INTRODUCTION
When Jet Airways collapsed in 2019, thousands of employees waited years to find out whether their provident fund and gratuity would survive the airline’s insolvency proceedings. The company had stopped paying salaries months before it grounded its last flight. What followed became an illustration of a contradiction sitting quietly inside the Insolvency and Bankruptcy Code, 2016 (“IBC”) itself.
The IBC was built around a predictable order in which a bankrupt company’s creditors get paid, so that insolvency stops being a free-for-all. Section 53 of the Code, the “waterfall mechanism,” lays out exactly that order. [1] Yet Section 36(4) makes a promise of its own, one that does not quite match. [2] The result is a Code arguing with itself over how much of a worker’s provident fund, gratuity, and pension actually survives a company’s death, and litigants have spent almost a decade forcing courts to referee the disagreement.
LEGAL BACKGROUND
Section 53(1) ranks claims after a company enters liquidation. [3] At the very top, insolvency costs are paid first and immediately after that, secured creditors and workmen’s dues for the twenty-four months preceding liquidation share equal priority. Employees who are not classified as “workmen” come next, but only for wages owed in the preceding twelve months. Everyone else, unsecured creditors, government dues, and shareholders, queue up behind them.
That twenty-four-month cap on workmen’s dues under section 53(1)(b) sounds protective by the standards of most jurisdictions. The trouble is that a few sections earlier, section 36(4)(a)(iii) does something the waterfall does not account for: it removes provident fund, pension fund, and gratuity fund dues from the liquidation estate entirely. [4] Not capped, not ranked, but completely excluded. If these sums never enter the estate in the first place, they were never supposed to be measured against section 53’s twenty-four-month window at all. They sit outside the waterfall, to be paid in full, independent of how the rest of the company’s assets get carved up.
THE LEGAL ASPECT: HOW THE CONTRADICTION PLAYED OUT IN COURT
Moser Baer and the liquidator’s shortcut
The conflict surfaced bluntly in the Moser Baer insolvency. When the electronics manufacturer went into liquidation, its liquidator treated provident fund and gratuity dues as ordinary workmen’s dues under section 53(1)(b), meaning they would be capped at twenty-four months and paid out of whatever the liquidation estate could afford, alongside secured creditors. The NCLAT initially endorsed a version of this approach, holding that a liquidator could decline to pay gratuity where the corporate debtor had never maintained a separate gratuity fund. [5] On appeal, the Supreme Court reversed that position, restoring the NCLT’s original view that provident fund, pension fund, and gratuity fund dues are not part of the liquidation estate at all, and that section 53 has no power to touch them. [6] They had to be paid to the workmen in full, exactly as section 36(4) says, whether or not the rest of the waterfall left anything on the table for anyone else.
Jet Airways and the twenty-four-month question
The Jet Airways liquidation pushed the same issue: employees were owed provident fund and gratuity going back well beyond the twenty-four-month cap that section 53(1)(b) would ordinarily apply. The NCLAT directed the resolution professional to clear the full amount owed up to the date insolvency commenced, treating the payment as a standalone statutory obligation rather than a capped claim inside the waterfall. [7] The Supreme Court affirmed this position on appeal. [8] Critics of the ruling have pointed out something uncomfortable: the NCLAT never fully explained where in the Code this “pay the full historical amount” obligation comes from, since section 36(4) only tells you the money is excluded from the estate, not how far back the liquidator’s cheque has to reach. The judgment solved the workers’ problem in that case, but it did not tidy up the statute; if anything, it added another judicial patch on top of an unresolved drafting gap.
THE IBC DOES NOT EVEN AGREE WITH THE COMPANIES ACT
Where a company winds up under the Companies Act, 2013 instead of the IBC, section 326 caps super-priority wage claims for employees at four months preceding the winding-up order. [9] Under the IBC, non-workmen employees get twelve months of unpaid wages in the equivalent tier. [10] Two statutes, both meant to protect the same category of worker in functionally the same situation, a company’s collapse, arrive at numbers that differ by a factor of three, depending entirely on which insolvency regime the company happens to fall into. Nothing in either statute explains why a worker’s claim should be worth three times more simply because their employer was liquidated under one law rather than the other.
WHY THIS IS NOT JUST ACADEMIC?
None of this is a hypothetical drafting quibble debated only in law journals. Liquidators handling real companies have to decide, in real time, whether provident fund dues get folded into the twenty-four-month bucket for workmen’s dues or paid out separately and in full, and that decision determines whether other creditors further down the waterfall get anything at all. Commentators have described the phenomenon of “strategic bankruptcies,” in which the slow and complex insolvency process itself is used by employers as leverage to delay or renegotiate what workers are owed, precisely because the statutory language leaves room for argument. [11] A worker who does not understand the difference between section 53 and section 36(4) has very little way of knowing which fight they are actually supposed to be having.
CONCLUSION
The IBC was drafted to bring order to what used to be a chaotic, first-come-first-served scramble among a bankrupt company’s creditors. On the specific question of what workers are owed, though, the Code has managed to create its own version of that chaos, just one level up, in the text of the statute rather than in the courtroom. Section 36(4) promises full payment of provident fund, pension, and gratuity dues, while section 53 keeps trying to measure those same dues against a twenty-four-month ruler that was never meant to apply to them. Courts have consistently sided with workers when the question reaches them, which is the right outcome, but it is also a sign that the legislature left an ambiguity for judges to keep resolving one liquidation at a time. A cross-reference in section 53 clarifying that workmen’s dues under sub-clause (b) exclude sums already carved out by section 36(4) would take one sentence to fix. Until that happens, every company that goes under will keep relitigating a question the statute should have answered on its own.
Author(s) Name: Soham Dey
References:
[1] Insolvency and Bankruptcy Code 2016, s 53
[2] Insolvency and Bankruptcy Code 2016, s 36(4)
[3] Insolvency and Bankruptcy Code 2016, s 53(1)
[4] Insolvency and Bankruptcy Code 2016, s 36(4)(a)(iii)
[5] Savan Godiawala v Apalla Siva Kumar (2020) SCC OnLine NCLAT 191
[6] Savan Godiwala v Apalla Siva Kumar (2023) Civil Appeal No 2520 of 2020
[7] Jet Aircraft Maintenance Engineers Welfare Association v Ashish Chhawchharia Resolution Professional of Jet Airways (India) Ltd & Ors (2022) Company Appeal (AT) (Insolvency) No 752 of 2021
[8] Jalan Fritsch Consortium v Regional Provident Fund Commissioner & Anr (2023) Civil Appeal No 407 of 2023 with Civil Appeal Nos 465-469 of 2023
[9] Companies Act 2013, s 326
[10] Insolvency and Bankruptcy Code 2016
[11] Widaphi Lyngdoh and Pradyumna Mishra, ‘Employee Protection Goals in India: A balance between workmen dues and claims of creditors under IBC’ (iPleaders, 06 April 2020) <https://blog.ipleaders.in/employee-protection-goals-in-india-a-balance-between-workmen-dues-and-claims-of-creditors-under-ibc/> accessed 7 September 2026.