruled that "Section 53(1) of IBC shall not be applicable to dues of workmen/employees on account of provident fund, gratuity and pension. These are to be treated outside the liquidation process and liquidation estate assets under the IBC per Section 36(4)." This was an absolute protection for workers' retirement savings.
Why the judgment matters for every insolvency case
This case settles a question that had been troubling insolvency practitioners since the IBC came into force: when a company is in the resolution process but not actually operating, do workers get paid as if they worked? The answer is no — unless they actually worked.
For lawyers advising resolution professionals, the judgment creates a clear record-keeping obligation. If a resolution professional wants workers' wages to qualify as top-priority costs, they must document which workers actually performed work during the insolvency period, and show that the company was genuinely being run as a going concern.
For workers, the judgment is a mixed result. Those who worked get full priority. Those who did not — even if they were asked to stay home — fall lower in the queue. But the protection of provident fund, gratuity, and pension is absolute, and does not depend on whether work was performed.
THE PLAY: If you are a resolution professional, maintain a separate register of workers who actually performed work during the insolvency resolution process — only their wages qualify as top-priority insolvency resolution process costs under Section 5(13)(c).
The Dahej yard stayed silent. The rusting hull of the half-built ship remained in the dry dock, a monument to a company that had stopped working long before the law caught up. The workers who waited there for 20 months got their answer — but not the one they wanted.