Gratuity Dues Of Workers Do Not Form Part Of 'Liquidation Estate' Of Corporate Debtor, Must Be Paid In Full: Calcutta High Court

The Calcutta High Court bench of Justice Shampa Dutt (Paul) has held that gratuity dues are statutorily protected under the Payment of Gratuity Act, 1972, and do not form part of the liquidation estate of the Corporate Debtor under the Insolvency and Bankruptcy Code, 2016 (IBC). The court held that gratuity payments are outside the waterfall mechanism under Section 53 of the IBC and must be paid in full, irrespective of the resolution plan. It further observed that Section 14 of the Payment of Gratuity Act has an overriding effect, ensuring that employees' statutory rights are upheld even in insolvency proceedings.Background FactsThe petitioner filed the writ petition challenging the order dated 11.11.2024 passed by the Assistant Labour Commissioner (Central) & Controlling Authority in Case No. 48(24) 2020-E2 (Shri Arun Roy v. M/s Stesalit Limited). By the impugned order, the Controlling Authority had directed the payment of gratuity along with interest to Respondent No. 4, who was an ex-employee of the Corporate Debtor.ContentionsThe Petitioner challenged the impugned order inter alia on the ground that Respondent No. 4 had already filed his claim for gratuity before the Interim Resolution Professional (IRP) during the Corporate Insolvency Resolution Process (CIRP), which was duly admitted and awarded as per the approved Resolution Plan. Respondent No. 4 had not challenged the approved Resolution Plan before the Adjudicating Authority. The Petitioner also argued that since the IBC is a special legislation, it overrides the Payment of Gratuity Act, 1972, as per Section 238 of the IBC.Per contra, Respondent No. 4 objected to the maintainability of the petition, arguing that the Petitioner had an alternative remedy before the Regional Labour Commissioner (Appellate Authority) but had directly approached the writ court without exhausting statutory remedies. Respondent No. 4 also contended that the Petitioner in a circuitous manner was challenging Section 10 of the Payment of Gratuity Act, 1972. ObservationsThe Court referred to SBI v. Moser Baer Karamchari Union, where the NCLAT held that “PF, Pension Fund and Gratuity Fund does not come within the meaning of Assets of Corporate Debtor for distribution under S. 53 IBC”.In Savan Godiwala, the Liquidator of Lanco Infratech Limited vs. Apalla Siva Kumar, the Supreme Court had observed that “Even if no fund is kept, the liquidator must make adequate provisions for paying gratuities to the applicants in accordance with their eligibility. The Liquidator cannot avoid the obligation to pay gratuities to the employees on the grounds that the CD did not maintain separate funds”.On “Gratuity” and its Interplay with IBCThe court noted that “Gratuity” is a sum payable by the employer to his workers upon completing service for the prescribed period of time. Once the company is brought to an end by the liquidation, then such payment is to be paid to the workers. Simultaneously, the IBC provides for the formation of a “liquidation estate” containing all the assets of the debtor, that are distributed to the creditors in terms of waterfall mechanism under Section 53 of the IBC. The court observed that the issue arose because if the gratuity falls under the “liquidation estate” and is to be distributed in terms of Section 53, then the workers may not get their dues in total. The court noted that Section 36(4)(a)(iii) of the IBC stipulates that all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund do not form part of the “liquidation estate”. The Court referred to Somesh Bagchi v. Nicco Corpn. Ltd. and SBI v. Moser Baer Karamchari Union, where the NCLAT held that gratuity does not form a part of the liquidation estate. It further referred to Alchemist Asset Reconstruction Co. Ltd. v. Moser Baer India Ltd where the NCLT held that amount due towards the workers cannot be used for the purposes of distribution in terms of Section 53 of the IBC. The claim of respondent no. 4, though considered, was not awarded in full. The court held that the dues of the workers have to be paid in full. It observed that the dues for the welfare of the workers are not permissible to be included in the liquidation estate and are to be utilized only for the payment of the dues of such workers in full.The court held that the claim was in respect of gratuity in respect of an “employee‟ which is guided by Payment of Gratuity Act.The controlling authority had observed that under Section 36(4) of the Code, gratuity dues are distinct; they are not simply part of the debtor's assets but represent the earned entitlements of employees. In contrast, “workmen's dues”, defined in Section 53 are a form of retrenchment compensation upon liquidation. Findings of the Controlling AuthorityThe controlling authority had observed that gratuity payments are classified as excluded dues and therefore, remain outside the scope of asset distribution among creditors under...

Gratuity Dues Of Workers Do Not Form Part Of 'Liquidation Estate' Of Corporate Debtor, Must Be Paid In Full: Calcutta High Court

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Gratuity Dues Of Workers Do Not Form Part Of 'Liquidation Estate' Of Corporate Debtor, Must Be Paid In Full: Calcutta High Court

Tazeen Ahmed

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