Section 87: Insolvency of employer

Finin2min analysis — what the section actually does

Full statutory text — Section 87

87. Insolvency of employer.—(1) Where any employer has entered into a contract with any insurers
in respect of any liability under this Chapter to any employee, then, in the event of the employer becoming
insolvent or making a composition or scheme of arrangement with his creditors or, if the employer is a
company, in the event of the company having commenced to be wound up, the rights of the employer
against the insurers as respects that liability shall, notwithstanding anything in any law for the time being
in force relating to insolvency or the winding up of companies, be transferred to and vest in the employee,
and upon any such transfer the insurers shall have the same rights and remedies and be subject to the same
liabilities as if they were the employer, so, however, that the insurers shall not be under any greater liability
to the employee than they would have been under the employer.
    (2) If the liability of the insurers to the employee is less than the liability of the employer to the
employee, the burden of proof shall lie on the employee for the balance in the insolvency proceedings or
liquidation.
     (3) Where in any case such as is referred to in sub-section (1), the contract of the employer with the
insurers is void or voidable by reason of non-compliance on the part of the employer with any terms or
conditions of the contract (other than a stipulation for the payment of premium), the provisions of that sub-
section shall apply as if the contract were not void or voidable, and the insurers shall be entitled to prove in
the insolvency proceedings or liquidation for the amount paid to the employee:
    Provided that the provisions of this sub-section shall not apply in any case in which the employee fails
to give notice to the insurers of the happening of the accident and of any resulting disablement as soon as
practicable after he becomes aware of the institution of the insolvency or liquidation proceedings.

     (4) There shall be deemed to be included among the debts which under the Insolvency and Bankruptcy
Code, 2016 (31 of 2016) or under the provisions of the Companies Act, 2013 (18 of 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.
    (5) Where the compensation is a half-monthly payment, the amount due in respect thereof shall, for the
purposes of this section, be taken to be the amount of the lump sum for which the half-monthly payment
could, if redeemable, be redeemed if applications were made for that purpose under section 80, and a
certificate of the competent authority as to the amount of such sum shall be conclusive proof thereof.
    (6) The provisions of sub-section (4) shall apply in the case of any amount for which an insurer is
entitled to prove under sub-section (3), but otherwise those provisions shall not apply where the insolvent
or the company being wound up has entered into such a contract with insurers as is referred to in
sub-section (1).
    (7) The provisions of this section shall not apply where a company is wound up voluntarily merely for
the purposes of reconstruction or of amalgamation with another company.

How to apply this provision

1. Primary statutory test — (1) Where any employer has entered into a contract with any insurers in respect of any liability under this Chapter to any employee, then, in the event of the employer becoming insolvent or making a composition or scheme of arrangement with his creditors or, if the employer is a company, in the event of the company having commenced to be wound up, the rights of the employer against the insurers as respects that…
2. Additional operative limb — (2) If the liability of the insurers to the employee is less than the liability of the employer to the employee, the burden of proof shall lie on the employee for the balance in the insolvency proceedings or liquidation.
3. Qualification / exception to test — Provided that the provisions of this sub-section shall not apply in any case in which the employee fails to give notice to the insurers of the happening of the accident and of any resulting disablement as soon as practicable after he becomes aware of the institution of the insolvency or liquidation proceedings.
4. Evidence file — retain facts and records proving the role/status of: Employer, Employee / worker, Authority / officer.

Rules, forms and cross-references

A direct concordance is not exhaustive. Central/State jurisdiction, schemes, authority appointments, saved instruments and later notifications may change the practical route without changing the section wording.

Worked example

Q&A — Section 87

Source & verification trail