Workers kept on payroll during insolvency but not paid: SC says no wages unless they actually worked

272 workers were kept on payroll for 20 months during insolvency. They never got paid. The Supreme Court just said why.

The Dahej yard of ABG Shipyard Limited had been silent since 2015. No welding torches. No cranes. No steel plates sliding into place. The empty slipways sat under the sun, the rusting hulls untouched. But the company's books still carried 272 names — workers and employees who, on paper, remained on the payroll through 20 months of the insolvency process. They were told to report. They were told to attend. They were never told their contracts were terminated. And they were never paid a single rupee.

When the company finally slid into liquidation, these workers walked into court with a simple question: If the company kept us on its rolls, if the Resolution Professional told us to keep showing up, why aren't our wages treated as costs of keeping the company alive — costs that get paid first, before banks and bondholders?

The Supreme Court's answer, delivered by a bench led by Justice M.R. Shah in Sunil Kumar Jain and Others v. Sundaresh Bhatt and Others, turned on a single, brutal distinction: being on the payroll is not the same as doing the work.

The workers walk into court

ABG Shipyard was a private shipbuilding company with yards at Dahej and Surat and a head office in Mumbai. In August 2017, the National Company Law Tribunal (NCLT) in Ahmedabad admitted the company into the Corporate Insolvency Resolution Process (CIRP — the formal process under the Insolvency and Bankruptcy Code where a company tries to restructure or revive under a professional's supervision). An Interim Resolution Professional (IRP — the person who takes over management when insolvency begins) was appointed.

The company had over 1,000 workers and employees. Among them, 272 at Dahej and Mumbai claimed they were kept on the payrolls throughout the 20-month CIRP period. The Resolution Professional (RP — the professional who manages the company during the insolvency process) did not terminate their contracts. He did not retrench them. In fact, he instructed them to report and attend.

But the Dahej yard had been non-operational since 2015 — two years before the insolvency even began. Most of these workers, the Liquidator would later argue, did no actual work during the CIRP period. The company was a shell. The yard was empty. The workers were names on a spreadsheet.

The workers' plea before the NCLT

The workers filed an interim application before the NCLT in April 2018, seeking their wages. The tribunal directed the company to deposit Rs. 2.75 crores, subject to the final outcome of the case. But when the company was ordered into liquidation in April 2019, the NCLT disposed of the workers' application without granting them relief.

The workers appealed to the National Company Law Appellate Tribunal (NCLAT — the appellate body that hears appeals from the NCLT). The NCLAT dismissed their appeal in May 2019. Its direction: the workers should file individual claims with the Liquidator, like any other creditor in the queue.

That queue — the "waterfall" under Section 53 of the IBC (the legal pecking order that decides which creditors get paid first from the company's assets) — was not where the workers wanted to be. At the top of the waterfall sit insolvency resolution process costs. Then secured creditors. Then workmen's dues for up to 24 months. Then employees' dues for up to 12 months. By the time the waterfall reaches individual workmen, the pool of money is often dry.

The workers wanted their wages classified as CIRP costs — the very top of the waterfall. They wanted their provident fund, gratuity, and pension excluded from the liquidation estate entirely. They went to the Supreme Court.

The legal knot: What counts as a CIRP cost?

The key question was deceptively simple: Under Section 5(13)(c) of the IBC (the provision that lists what counts as insolvency resolution process costs), do wages paid during the CIRP period automatically qualify as CIRP costs?

The workers argued yes. The company kept them on payroll. The RP instructed them to report. The law, they said, does not require that a worker actually produce output to be entitled to wages for the period they were kept on the rolls.

The Liquidator argued no. The Dahej yard was non-operational since 2015. Most workers did no actual work. The CIRP period was about running the company as a going concern — not about paying people who were idle. If the workers wanted wages, they could file individual claims with the Liquidator and take their place in the waterfall.

There was a second knot: the provident fund, gratuity, and pension amounts. Section 36(4) of the IBC (the provision that excludes certain assets from the liquidation estate) says that sums set aside for provident fund, pension fund, and gratuity fund are not part of the liquidation estate. The workers argued these amounts must be paid to them in full, outside the waterfall. The Liquidator did not dispute this — but the question was whether the workers could enforce this through the same appeal.

What the Supreme Court held

The Supreme Court drew a line that will likely be cited in every insolvency case involving employee claims for years to come. The court held that wages and salaries of workmen and employees during the CIRP period qualify as CIRP costs under Section 5(13)(c) — but only under two conditions. One: the workers actually assisted the Resolution Professional in running the business as a going concern. Two: the costs were ratified by the Committee of Creditors (COC — the group of financial creditors that oversees the insolvency process).

Being kept on the payroll is not enough. Being told to report is not enough. The worker must have done actual work that helped the RP keep the company alive during the insolvency process. And the COC must have signed off on the payments. The court's reasoning, as recorded in the judgment, was that wages qualify as CIRP costs only where workers actually assisted the RP in running the business as a going concern and the costs were ratified by the COC.

Second, the court held that provident fund, pension fund, and gratuity fund amounts under Section 36(4) are not part of the liquidation estate. These must be paid to the workers in priority — outside the waterfall, before any distribution to creditors.

Third, for workmen dues that do not qualify as CIRP costs, the court clarified that they must be paid according to the waterfall mechanism: workmen's dues for up to 24 months under Section 53(1)(b)(i), and employees' dues for up to 12 months under Section 53(1)(c).

The court relied on two key precedents: Swiss Ribbons Pvt. Ltd. v. Union of India, where the Supreme Court had upheld the constitutional validity of the IBC and emphasized that the code balances the interests of all stakeholders, and Gujarat Urja Vikas Nigam Limited v. Amit Gupta, which dealt with the scope of CIRP costs.

The distinction that matters

The judgment draws a sharp distinction that practitioners need to understand. Under Section 20 of the IBC (the provision that requires the IRP or RP to manage the company as a going concern), the RP has a duty to keep the business running. That may mean keeping workers on the payroll to preserve the company's ability to restart operations. But keeping workers on the payroll is not the same as paying them CIRP-level wages.

The court's reasoning appears to be this: CIRP costs are the costs of running the insolvency process itself — the costs that keep the company alive so that a resolution plan can be found. If a worker is not actually helping the RP run the business, their wage is not a cost of the process. It is a pre-existing liability that the company owes, and it must take its place in the waterfall.

For the 272 workers of ABG Shipyard, this means most of them will not see their CIRP-period wages paid at the top of the waterfall. They will have to file individual claims with the Liquidator and wait for their turn in the queue — a queue that, for an insolvent shipyard with a yard that had been silent since 2015, may have very little money left at the bottom.

THE PLAY: If you are a Resolution Professional keeping workers on payroll during CIRP, document which workers are actually assisting in running the business as a going concern — and get COC ratification for their wages — or those wages will not qualify as CIRP costs.

The Dahej yard stayed silent. The workers stayed on the books. And the Supreme Court said the law does not pay people for being present — it pays them for working.