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Insolvency Cannot Be Initiated On The Basis Of Unpaid LTC And Leave Encashment Dues: NCLAT

Akshay Sharma
14 May 2022 3:30 PM GMT
Insolvency Cannot Be Initiated On The Basis Of Unpaid LTC And Leave Encashment Dues: NCLAT

National Company Law Appellate Tribunal (NCLAT) bench comprising of Justice Ashok Bhushan and Ms. Shreesha Merla in the case of Kishore K Lonkar versus Hindustan Antibiotics Ltd. held that the welfare claims such as Leave Encashment, superannuation dues are not operational debt for the purpose of initiation of Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor under Section 9 of the Insolvency & Bankruptcy Code (IBC/Code).

Appellant who was an ex-employee of the Corporate Debtor filed the appeal under Section 61 of the Code before NCLAT against the order dated 06.09.2021 passed by NCLT Mumbai wherein the Petition filed by the Appellant under Section 9 of the Code against the Corporate Debtor was dismissed.

Brief Background.

Appellant worked as an employee of the Corporate Debtor and attained superannuation on 31.10.2016 and an amount of INR 16.80 lakhs which includes gratuity, EL Encashment, LTC was payable to the Appellant by the Corporate Debtor but the same was not paid.

Appellant served a demand notice under Section 8 of the Code upon the Corporate Debtor but no payment was made to the Appellant. Thereafter, the Appellant filed the petition under Section 9 which was dismissed by the NCLT, Mumbai.

Contentions of Appellant.

It was contended by the Appellant that Gratuity, LTC, EL Encashment are all components of the salary and constitute "salary" and therefore, falls under the ambit of the definition of Operational Debt under the Code.

It was further contended by the Appellant the even if the payment of gratuity is to be adjudicated by the Regional Commissioner, the dues of LTC and EL Encashment are still due and payable to the Appellant.

Contentions of Corporate Debtor

It was contended by the Corporate Debtor payment of gratuity has to be decided by the Reginal Labour Commissioner under Section 11 of the Payment of Gratuity Act, 1972. It was further contended that the gratuity has already been paid to the appellant but whether any interest is to be paid on the same is to be decided by the Regional Labour Commissioner and not the NCLT under IBC.

Decision/Analysis By NCLAT.

NCLAT noted that the definition of operational debt under Section 5(21) of the Code includes claim towards services which includes "employment" also however, NCLAT observed that the amount claimed by the Appellant are not towards any services rendered by him during his employment with the Corporate Debtor but all these payments were accrued after the cessation of employment.

The Bench observed that the term "employee" in general parlance refers to a person who is hired by the employer to perform a particular job and is entitled to a specific wage or salary. The Bench referred to the definition of workmen dues under Section 326 of the Companies Act, 2013 and held that workmen dues would cover wages and salary, accrued holiday remuneration, workmen compensation, and all sums due from Provident Fund, Pension, Gratuity Fund or any other fund for the welfare of the workmen, maintained by the employer.

NCLAT further held that the dues arising out of service of employment can be categorized in two categories namely "service claims" which includes salary, wages, bonus and "Welfare Claims" which arise after the cessation of employment such as gratuity, leave encashment, superannuation dues which will be dependent on the tenure of the employment.

"9…Though 'service benefits' like 'LTC' accrue, on account of the service rendered during the period of employment, the scope and objective of the Code is simply not just for recovery of 'dues' but Resolution of the Companies meant for 'maximization of the value of assets', to promote entrepreneurship, availability of credit and balance all interest of the stakeholders"

The Bench held that all these claims can be filed before the Resolution Professional after the initiation of CIRP but the it is not the intent and objective of the code to initiate CIRP on the ground of LTC and EL Encashment. Accordingly, the appeal filed by the Appellant was dismissed by NCLAT.

Click Here To Read/Download Order

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