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Call for Clarity: Employee Dues under IBC in light of the Social Security Code

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Sikha Bansal and Neha Malu | resolution@vinodkothari.com

Treatment of employee dues under IBC has always been a matter of debate. While various judicial precedents have interpreted the provisions of the Code (see discussion later), however, the dilemma may revive with the notification of Code on Social Security, 2020 (“Social Security Code”). The Social Security Code now speaks of retirement benefits being paid in accordance with the priority under IBC; while Courts in the past have ruled that retirement dues will have to be paid beyond the priorities under IBC. Obviously, there was no reference to IBC in the labour laws before. Now that there is an explicit submission to IBC, does it result in a different interpretation as to the payment of dues such as provident fund, gratuity, pension, etc? 

In our view, it will be quite a long and costly way to try and get the reconciliation between the labour codes and IBC through jurisprudence; instead, whatever be the policy and intent of the lawmaker should be spelt clearly in the law itself, more so because a comprehensive amendment to the Code is imminent.

[A comparison of the provisions of Code on Social Security Code, 2020 with the erstwhile provisions of relevant Labour Laws is provided in the Annexure to this article]

Payment priority of retirement benefit dues under IBC

In the context of retirement benefit dues, viz. provident fund, pension fund and gratuity dues, two important provisions must be noted –

  • First, as per the definition of “workmen dues” provided under section 326 of the Companies Act, 2013, it includes, “all sums due to any workman from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the workmen, maintained by the company”.
  • Second, in terms of section 36(4) of IBC, all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund shall not form part of the liquidation estate.

Judicial precedents have interpreted the provisions to say that any amount due as PF, pension or gratuity will be paid beyond the priorities under section 53. If there is a fund already, the fund cannot form part of the liquidation estate. Even if there is no fund, the liquidator shall ensure that the fund is made available in the aforesaid accounts, even if their employer has not diverted the requisite amount. 

See NCLT ruling in Alchemist Asset Reconstruction Co. Ltd. v. Moser Baer India Limited, where it was held that:

“It is made clear that if there is any deficiency to the provident fund, pension fund and gratuity fund, then the liquidator shall ensure that the fund is made available in the aforesaid accounts, even if their employer has not diverted the requisite amount.”  

Appeal filed before NCLAT by the FC in this matter was disallowed with the following observations:

“Once the liquidation estate/ assets of the ‘Corporate Debtor’ under Section 36(1) read with Section 36 (3), do not include all sum due to any workman and employees from the provident fund, the pension fund and the gratuity fund, for the purpose of distribution of assets under Section 53, the provident fund, the pension fund and the gratuity fund cannot be included.”   

Thereafter, the Supreme Court tagged the appeal in this matter (Civil Appeal no. 258 of 2020) with the appeal in the matter of Savan Godiwala v. Apalla Siva Kumar (Civil Appeal No. 2520 of 2020).

Ultimately, vide its order dated 7th February, 2023, Supreme Court upheld the decision of NCLAT in Moser Baer and concluded that dues towards PF and gratuity shall be kept outside the liquidation priority u/s 53. 

Also, NCLT Mumbai in Precision Fasteners Ltd. v. Employees Provident Fund Organization, held that:

“…Even if a claim is made by provident fund authority before the liquidator, such claim knowingly or unknowingly made by such authority will not be construed as liquidator is provided with special leverage to include that claim as part of the liquidation estate. Indeed, under section 36 (4), it is a mandate upon the liquidator to treat provident fund dues as an asset lying with the corporate debtor and pay off the said dues before comprising the liquidation estate and this objective will be explicit if subsection 3 and subsection 4 of section 36 are read together.”

Similarly, with respect to Employees’ State Insurance dues, NCLAT in the matter of Regional Director, ESI Corporation v. Manish Kumar Bhagat Liquidator, Gupta Dyeing & Printing Mills Pvt Ltd., held that “…the amount of ESI, contributed both by the employer and employee, lying with the CD/Company in liquidation, is in trust in view of Section 40(4) of the ESI Act, 1948 to which the provisions of Section 36 (4) (a) (i) shall squarely apply.” See also Nurani Subramanian Suryanarayanan, Liquidator of Care IT Solutions Pvt. Ltd. v. Employees State Insurance Corporation, Rep. by its Regional Director & Ors. In view of the above rulings, dues towards ESI shall also be kept outside the liquidation estate of the CD. 

Accordingly, in light of various judicial precedents as discussed above, the settled position prior to the notification of the Social Security Code was that: 

  1. existing provident, pension and gratuity funds remain outside the liquidation estate; 
  2. any shortfall must be made good from the estate; and 
  3. payments towards these dues are made outside the waterfall under section 53.

Social Security Code – whether a turning point?

The Social Security Code, however, apparently brings in a different angle. Section 19 of the Code dealing with payment towards PF dues provides that:

“Notwithstanding anything contained in any other law for the time being in force, any amount due under this Chapter shall be the charge on the assets of the establishment to which it relates and shall be paid in priority in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.”

(Similar provisions are there in sections 47, 151 of the Social Security Code)

Now, here it is pertinent to note that the only provision in IBC that deals with priority is section 53. And with the literal interpretation of section 19 of the Social Security Code, it appears to suggest that PF dues would fall within this waterfall. 

Even if it is argued that there is no inconsistency between the two laws, and that the Social Security Code gives way to the provisions of IBC, a harmonious reading of the provisions would only indicate that –

  • Only the “funds” which already exist on the onset of insolvency/liquidation will remain outside the liquidation estate, and these “funds” only should be utilised to pay off the corresponding dues
  • Any shortfall in these “funds” would be paid in accordance with priority under IBC, that is, under section 53(1)(b)

To argue that the phrase “shall be paid in priority in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016” as used in the Social Security Code should be read as “beyond” the priority of section 53 – would defeat the well-settled principles of interpretation. That is, in absence of any ambiguity or uncertainty in the clause, one cannot imply any term or interpret the clause contrary to its plain meaning.

Closing thoughts

The position on workmen’s dues under the IBC, as discussed above, is presently shaped largely by judicial interpretation. The Social Security Code now, as discussed, stipulates that payment of PF and other retirement dues must be paid in accordance with the priority framework under the IBC. Here, it may be noted that the only provision in the IBC that sets out a priority waterfall is Section 53. We have earlier argued that payment of employees’ benefit dues shall be made from the respective fund, if any maintained by the company, before it went into liquidation and any claims against such funds shall not be against the liquidation estate. Any deficit in the funds shall be dealt with under section 53 only.

Now, with the provisions and language of the Social Security Code, the argument as above, that the dues are to be paid in priority under section 53, finds a reinforcement.  

Therefore, if the intent of the legislature is aligned with the judicial precedents discussed above, then instead of waiting for any further  judicial intervention to settle these ambiguities, it would be prudent for the legislature to clearly and explicitly delineate the scope and treatment of workmen’s and employees’ dues under the proposed IBC amendments, especially at a time when the IBC is under review by the Parliamentary Committee.

Annex: Comparison of the provisions of the Code on Social Security concerning IBC with erstwhile Labour Laws 

Section no.Provision in Code on Social Security, 2020Erstwhile provisions
19. Chapter III – Employees’ Provident Fund
Priority of payment of contributions over other debts.Notwithstanding anything contained in any other law for the time being in force, any amount due under this Chapter shall be the charge on the assets of the establishment to which it relates and shall be paid in priority in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.		Section 11(2) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
(2) Without prejudice to the provisions of sub-section (1), if any amount is due from an employer whether in respect of the employee’s contribution (deducted from the wages of the employee) or the employer’s contribution, the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority to all other debts.
47. Chapter IV – Employees State Insurance Corporation
Contributions, etc., due to Corporation to have priority over other debts.Notwithstanding anything contained in any other law for the time being in force, any amount due under this Chapter shall be the charge on the assets of the establishment to which it relates and shall be paid in priority in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.		Section 94 of Employees’ State Insurance Act, 1948
94. Contributions, etc., due to Corporation to have priority over other debts 
There shall be deemed to be included among the debts which, under section 49 of the Presidency-Towns Insolvency Act, 1909, or under section 61 of the Provincial Insolvency Act,1920, or under any law relating to insolvency in force in the territories which, immediately before the lst November, 1956 were comprised in a Part B State, or under section 530 of the Companies Act, 1956, are in the distribution of the property of the insolvent or in the distribution of the assets of a company being wound up, to be paid in priority to all other debts, the amount due in respect of any contribution or any other amount payable under this Act the liability where for accrued before the date of the order of adjudication of the insolvent or the date of the winding up, as the case may be. 
87. Chapter VII – Employee’s Compensation
87. Insolvency of employer.…(4) There shall be deemed to be included among the debts which under the Insolvency and Bankruptcy Code, 2016 or under the provisions of the Companies Act, 2013 are in the distribution of the assets of an insolvent or in the distribution of the assets of a company being wound up to be paid in priority to all other debts, the amount due in respect of any compensation, the liability accrued before the date of the order of adjudication of the insolvent or the date of the commencement of the winding up, as the case may be, and the provisions of that Code and Act shall have effect accordingly		Section 14 of Employee’s Compensation Act, 1923
(4) There shall be deemed to be included among the debts which under section 49 of the Presidencytowns Insolvency Act, 1909 (3 of 1909), or under section 61 of the Provincial Insolvency Act, 1920 (5 of 1920), or under section 530 of the Companies Act, 1956 (1 of 1956), are in the distribution of the property of an insolvent or in the distribution of the assets of a company being wound up to be paid in priority to all other debts, the amount due in respect of any compensation the liability wherefor accrued before the date of the order of adjudication of the insolvent or the date of the commencement of the winding up, as the case may be, and those Acts shall have effect accordingly.
128. Chapter XI – Authorities, Assessment, Compliance And Recovery
Power to recover damages.…Provided further that the Central Board or the Corporation, as the case may be, may reduce or waive the damages levied under this section in relation to an establishment for which a resolution plan or repayment plan recommending such waiver has been approved by the adjudicating authority established under the Insolvency and Bankruptcy Code, 2016 subject to the terms and conditions as may be specified by notification, by the Central Government.		Section 14B of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
Provided further that the Central Board may reduce or waive the damages levied under this section in relation to an establishment which is a sick industrial company and in respect of which a scheme for rehabilitation has been sanctioned by the Board for Industrial and Financial Reconstruction established under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985,subject to such terms and conditions as may be specified in the Scheme.
151. Chapter XIV – Miscellaneous 
Protection against attachment, etc.(3) Notwithstanding anything contained in any other law for the time being in force, any amount due under the Chapters referred to in sub-section (1) shall be the charge on the assets of the establishment to which it relates and shall be paid in priority in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.
[Sub-section (1) deals with Chapters III on EPF, IV on ESIC, V on Gratuity, VI on Maternity benefit and VII on Employee’s compensation]		Section 10 of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
10. Protection against attachment.—(1) The amount standing to the credit of any member in the Fund or of any exempted employee in a provident fund shall not in any way be capable of being assigned or charged and shall not be liable to attachment under any decree or order of any court in respect of any debt or liability incurred by the member or the exempted employee, and neither the official assignee appointed under the Presidency-towns Insolvency Act, 1909 (3 of 1909), nor any receiver appointed under the Provincial Insolvency Act, 1920 (5 of 1920), shall be entitled to, or have any claim on, any such amount. XX
Section 60 of Employees’ State Insurance Act, 1948
60. Benefit not assignable or attachable (1) The right to receive any payment of any benefit under this Act shall not be transferable or assignable.(2) No cash benefit payable under this Act shall be liable to attachment or sale in execution of any decree or order of any Court. 
Section 13 of Payment of Gratuity Act, 1972
13. Protection of gratuity.—No gratuity payable under this Act  and no gratuity payable to an employee employed in any establishment, factory, mine, oilfield, plantation, port, railway company or shop exempted under section 5 shall be liable to attachment in execution of any decree or order of any civil, revenue or criminal court.
Section 9 of Employee’s Compensation Act, 1923
9. Compensation not to be assigned, attached or charged.- Save as provided by this Act no lump sum or half-monthly payment payable under this Act shall in any way be capable of being assigned or charged or be liable to attachment or pass to any person other than the employee by operation of law nor shall any claim be set off against the same.

A voice without a vote: IBBI proposes OCs as observers amongst unrelated FCs in CoC

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Team Resolution | resolution@vinodkothari.com

Where the CoC has no regulated financial entity and a single unregulated financial creditor holds over 66% of the voting share, effectively dominating all decisions, IBBI in its Discussion Paper dated 17th November, 2025 proposed that the five largest operational creditors will also be brought into the CoC meeting, giving them a seat and a voice in the discussions, even though they will not have voting rights.

Such operational creditors will be entitled to receive the notice, agenda and minutes of the meeting and may participate in deliberations.  Notably, they cannot cast their vote in any of the agenda and merely attend the meeting as observers. However, the proposal suggests that the RP shall record their observations, if any, in the minutes.

The rationale behind such inclusion is that, in cases where the CoC does not have any regulated lender and an unregulated creditor effectively controls decisions with more than 66%, it raises a genuine concern about the quality and objectivity of CoC decision-making. Such a creditor may not have the financial or institutional expertise that banks and regulated entities typically bring to the process, and in some cases may even be a friendly or aligned party. This creates a risk that decisions may not withstand scrutiny and may dilute the credibility of what is otherwise treated as the CoC’s commercial wisdom.

However, the proposal does not fully take into account the following:

  1. Whether possible under subordinate law: The Code already provides for exclusion of related party financial creditors from CoC. The Code does not permit further exclusions or inclusions to be specified by IBBI. The only scenario where IBBI regulations can step in is where there are NO financial creditors. Therefore, whether this proposed inclusion of operational creditors is possible by way of amendments in regulations, can be a point of discussion. Notably, the constitutionality and the “intelligibility” of the distinction between financial and operational creditors was discussed and settled in very early rulings of the SC on the Code – viz., Swiss Ribbons Pvt. Ltd. & Anr v. Union of India & Ors., Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta & Ors. In those rulings as also in the frame of the Code, the image of a CD under insolvency has been one who has multiple financial creditors, primarily banks. The structure of the Code does not realize that in practice, there are several outliers. There are situations where insolvency may be a design rather than a fait accompli. In such cases, there may be a so-called financial creditor who has been introduced to avoid the formation of a CoC with operational creditors. Hence, the concern that IBBI is trying to address is quite well appreciated, but the issue is – are these remedies possible without the main law being amended? 
  2. Regulated vs. unregulated financial creditors: The proposal seeks to distinguish between “regulated” vs. “unregulated” financial entities. The concerns as to quality, objectivity may still be there, as being a regulated entity does not guarantee these features. There are some 8000-odd NBFCs which are regulated. Technically, even the non-corporate moneylenders may also have registration under State money-lending laws and may claim to be regulated. The mere fact that a financial creditor is regulated does not ensure objectivity and transparency.

In fact, assume there is a single regulated entity holding the financial debt. The very fact that one entity has 66% share (that is, the voting share required to have decisions passed) in the admitted financial claims gives the creditor the right of complete control on the proceedings. 

  1. The inclusion of OCs without voting rights raises concerns about utility: Their presence adds no real decision-making power, calling into question the practical value of their participation. The only silver lining may be that as the minutes of CoCs will capture the observations of the OCs, the NCLT while approving the plan may have regard to the fairness or otherwise of the decisions of the CoC. Going by the weight of SC views that AAs do not have the right to question the commercial wisdom of the CoC, whether a solo-powered CoC’s decisions will also carry the same aura of commercial wisdom remains to be seen.
  2. The core issue remains unaddressed: An unregulated financial creditor with over 66% voting share continues to dominate outcomes, while the OCs’ views are merely recorded without any mandatory impact on final decisions.
  3. The proposal diverges from the BLRC’s foundational reasoning: The BLRC Committee reasoned that members of the creditors committee have to be creditors both with the capability to assess viability, as well as to be willing to modify terms of existing liabilities in negotiations. This proposal thereby contradicts the BLRC framework. 

In this regard, the BLRC Committee noted as follows:

“Typically, operational creditors are neither able to decide on matters regarding the insolvency of the entity, nor willing to take the risk of postponing payments for better future prospects for the entity. The Committee concluded that, for the process to be rapid and efficient, the Code will provide that the creditors committee should be restricted to only the financial creditors.”

Our Views: 

Even though the intent behind such a proposal is noble, it may fail its desired objective.. The intent of this provision can succeed only if the rights of OCs are clearly laid down. Securing a seat in CoC meetings and a right to put forward their views may be a welcome step for bringing OCs into the process. However, the actual influence that OCs can exert as mere observers remains uncertain. Only with time will it become clear whether their inclusion practically alters decision making in CoC meetings or merely remains a symbolic entry.

Also read our detailed article titled “Subordination of Operational Creditors Under IBC: Whether Equitable” [Published on 26th July, 2018]

Other Proposals in the DP:

1. Mandate that the IM shall include the details of all allottees, including their names, amounts due, and units allotted, as reflected in the CD’s records, regardless of whether they have filed formal claims and require that the resolution plan provides for the treatment of such allottees. 

2. Disclosure of receivables, JDAs and information on assets which are under attachment, should be mandatorily included in the IM

3. When the CoC recommends liquidation even though a compliant resolution plan of value greater than the liquidation value was received, the reasons for recommendation for liquidation shall be recorded and submitted in the application for liquidation to the NCLT. 

Going Concern Sales in Liquidation – Ghosted or Alive?

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– Sikha Bansal, Resolution Division, Vinod Kothari & Company | resolution@vinodkothari.com

About the Amendment

The edifice of IBC is premised on value-maximisation, and thus, resolution has always been preferred over liquidation[1]. Even in liquidation, the regulations and Courts have stressed and preferred on selling the entity/business as going concern (referred to as GCS)[2]. However, IBBI, vide Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2025 (“Amendment”)[3], has amended Liquidation Regulations omitting the option of GCS altogether from the liquidation process. Notably both the GCS options – one, sale of CD as a going concern (reg. 32(e)), and second, sale of business of the CD as a going concern (reg. 32(f)) – have been omitted.

So, what impact does this Amendment have? Does that mean, that the GCS is completely gone, and that it is now impossible to cause a GCS once the liquidation order is passed? Does that mean, the liquidator will only have 4 options left: asset-by-asset sale, sale of collective set of assets, or sale of assets in parcels or slump sale, but not the GCS option? Does that mean, that if there is already a business which is running, the liquidator will first have to stop it, and then sell the assets? In essence, will a business which is live and active will first be killed, and sold as a bunch of assets, minus the life and the activity?

In this write-up, we argue that GCS has not gone – it is still there; in fact, it was even there when the regulations were not amended to include these modes of sale. To justify the point, we have discussed how the concept of GCS was brought into liquidation under IBC, and also, how the law provides for dealing with business and assets of a corporate debtorduring liquidation proceedings. If the Amendment was based on recommendation of the Insolvency Law Committee (see below), the recommendation was based on potential misuse of GCS, particularly by selling the CD itself, and thereby achieving the same result in liquidation that could have been achieved in resolution.

Disconnect between the ILC Recommendations and Amendment

Before we proceed further, it would be important to trace the inspiration behind the Amendment. The Amendment is pursuant to a Discussion Paper (“DP”) released by IBBI on 4th February, 2025. The DP, apparently, quoted the Report of the Insolvency Law Committee (February, 2020) (“ILC Report”), stating “the Liquidation Regulations should be appropriately amended to prevent a going concern sale of the corporate debtor”, to justify the omission.

However, Para 5.9 of the ILC Report unequivocally states, “the Committee agreed that it would be contrary to the scheme of the Code to allow a corporate debtor to be sold as a going concern after the conclusion of its liquidation process, which envisages a dissolution of the corporate entity. However, where the business of the corporate debtor can be sold as a going concern, the liquidator may attempt the same. Accordingly, the Liquidation Regulations should be appropriately amended to prevent a going concern sale of the corporate debtor.”

Therefore, the ILC merely recommended omission of sale of CD, that is, the legal entity itself, as a going concern (reg. 32(e)), but not sale of business of CD as going concern (reg. 32(f)). Although, surprisingly, the Amendment does away with both, disregarding the fundamental difference between the two – while the former is selling the activity with the corporate shell, the latter is only transfer of the business activity but not the shell. Therefore, in the former case, the entity is not dissolved – and that, in turn, goes against the very scheme of the Code.

Nevertheless, as we discuss below, even after the omission, the slump sale option makes it possible to overcome the limitation as is seemingly there.

How GCS made an entry in liquidation under IBC

GCS in liquidation was not originally there under IBC or the Liquidation Regulations. It was only when the  Kolkata Bench of NCLT in Gujarat NRE Coke ordered a GCS that a GCS was first facilitated in liquidation proceedings under IBC. Therefore, even before the IBBI came up with formal amendments to the Liquidation Regulations, there were multiple rulings[4] under IBC permitting GCS in liquidation.

Here, to answer the questions posed above, it would be quite relevant to understand the context and the facts under which the NCLT ordered the GCS. In that case, the CD was a going concern and had a large number of employees on its payroll. Therefore, with the objective of preserving the business operations of the CD and safeguarding the livelihood of its employees, the NCLT Kolkata directed the sale of the CD as a going concern, relying on the provisions of Section 33(7) of the Code, which says that- an order of liquidation shall be deemed to be a notice of discharge to the officers, employees, and workmen of the Corporate Debtor, except when the business of the Corporate Debtor is continued during the liquidation process by the Liquidator.

It was after this ruling that IBBI came up with a Discussion Paper, and later, vide  IBBI (Liquidation Process) (Second Amendment) Regulations, 2018, GCS was formally introduced in the regulations under reg. 32 (Modes of Sale).

Note that, while ordering the GCS in the above case, the NCLT relied on the slump sale option – discussed below.

From “Slump Sale” to “Going Concern”

While the two modes of GCS have been omitted, one of the other alternatives of sale is “slump sale” – under clause (b) of reg. 32 of Liquidation Regulations. “Slump sale” has not been defined under IBC/Liquidation Regulations; therefore, the meaning has to come from the widely referred definition given in section 2 (42C) of the Income Tax Act, 1961, which defines the same as the transfer of one or more undertaking, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer. (“IT Act”).

The definition of “slump sale” relies on the definition of “undertaking” – for which one will have to refer to Explanation 1 to clause (19AA) of section 42C of the IT Act, which defines “undertaking” as follows:

“…”undertaking” shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.”

Therefore, an undertaking is “business activity” taken as a whole – an undertaking is not merely a bunch of assets and liabilities.  Further, the meaning of undertaking has been discussed in various judicial pronouncements to say and conclude that an undertaking is a running business or capable of being run as an independent business.

Here again, while the definitions of “slump sale” and “undertaking” under the IT Act, as above, may be referred to; however, these should be read in the context – that is, in liquidation proceedings, there is no transfer of liabilities. All liabilities are subsumed under a common hotchpot, called liquidation estate, and are paid out of realisations from the same. Also, the IT definition of slump sale is merely about determination of the consideration – not asset by asset, but for the net worth as a whole – the definition is designed from the viewpoint of capital gain determination.

Thus, the essence of a slump sale is sale of an “undertaking”, commonly undertaken through a business transfer agreement (referred to as BTA). As the name implies, BTA is the transfer of a business, and not the assets of a business.

Therefore, slump sale can lead to a sale of business of the CD as a going concern. It, however, must be noted that slump sale cannot lead to sale of CD itself as a going concern – as because, “undertaking” is different from the “entity” itself. Slump sale is sale of an “undertaking”, that is, the activity which is housed inside the entity – it can not refer to and include sale of the entity itself.

It may also be noted that, every GCS is a slump sale; however, vice-versa may not be true. A slump sale will be GCS only when the conditions exist so as to indicate and conclude that the business has, in fact, been “going”. Now, a pertinent question would we – when does one say that the business is, in fact, is “going”? The question is addressed below.

What does “Going Concern” actually mean?

The “going concern” assumption is the fundamental assumption in accounting standards. An entity is required to prepare its financial statements on a going concern basis unless the entity is unable to be continued as a going concern. Now, does it lead to an inference that, if an entity is not preparing its accounts on a going concern basis, it has actually ceased to be a going concern? To answer this, it is important to understand the objective of the accounting assumption. The fundamental assumption of going concern is to ensure that the management takes a regular assessment of the possibility of continuity of business and flags uncertainties in case there are such circumstances. It is all about taking a conservative approach. However, not preparing financial statements on a going concern basis does not determine the actual state of things.

Whether or not an entity is a going concern is completely a circumstantial thing.  In KBD Sugars & Distilleries Ltd., Bangalore vs. Asstt. Commissioner of Income-Tax, it was held that going concern always means to say ‘alive’, whether profit-making or not. Also, the Income tax Appellate Tribunal (ITAT) held in the above case, for a going concern to mean, that the undertaking constituted a business activity capable of being run independently for the foreseeable future. See also the ruling in Hindustan Engineering by ITAT, Kolkata, and ruling in Indo Rama Textile Limited by Delhi High Court.

Liquidation – Whether puts an automatic end to “Going Concern”?

Section 33 of the Code provides for consequences which shall follow on passing of a liquidation order. Section 33(7) states, “The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator.”. Further, section 35(1) which provides for powers and duties of the liquidator says that the liquidator shall have the power and duty to “carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary” [clause(e)].

It is clear from the provisions as above that there is neither a presumption nor a prerequisite that liquidation, by itself, leads to death of an otherwise thriving or running business. Just because the CD could not get suitors during CIRP, does not mean it is lifeless. In fact, the liquidator has been cast with a duty to carry on the business albeit for the purpose of beneficial liquidation. As to what is beneficial liquidation, it can be understood as one where the stakeholders (that is, creditors in general) stand benefitted, which is an obvious outcome of a better realisation.  Hence, if there is anything which helps the liquidator in recouping a better value, and for that purpose, if the liquidator is required to carry on the business of the company, he shall, in fact, do the same – as, it is his duty (as well as power) under the law. In fact, in Prakash Chandra Kapoor v. Vijay Kumar Iyer, NCLAT specifically observed that the regulations cannot override the objective of ‘beneficial liquidation’ stipulated under the Code. Of course, that does not mean that, in a case where the entity has ceased to be “going”, the liquidator shall first revive the same.

Therefore, a liquidation order is not the trigger which kills a going concern – the entity might still remain a going concern during the liquidation proceedings. If that is the case, at the time the liquidator sets on to make realisations, is he expected to stop running the business? The answer is an obvious NO. The whole idea of keeping the business running was to carry out a beneficial liquidation, and if at the time of selling, the liquidator stops the business, then the whole effort of keeping the business running during liquidation will become futile. That is to say, in simple words, if the business was kept “going” during liquidation, it can be sold as “going” as well. Therefore, a GCS is perfectly possible during liquidation.

There is nothing in the Code which runs contrary to a GCS in liquidation. In fact, the provisions of sections 33 and 35 (as discussed above), lead to an obvious conclusion that GCS is a possible option during liquidation. Therefore, in the humble view of the author, saying that the concept of GCS runs contrary to the scheme of the Code might not be correct.

Closing Thoughts

The experience around GCS in liquidation under IBC has been fraught with various questions and uncertainties, including concerns on tax benefits, continuity of soft/intangible assets, etc. Further, the outcome of GCS in liquidation has not been encouraging[5]. However, to say that the Amendment literally takes away any possibility of GCS may not be correct. To say that the liquidator cannot at all do a GCS in liquidation will be contrary to the scheme of IBC as well as against the settled jurisprudence over years. Further, as discussed above, doing away with the option of selling the business of CD as a GCS was not even envisaged by ILC.

In fact, when liquidation of companies before IBC was governed by the provisions of the Companies Act, 1956, there have been judicial precedents under the Companies Act, 1956 where liquidation sale was a GCS. Therefore, GCS under liquidation was never seen as an abnormality – rather it was mainstream, albeit mostly to ensure employee welfare.

Nevertheless, as discussed above, whether or not there is an explicit entry in the “Modes of sale” under the Liquidation regulations, it is safe to say that GCS, wherever the conditions exist, can be undertaken as a mode of sale in liquidation.

[1] Some case laws are –Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors; Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Anr.; Edelweiss Asset Reconstruction Company Ltd. v. Chirag Rejendrakumar Shah

[2] See our article titled “Enabling going concern sale in liquidation” here;  “Concerns on Going Concern” by Vinod Kothari here; “Accounting and Tax considerations in Going Concern Sale in Liquidation” by Devika Agrawal here

[3] Notification dated 14th October, 2025.

[4] Narottamka Trade and Vyapaar Pvt. Ltd. Vs. SPP Insolvency Professionals LLP Liquidator Kamachi Industries Ltd., Bank of Baroda vs. Aryavrat Trading Private Limited ,

[5] IBBI observed that recovery from GCS in liquidation were lower than recoveries from standard liquidation (2.4% vs 3.7% of claims)

Redeemable preference shares not debt under IBC

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– SC reinforces the distinction between ‘debt’ and ‘share capital’ for the purpose of IBC

– Sourish Kundu | resolution@vinodkothari.com

Introduction

The Supreme Court in a recent judgement in the matter of EPC Constructions India Limited v. M/s Matix Fertilizers and Chemicals Limited, has categorically clarified that holders of Cumulative Redeemable Preference Shares (“CRPS”) are classified as investors rather than creditors (more specifically, financial creditors) and are therefore not entitled to file for insolvency under Section 7 of the IBC, since non-redemption of these shares do not qualify as a “default” under the Code.

In an article titled “Failed Redemption of Preference Shares: Whether a Contractual Debt?”, written way back in May, 2021, in the context of SC judgment in Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund (earlier known as Kotak India Ventures Limited) & Ors, we  concluded, on the basis of the provisions of section 55 of the Companies Act, 2013 (“Act”) and related judicial precedents around the meaning of “debt”, that there can be no debt associated with a preference share and, where there is no ‘debt’, there is no question of it being a ‘financial debt’.

The findings of the SC in EPC Constructions judgement resonate with our views as explained in the article. However, we delve deeper into the aspect with analysis of the ruling as below, as to on what basis it was concluded that preference shares cannot be considered as ‘debt.

Brief facts of the case

The appellant entered into a contract for construction of a fertilizer complex with  the respondent, pursuant to which certain amounts  became due and payable by the respondent to the appellant, The receivables under the contract was converted into NCRPS, and such conversion was duly approved by the respective boards. Eventually, in course of certain events, the appellant filed a Section 7 petition against the respondent, on account of failure to pay the redemption amount on account of maturity of CRPS. The application was dismissed by NCLT, and then NCLAT on grounds that the CRPS cannot be termed as debt. The application then came for appeal before SC.

Below is a discussion highlighting the rationale for which dues pertaining to preference shares were not held to be financial debt.

Actions speak about “intent”: Conversion of receivables into CRPS conclusive of intent

It was contended by the Appellant that the true nature of the transaction should be unveiled in order to determine whether such preference shares should be treated as debt or not. The fact that there were outstanding receivables, which had become due and payable, the Appellant argued that conversion of the same into preference shares was in a way ‘subordination of debt’, i.e. debt which is having lower priority than other debt in terms of payment, and was with the objective of maintaining the debt-equity ratio. As clear from the communication between the parties, the CRPS merely acted as a temporary tool for borrowing, providing Matix “a pause point” under the arrangement entered by way of exchange of emails. Therefore, the substance of the transaction should be given weightage, and an expansive interpretation of the term “commercial effect of borrowing” should be applied, as was interpreted by the Apex Court while classifying home buyers as FCs.[1] In fact, the SC, in another matter[2] delved into the real nature of a transaction while determining whether a debt is a financial debt or an operation debt.

On this, the Court noted that the preference shares were issued upon conversion of outstanding receivables. The board of the preference shareholder exercised its commercial wisdom in accepting the shares, given the low recovery prospects. Therefore, what was actually a financial debt, extinguished owing to such conversion, and hence the appellant cannot pose as a financial creditor.There is no question of there being any underlying contrary intent as the only intent was to convert the debt into preferential shareholding[3]. The SC, therefore, remarked:

“There is no question of there being any underlying contrary intent as the only intent was to convert the debt into preferential shareholding. The egg having been scrambled, . . .  attempt to unscramble it, must necessarily fail.”

Debt vs. preference shares: Redeemable preference shareholder not a creditor

The SC placed reliance on the relevant provisions of the Companies Act, particularly Sections 43, 47, and 55, and held that preference shares form part of the company’s share capital and not its debt capital. Consequently, preference shareholders cannot be treated as creditors, nor can they initiate insolvency proceedings under Section 7 of the IBC, which is reserved for financial creditors.

The Court noted that –

“It is well settled in Company Law that preference shares are part of the company’s share capital and the amounts paid up on them are not loans. Dividends are paid on the preference shares when company earns a profit. This is for the reason that if the dividends were paid without profits or in excess of profits made, it would amount to an illegal return of the capital. Amount paid up on preference shares not being loans, they do not qualify as a debt.” (Emphasis added)

Dividends on preference shares are payable only out of profits or proceeds from a fresh issue of shares for redemption. Thus, only a profit-making company can redeem its preference shares, as profits accrue after all expenses, including interest on borrowings. To suggest that preference shareholders become creditors upon default, even when the company has no profits, would distort this basic principle. [4] As aptly stated in “Principles of Modern Company Law”[5]:

“The main difference between the two in such a case may then be that the dividend on a preference share is not payable unless profits are available for distribution, whereas the debt holder’s interest entitlement is not subject to this constraint; and that the debt holder will rank before the preference holder in a winding-up.”

In the context of a CIRP, initiation under Section 7 requires a “default”, a debt that has become due and payable. The Supreme Court observed that since preference shares are redeemable only out of profits or fresh issue proceeds, no “debt” arises unless such conditions exist; consequently, there can be no default under Section 7.

Difference between preference shareholder and a creditor was concisely captured in “A Ramaiya’s Guide to the Companies Act”[6]:

“It must be remembered that a preference shareholder is only a shareholder and cannot as a matter of course claim to exercise the rights of a creditor. Preference shareholders are only shareholders and not in the position of creditors. They cannot sue for the money due on the shares undertaken to be redeemed, and cannot, as of right, claim a return of their share money except in a winding-up. In Lalchand Surana v. Hyderabad Vanaspathy Ltd., (1990) 68 Com Cases 415 at 419 (AP), where a preference shareholder was denied redemption in spite of maturity, he was not allowed to file a creditor’s petition for a winding-up order under s. 433(e) of the 1956 Act. An unredeemed preference shareholder does not become a creditor.”

A financial debt necessarily involves disbursal against the consideration for time value of money, typically represented through interest.[7] While interest may not be a sine qua non in every case[8], there must at least be an element of consideration for the time value of money. In the present case, no such disbursal or consideration existed and hence, the claim failed to meet the threshold of a financial debt.

As such, preference shares do not fall within the ambit of “financial debt” under Section 5(8)(f) of the Code, and equating them with financial creditors would distort the fundamental distinction between shareholders and creditors[9].

Whether accounting entries/recognition as “liability” would make a difference

It was contended that financial debt is an admitted liability in the books of accounts of Matix.

However, the SC[10], held the treatment in the accounts due to the prescription of accounting standards will not be determinative of the nature of relationship between the parties as reflected in the documents executed by them. Further the IBC has its own prerequisites which a party needs to fulfil and unless those parameters are met, an application under Section 7 will not pass the initial threshold. Hence, by resort to the treatment in the accounts this case cannot be decided.

Our Analysis

While the judgment firmly settles that preference shareholders cannot be treated as creditors, since shares represent ownership and not loans, the question often arises why such instruments, though debt-like in spirit and accounting treatment, are not “debt” under law. The rationale goes beyond mere nomenclature.

Ind AS 32 [Para AG25 to AG28] clarifies that in determining whether a preference share is a financial liability, or in other words, a debt, or simply an equity instrument, the shares has to be assessed against the rights attached to it, and whether it signifies a character of financial liability. In other words, if a preference share is redeemable at a specific date in the future at the option of the shareholder, such instrument carries a financial liability and is treated as such. However, it should be noted that every law has to be read in a given context. Treatment under accounting standards is more from the perspective of the financial position of the issuer. However, in case of IBC, the question is of rights – as a creditor will have right to file an application under section 7, but a shareholder will not have such right; similarly, a creditor will have a higher priority under section 53, while a shareholder stands in the lowest step of the priority ladder.

Therefore, the context in which accounting standards operate cannot be superimposed while interpreting the rights and liabilities under laws like the Code. Therefore, preference shares, depending on their terms of issuance may be classified as a liability for the purpose of complying with accounting principles, however, that cannot be said to be confer such preference shareholders the status of a creditor, and consequently, entitling them to file CIRP application under the Code.

Hence, there is a fundamental difference between “debt” and “shares” – a “debt” once converted into “shares”, moves from one end of the spectrum to another, and cannot retain its original nature and rights under the Code.

[1] Pioneer Urban Land and Infrastructure Ltd. and Another v. Union of India and Others ((2019) 8 SCC 416)

[2]  Global Credit Capital Ltd and Anr. v. Sach Marketing Pvt Ltd and Anr. (2024 SCC OnLine SC 649)

[3] Commissioner of Income Tax v. Rathi Graphics Technologies Limited (2015 SCC OnLine Del 14470), where it was held that, where the interest or a part thereof is converted into equity shares, the said Interest amount for which the conversion is taking place is no longer a liability.

[4] Lalchand Surana v. M/s Hyderabad Vanaspathy Ltd. (1988 SCC OnLine AP 290)

[5] (Tenth Edition) at page 1071

[6] (18th Edition, Volume 1 Page 879)

[7]  Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited and Others ((2020) 8 SCC 401)

[8]  Orator Marketing v. Samtex Desinz (Civil Appeal No. 2231 of 2021)

[9] Radha Exports (India) Private Limited v. K.P. Jayaram and Another ((2020) 10 SCC 538)

[10] Relied on State Bank of India v. Commissioner of Income Tax, Ernakulam ((1985) 4 SCC 585)

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Kabhi Naa, Kabhi Haan: Key Takeaways from the SC’s verdict in Bhushan Steel

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Kabhi Naa, Kabhi Haan: Key Takeaways from the SC’s verdict in Bhushan Steel

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– Sikha Bansal, Senior Partner | resolution@vinodkothari.com

The proceedings in Bhushan Steel now take a U-turn, as the SC ruling has upheld the resolution plan of SRA. Earlier, the SC had ordered liquidation of the CD. 

Here is a quick round up of important takeaways from the verdict:

  1. CoC has a vital interest in the resolution plan and that such an interest would continue till the Resolution Plan is actually implemented. If it is argued that the CoC cannot act in any manner after approval of resolution plan, then it can lead to a limbo or an anomalous situation where, say, the plan could not be implemented for any reason, leaving the creditors high and dry. Notably, the cloud of uncertainty exists until finality is given by the SC under section 62. Until then, CoC remains interested. 
  2. Appeal to SC can be made only if it was appealed against before the NCLAT. Also, appeal to SC is available only on questions of law pertaining to any of the five grounds specified in Section 61 of the IBC – and, for no other reason.
  3. A clause in the resolution plan empowering the CoC to merely extend the implementation timeline by a specified majority and neither providing for withdrawal nor modification, cannot be stated to be an open ended or indeterminate plan solely at the discretion of the resolution applicant.
  4. CCDs are equity. Courtesy: SC rulings in Narendra Kumar Maheshwari, IFCI Limited v. Sutanu Sinha and Others. Also, if CoC has exercised its commercial wisdom in the matter, judiciary has nothing to interfere with.
  5. For issues like distribution of profits arising during CIRP, look at the RFRP and the resolution plan. Unless there is a specific provision with regard to such distribution to be made to creditors, the money shall remain with CD. Also, in this case, the resolution plan explicitly contemplated that SRA shall take over the assets and liabilities of the CD as a ‘going concern’, which would include the profits or losses that may be generated by the company during CIRP.
  6. Where a creditor was classified as contingent creditor by SRA and the plan was approved by CoC; and ambivalent stance was taken by the concerned creditor, then the commercial wisdom of CoC cannot be challenged.
  7. Payments to creditors against pre-CIRP dues must be done only in accordance with the resolution plan and with the express agreement of the CoC.
  8. Decisions pertaining to the resolution plan and dues thereunder fall under the “commercial wisdom” of CoC. Where CoC exercises commercial wisdom, the decision  is deemed to be non-justiciable by this Court in view of ruling in K. Sashidhar. 
  9.  Once the resolution plan has been approved by the CoC and NCLT, permitting any claims to be reopened which were not a part of the RFRP/resolution plan will open Pandora’s box, and will do violence to the provisions of IBC. SRA cannot be forced to deal with claims that are not a part of the RfRP issued in terms of Section 25 of the IBC or a part of its Resolution Plan. Courtesy: SC ruling in Essar Steel and Ghanshyam Mishra.

Ruling available here: https://api.sci.gov.in/supremecourt/2020/7358/7358_2020_1_1501_64744_Judgement_26-Sep-2025.pdf

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Presentation on IBC Amendment Bill, 2025

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YouTube Recording of Discussion on Bill: https://youtube.com/live/jAvKP7U5qKY

IBC (Amendment) Bill, 2025Download

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Done, dented, damaged: The IBC edifice, even before it’s 10

Supreme Court’s Judgment in Bhushan Power and Steel Ltd.: a wake up call for the Resolution Professionals and Committee of Creditors

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Webinar on IBC, 2025.pptx (1)Download

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IBC for a makeover: bold and beautiful! Quick highlights of the IBC Amendment Bill, 2025

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– Team Resolution | resolution@vinodkothari.com

Far reaching changes, several strategic initiatives, bold moves to overcome impact of jurisprudence that did not seem to serve the policy framework – these few words may just approximately describe the IBC Amendment Bill. The Bill has been put to a Select Committee of the Parliament, and may hopefully come back in the Winter Session. However, the mind of the Government is clear: if a bold legal reform has faced implementation challenges, the Government will clear the roadblocks. Some extremely crucial amendments might soon see the light of day, providing much-required clarity on priority of creditors, role of AA, group insolvency, among others.

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Done, dented, damaged: The IBC edifice, even before it’s 10

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– Sikha Bansal, Senior Partner | resolution@vinodkothari.com

What was ushered in as a new era of legal reforms in the country, with keen interest from all over the world, is now a bruised, battered structure, even before it cuts its cake for the 10th time.

The BLRC Vision

When the Bankruptcy Law Reforms Committee first put the Insolvency and Bankruptcy Code, 2016 (“IBC”) into its mould, they envisaged it as a tool in the hands of creditors who should decide on the fate of a defaulting firm. As they put it, “The appropriate disposition of a defaulting firm is a business decision, and only the creditors should make it.” Needless to say, they also recognised that decision-making has to be quick – as delays lead to value destruction. Indeed, the design and structure of IBC was promising enough – a unique categorisation of creditors as financial and operational creditors (found no-where in the world) with financial creditors, a creditor-driven resolution process, strict hardbound timelines, an irreversible liquidation outcome, a well-thought of priority waterfall, and a court-appointed liquidator taking the corporate debtor to the death pyre.

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