2025 (2) TMI 1117 - HC - IBC

Company must pay employee gratuity dues from assets despite insolvency proceedings under Payment of Gratuity Act

M/s. Stesalit Limited Versus Union of India & Ors.

The HC dismissed a petition challenging gratuity payment orders under the Payment of Gratuity Act, 1972. The court held that gratuity funds do not form ... Maintainability of petition without exhausting alternative remedies under the Payment of Gratuity Act, 1972 - Gratuity and its Interplay with IB Code - whether Gratuity Fund come within the meaning of Assets of Corporate Debtor for distribution u/s 53 IBC or not - HELD THAT:- Since in many instances, liquidation results in the complete closure of the business of the ailing debtor, which results in the termination of the employment of the workers. In legal parlance, this discharge of workers amounts to their retrenchment i.e. the termination of service of workers by the employer for any reason other than punishment inflicted by way of disciplinary action. Naturally to protect the workers, funds such as pension fund, provident fund, and the gratuity fund are kept out of the liquidation distribution and to be used solely for the benefit of the workers. This question was even dealt with by the National Company Law Appellate Tribunal (NCLAT) in Somesh Bagchi v. Nicco Corpn. Ltd. (Somesh Bagchi) [2018 (7) TMI 2362 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] as well SBI v. Moser Baer Karamchari Union (Moser Baer – NCLAT) [2019 (8) TMI 915 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] wherein the Appellate Tribunal had held that gratuity does not form a part of the liquidation estate. In Moser Baer – NCLT, the Court further directed the liquidator that in cases there is any deficiency to the provident, pension or the gratuity funds; the liquidator shall ensure that the fund is available in these accounts, “even if their employer has not diverted the requisite amount” - This order was impugned by the State Bank of India – a secured creditor of Moser Baer in SBI v. Moser Baer Karamchari Union, where the limited question that came before the NCLAT was whether the gratuity dues formed a part of the liquidation estate. Holding the answer in negative, the NCLAT decided not to interfere with the order of the NCLT. In the present case, there is no such fund maintained by the company. Herein, the company never closed down nor did it go into liquidation. The dues for the welfare of the workers is not permissible to be included in the liquidation estate and is to be utilized only for the payment of the dues of such workers in full - Admittedly the respondent joined in the post of Manager Technical Operations and is not a worker and any dispute raised by him is thus not an industrial dispute. But the claim herein is in respect of gratuity in respect of an ‘employee’ which is guided by the labour legislation, payment of gratuity act and applies to all employees. Conclusion - i) All ‘employees’ are covered under the payment of gratuity act and the said act is a labour legislation. This answers the point of jurisdiction/determination. ii) Admittedly the company never closed down, as the petitioner-company was taken over by the new management under the CIRP and the company remained active. Thus the jurisdiction of the concerned authority has never been ousted. iii) There being no specific fund maintained for such purpose by the company, the controlling authority rightly held that the entire dues of the workers would not come under the ‘liquidation assets’ and a worker was entitled to his total dues from the assets of the company. Such claim was above the claim of other creditors.iv) The controlling authority thus had jurisdiction to decide the issue of gratuity as the company never closed down. CIRP is a recovery mechanism for creditors unlike liquidation which is a way to end a company’s life. Petition dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe judgment addresses several core legal questions:Whether the writ petition is maintainable without exhausting alternative remedies under the Payment of Gratuity Act, 1972.Whether the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) override the Payment of Gratuity Act, 1972.Whether the gratuity dues of an employee are included in the liquidation estate under the IBC.Whether the controlling authority had jurisdiction to decide on gratuity payments in light of the company's status under Corporate Insolvency Resolution Proceedings (CIRP).Whether the petitioner company's failure to maintain a specific gratuity fund affects the obligation to pay gratuity under the Gratuity Act.2. ISSUE-WISE DETAILED ANALYSISMaintainability of the Writ Petition:The respondent argued that the petitioner should have appealed to the Regional Labor Commissioner before filing a writ petition, as per the remedies available under the Payment of Gratuity Act, 1972.The court noted that the petitioner bypassed the appellate remedy to avoid depositing the awarded amount, which is a requirement under the Gratuity Act.The court found the writ petition to be an inappropriate attempt to challenge the order of the controlling authority without following the due appellate process.Interplay between the IBC and the Payment of Gratuity Act:The petitioner argued that the IBC, being a special legislation, should override the Gratuity Act, citing Section 238 of the IBC.The court examined precedents where gratuity and similar dues were considered outside the liquidation estate under the IBC, emphasizing that such dues are not assets of the corporate debtor but earned entitlements of employees.The court held that the Gratuity Act has overriding authority as per Section 14, ensuring that gratuity payments take precedence over conflicting legislation.Inclusion of Gratuity Dues in the Liquidation Estate:The court referred to multiple precedents, including judgments from the NCLT and NCLAT, which consistently held that gratuity dues do not form part of the liquidation estate.The court reiterated that gratuity, provident fund, and pension fund dues are excluded from the assets available for distribution under Section 53 of the IBC.The court emphasized that these funds are meant for the welfare of employees and should not be used to satisfy creditors' claims.Jurisdiction of the Controlling Authority:The petitioner contended that the controlling authority lacked jurisdiction due to the company's status under CIRP.The court clarified that the company was not in liquidation but under CIRP, which does not terminate the company's existence.The court found that the controlling authority had jurisdiction to decide on gratuity payments as the company remained operational.Absence of a Specific Gratuity Fund:The petitioner argued that the absence of a specific gratuity fund should affect the obligation to pay gratuity.The court noted that the obligation to pay gratuity exists regardless of whether a specific fund is maintained, as per the Gratuity Act and relevant case law.The court held that the controlling authority correctly directed the payment of gratuity dues, recognizing them as excluded assets under the IBC.3. SIGNIFICANT HOLDINGSThe court preserved several crucial legal reasonings:'The Payment of Gratuity Act, 1972, uses the term 'employee' instead of 'workman,' reflecting a broader definition that includes both workers and supervisory personnel.''Gratuity payments are classified as excluded dues, and thus they remain outside the scope of asset distribution among creditors, as stipulated by the waterfall mechanism in Section 53.''Section 14 of the Payment of Gratuity Act, 1972, confers this Act with overriding authority, clearly stating that 'the provisions of this Act or any rule made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any enactment other than this Act.''The court concluded that the controlling authority's order was in accordance with the law and required no interference. The writ petition was dismissed, affirming the obligation of the petitioner to pay the gratuity amount along with interest as directed by the controlling authority.