What Happens to Employees When a Company Winds Up?

Last updated 22 May 2026

Strike off vs winding up: what the distinction means for employees

The two main routes for closing a company have very different implications. The voluntary strike off route under Section 248(2) requires the company to have zero liabilities at the time of filing STK-2. This means all employee dues — salaries, bonuses, notice pay, gratuity, and any pending PF or ESI contributions — must be fully settled before the application is submitted. A company cannot use the strike off route to escape employee obligations; it must clear them first.

The formal winding up route (either voluntary creditors' winding up or court-ordered winding up) is different. In a winding up, a liquidator is appointed to realise the company's assets and distribute the proceeds to creditors in the legally prescribed order. Employees are recognised as preferential creditors under this process, but the priority order still places them behind certain other claimants.

Priority order in liquidation under the IBC

Under the Insolvency and Bankruptcy Code 2016, which now governs the liquidation of companies, the order of payment from the liquidation estate is as follows:

First: Insolvency resolution process costs and liquidation costs (the liquidator's fees and administrative expenses).

Second: Workmen's dues for the 24 months preceding the liquidation commencement date, and debts owed to secured creditors to the extent their security interest has been relinquished to the liquidation estate.

Third: Wages and any unpaid dues to employees (other than workmen) for the 12 months preceding the liquidation commencement date.

Fourth: Financial debts owed to unsecured creditors.

Fifth: Any remaining dues to the central or state government.

Sixth: Any remaining secured debts.

Seventh: Any surplus distributed to equity shareholders.

In practice, for most small private limited companies undergoing voluntary closure, there are no assets left once employee dues and secured creditors are paid — shareholders rarely receive anything from a winding up.

Gratuity: a statutory right that survives closure

Under the Payment of Gratuity Act 1972, an employee who has completed five or more years of continuous service is entitled to gratuity on separation — whether the separation is due to resignation, retrenchment, retirement, or the employer's closure. The gratuity formula is 15 days' last drawn salary for each completed year of service (or part thereof exceeding 6 months), subject to a ceiling.

Gratuity is not a discretionary payment — it is a statutory obligation. In a company closure, outstanding gratuity dues must be settled as part of clearing employee liabilities before filing STK-2, or they become part of the preferential claims in a formal winding up. A company cannot be struck off while gratuity claims remain unpaid to eligible employees.

PF and ESI: directors carry personal liability

Provident Fund (PF) contributions and Employee State Insurance (ESI) contributions are statutory deductions that the employer is obligated to deposit with the relevant authorities. If an employer deducts PF from an employee's salary but fails to deposit it with the EPFO, this is treated as a serious default — effectively, the employer is holding employee money that should have gone to the government-administered fund.

Directors who are in charge of and responsible for the conduct of the business at the time of the default are personally liable for these undeposited amounts under both the EPF Act and the ESI Act. This personal liability is not extinguished by the company's closure. The EPFO and ESIC can recover outstanding dues from the personal assets of such directors even after the company has been struck off. This is one of the most common ways founders discover post-closure liabilities they believed were settled.

Notice period obligations and the Industrial Disputes Act

For companies with fewer than 100 workers, the contractual notice period specified in the employment agreement governs the separation. The company must either provide notice or pay in lieu of notice. For companies with 100 or more workers, Chapter V-B of the Industrial Disputes Act 1947 requires prior permission from the appropriate government before retrenchment — closure counts as retrenchment. This applies to establishments that have been in operation for more than a year. Companies with fewer than 100 workers are not subject to this prior permission requirement.

Practical approach for most startup closures

The vast majority of private limited companies that seek closure in India are small startups or micro-enterprises with a handful of employees or no employees at all. For these companies, the practical approach is to settle all employee dues — including salary, notice pay, and any gratuity — before initiating the STK-2 process. Written settlement agreements and acknowledgement receipts from employees are strongly recommended to document that all dues have been cleared.

If the company has had any employees covered under PF or ESI, the director should obtain a clearance certificate or no-dues certificate from the EPFO and ESIC before filing STK-2. This prevents post-closure recovery notices that can create serious personal liability for directors years after the company has been removed from the register.

This article is for general information only. For your specific situation, consult a practicing CA.