Mumbai: Noting the key role of employees in companies undergoing bankruptcy proceedings, lenders and bidders are paying extra attention to ensure resolution plans take care of their interest to avoid any disruption in operations.

Employees of Bhushan Steel Ltd recently objected to the bid from Tata Steel Ltd, which was eventually declared the successful applicant. At Gujarat NRE Coke, employees intervened to liquidate the company as going concern. Considering the appeal of around 1,200 permanent workers, the National Company Law Tribunal (NCLT) asked the liquidator to sell the company’s assets within three months without disrupting operations.

“The aim of Insolvency and Bankruptcy Code (IBC) is to revive the company on a going concern basis and hence, the support of employees is crucial. In many cases that we have seen, the resolution applicants are agreeing to pay all or almost all the dues of the employees. Bidders are also mindful of employee concerns if they are to take control of the company and revive it," said Aashit Shah, partner at J Sagar Associates.

According to resolution professionals (RP) who are in charge of the management of the company during insolvency proceedings, it becomes difficult to manage operations and comply with rules pertaining to quarterly filings, disclosure to exchanges, tax assessments etc., in case companies and employees turn hostile.

“With CIRP (corporate insolvency resolution process) getting initiated, everything changes overnight. Though RP does not normally displace existing employees unless there are malafide actions or there are some issues of allegiance, the mind of employees lies with the previous management," said Mamta Binani, independent RP.

Employees of some of the large companies had expressed interest in bidding for the company. According to an Economic Times report dated 14 March, a trust formed by senior employees of Alok Industries, which is part of the central bank’s first list of 12 companies identified for IBC proceedings, had submitted an expression of interest. 

Similarly, Gujarat NRE Coke employees had come together to submit a resolution plan. But it could not be considered within the stipulated timeframe.

Experts point out that while loss of job, in case of liquidation, is prompting employees to step ahead to revive the company, the committee of creditors (CoC) must ensure that resolution plans don’t let defaulted promoters regain control of the company.

"With Section 29(A), we are seeing change in the mindset of employees, who now have come to terms that reigns of the company will not stay with promoters," said an RP, who spoke on condition of anonymity. 

Section 29(A) of the Insolvency and Bankruptcy code bars defaulting promoters from participating in the corporate insolvency resolution process.

According to Shah, as far as bidding by employees is concerned, there is nothing in the Code that bars them. 

“To ensure that employee groups are not a “front" for promoters, the CoC may consider including conditions such as networth criteria, expertise in running businesses, lock-ins, etc., as part of the resolution process so that genuine applicants come forward," he said.

Close