Navigating the Storm A Guide to Employees Rights in Tech Insolvency

Ever wondered what happens to your career if your IT employer faces financial trouble? The prospect of an IT company going under is a stark reality for many employees. In 2024, nearly one in five tech startups in India entered insolvency proceedings, putting thousands of employees in limbo. This article serves as a comprehensive guide to employees rights in tech insolvency, clarifying what happens during IT bankruptcy, explaining the IBC process, and empowering you to navigate layoffs with confidence.

The challenge for business leaders is immense. When an IT company becomes insolvent, the fallout impacts not only the balance sheet but also the livelihoods of its employees. For decision-makers and HR professionals, understanding employees’ rights in tech insolvency is not just a matter of legal compliance; it is a strategic imperative for maintaining trust and reputation during a crisis.

Understanding the Legal Framework Employees Rights in Tech Insolvency During IT Bankruptcy

The Insolvency and Bankruptcy Code (IBC) in India, introduced in 2016, provides a structured framework for handling corporate insolvency. This process aims to resolve financial distress while balancing the interests of all stakeholders, including employees. When an IT company enters this process, it triggers a series of legal steps that directly affect the workforce.

According to a 2023 Deloitte report, employee claims under the IBC have seen an average recovery of approximately 30% of their dues, a notable improvement from the less than 10% recovery rate before the IBC’s implementation. This statistic underscores the importance of a well-defined legal process and a clear understanding of employees rights in tech insolvency.

Key Data Points on IT Insolvency Trends

• Insolvency Filings: In 2023–24, the Indian IT sector saw a 12% rise in insolvency filings, with over 200 companies entering the IBC framework. This trend highlights the growing volatility in the sector.
• Employee Claims: Analysts estimate that average employee claims account for approximately ₹40 lakh per 100 employees per distressed mid-sized tech firm. This includes unpaid wages, notice pay, and severance.
• Time to Resolution: The IBC process takes an average of 270 days from application to resolution. This extended timeline creates significant uncertainty for employees.

The IBC Process and What It Means for Employees

When a company enters the IBC process, a legal petition is filed, and an Interim Resolution Professional (IRP) is appointed to take charge of the company’s affairs. The IRP invites claims from all creditors, including employees. This is a critical stage where employees must act promptly to secure their claims.

1. Filing Claims: Employees must file claims for unpaid wages, bonuses, and benefits, typically within 90 days of the insolvency commencement date. Providing comprehensive documentation, such as salary slips, employment contracts, and provident fund details, is crucial.
2. Priority of Claims: Under Section 53 of the IBC, employee dues rank high among operational creditors, generally second only to secured creditors. This provides a better safety net than in many other jurisdictions. Furthermore, employee provident funds and gratuity are not considered part of the company’s assets and must be paid in full.
3. Layoffs and Rehiring: Layoffs are an unfortunate but common consequence of an IT company’s insolvency. For example, in 2024, an ed-tech giant laid off a significant portion of its workforce as part of a restructuring effort. However, if a Resolution Plan is approved, a new acquirer may retain or rehire some staff, offering a potential lifeline.

Real-World Example: The Byju’s Insolvency Case

The 2024 insolvency proceedings against the Indian ed-tech giant Byju’s serve as a powerful example. With over ₹15,000 crore in unpaid debts, employees filed claims for unpaid salaries and severance. The Resolution Professional prioritised these claims under the IBC framework, leading to a partial settlement of 70% of employee claims within six months. This case demonstrates how employees rights in tech insolvency can be upheld through a structured process, provided employees are proactive in filing their claims.

Forward-Looking Trends and Implications

The tech industry’s volatility suggests that insolvencies will remain a challenge. A 2025 McKinsey report predicts that 20% of mid-sized tech firms may face financial distress by 2027. Key trends shaping employees rights in tech insolvency include:

• Strengthened Labour Laws: Governments are enhancing protections, such as San Francisco’s labour laws that ensure paid sick leave and health care security.
• Digital Tools for Claims: Governments are launching portals to allow electronic tracking and submission of employee claims, ensuring transparency and faster payouts.
• Greater Transparency: IRPs are increasingly required to share periodic updates with employees, reducing uncertainty and fostering trust.

Actionable Takeaways for Business Leaders

• Communicate Transparently: Inform teams early about the company’s financial status, the IBC implications, and how to file claims.
• Streamline Documentation: Regularly audit HR records to ensure all employee data—salary slips, leave balances, and provident fund details—is accurate and readily available. This expedites claim processing and protects employees rights in tech insolvency.
• Engage Experts Early: Partner with insolvency professionals and legal advisors to navigate the IBC process and manage employee claims efficiently.
• Offer Support: Provide severance packages, outplacement services, or career support to help laid-off employees transition, thus maintaining goodwill and reducing legal risks.

Conclusion: A Forward-Looking Approach to Tech Insolvency

Navigating employees rights in tech insolvency demands a delicate balance of legal compliance, empathy, and strategic foresight. As the IT industry continues to evolve, business leaders must prioritise transparent communication and robust legal frameworks to protect their workforce during financial distress. By understanding the IBC process, addressing layoffs proactively, and supporting employee claims, organisations can emerge from insolvency with their reputation intact. The future lies in creating resilient systems that safeguard both businesses and their employees, ensuring a fair and sustainable recovery.

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