Gratuity claims with interest awarded by Labour Commissioner constitute operational debt under IBC Section 5(21)

The NCLAT dismissed the appeal and held that gratuity claims with interest awarded by Labour Commissioner constitute operational debt under IBC Section 5(21). The court rejected the corporate debtor's plea of pre-existing dispute, finding that suits filed after the demand notice were mala fide attempts to avoid liability, particularly when the company had previously agreed before Delhi HC that workers could file claims under Sections 8 & 9. The prior dismissal of trade union's Section 9 application on prematurity grounds did not operate as res judicata against the present individual claim.

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The core legal questions considered in this judgment revolve around the admission of a Section 9 application under the Insolvency and Bankruptcy Code, 2016 ("IBC") filed by an operational creditor against a corporate debtor. The issues addressed include:

i. Whether the payment of gratuity claimed by the operational creditor constitutes an operational debt within the meaning of the IBC;

ii. Whether there existed any pre-existing dispute prior to the issuance of the demand notice that would bar the admission of the Section 9 application;

iii. Whether the order passed in a prior Section 9 application filed by a trade union, in which the present operational creditor had also participated by affidavit, operates as res judicata against the present claim.

Regarding the first issue, the legal framework centers on the definition of "operational debt" under Section 5(21) of the IBC, which includes claims in respect of the provision of goods or services including employment, or debts arising under any law payable to the government or local authorities. The Court also referenced Section 326 of the Companies Act, 2013, which defines "workmen's dues" to include sums due from gratuity funds maintained by the company.

The operational creditor's claim for gratuity was based on an award dated 26.02.2014 by the Assistant Labour Commissioner, which had become final and was not challenged by the corporate debtor. The adjudicating authority found that the decretal amount of Rs. 1,23,725 (including interest) exceeded the threshold limit prescribed under Section 4 of the IBC, thus qualifying as a "debt" and specifically as an operational debt.

The appellant relied on a prior judgment where this Tribunal held that welfare dues such as LTC and Earned Leave Encashment do not constitute operational debt if the principal gratuity amount has already been paid. However, the Court distinguished that case on facts, noting that in the present matter the gratuity amount itself remained unpaid and was crystallized by a final award. Therefore, the Court concluded that the payment of gratuity claim with interest indeed constitutes operational debt, making the Section 9 application maintainable.

On the second issue concerning pre-existing dispute, the appellant contended that two suits filed by the corporate debtor (Suit No. 500/2017 and Suit No. 2506/2017) prior to the Section 9 application evidenced a dispute that barred the insolvency petition. Suit No. 500/2017 sought declarations that draft rehabilitation schemes and financial statements should not be construed as admissions of debt, and injunctions against creditors raising claims based on those documents. Suit No. 2506/2017 sought injunctions restraining retired workers from representing their dues in various forums and declared certain documents null and void.

The Court analyzed these suits and found that they did not raise any substantive dispute regarding the gratuity claim or other dues of the workmen. Instead, the suits aimed to protect the corporate debtor's position in relation to rehabilitation schemes and financial disclosures. Further, the Court noted that the suits were filed after the issuance of the demand notice under Section 8 of the IBC by the trade union on 14.03.2017, which preceded the suits by several months. The trade union's Section 9 application was dismissed as premature, but the demand notice and claim were valid and prior to the suits.

Additionally, the Delhi High Court had earlier acknowledged the right of the workmen to invoke the jurisdiction of the NCLT under Sections 6, 8, and 9 of the IBC. The corporate debtor's counsel had agreed to this position in the Writ Petition that was disposed of on 06.12.2017. The Court found that the suits filed after this date to restrain workmen from claiming dues were mala fide and could not be treated as raising a pre-existing dispute. Hence, the plea of pre-existing dispute was rejected as frivolous and a mere obfuscation.

The third issue concerned whether the dismissal of the Section 9 application filed by the trade union (JK Jute Mazdoor Morcha) and the affidavit filed by the present operational creditor in that proceeding barred the present claim by res judicata. The Court examined the affidavit filed by the operational creditor, which authorized the trade union to represent his claim and requested the Tribunal to consider his claim in that appeal. However, the Tribunal's dismissal of the trade union's Section 9 application was solely on the ground of prematurity, i.e., the application was filed before the expiry of 10 days from delivery of the demand notice, as mandated by Section 9.

No decision was taken on the merits of the claim or the existence of debt or default. The Supreme Court also dismissed the subsequent civil appeal without addressing the merits. Therefore, the Court held that the prior order did not constitute res judicata against the present claim. The principle of res judicata requires a final determination on the merits, which was absent here. Consequently, the present Section 9 application was not barred by the prior dismissal.

In its reasoning, the Court also took note of the prolonged history of the corporate debtor being a sick company under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) until its repeal in 2016, the failure of rehabilitation schemes, and the winding-up directions by BIFR. The corporate debtor had been non-operational and closed since March 2014. The workmen's dues had accumulated, and the insolvency resolution process was deemed the only viable route for revival and realization of dues.

The Court highlighted the Supreme Court's earlier ruling that trade unions can be operational creditors under the IBC and can file joint applications on behalf of workmen. The Court also noted that multiple Section 9 applications filed by different workmen were disposed of following the admission of the present application, consolidating claims.

The Court rejected the appellant's contention that intervention applications filed by other workmen were not maintainable or that the operational creditor's claim lacked strength because of alleged manipulation by previous management. The Court emphasized that the application must stand on its own merits but also recognized the practical consolidation of claims for efficient resolution.

In conclusion, the Court upheld the adjudicating authority's order admitting the Section 9 application. It held that:

- The gratuity claim with interest awarded by the Labour Commissioner constitutes an operational debt under Section 5(21) of the IBC;

- There was no pre-existing dispute that barred the application, as the suits filed by the corporate debtor did not contest the gratuity claim and were filed after the demand notice;

- The dismissal of the prior Section 9 application by the trade union on prematurity grounds does not operate as res judicata against the present claim;

- The application was within the limitation period;

- The initiation of Corporate Insolvency Resolution Process (CIRP) was justified given the corporate debtor's prolonged closure and financial distress.

The Court dismissed the appeal, vacated the interim order, and excluded the period from 02.02.2024 till the date of the order from the CIRP timeline. Costs were left to the parties.

Significant holdings include the following verbatim excerpt from paragraph 22 of the adjudicating authority's order, affirmed by the Court:

"The decretal amount is adjudicated by the Labour Court as a legally payable claim crystallized and payable in law, the same would constitute a 'debt' which remained unpaid by the Corporate Debtor. The decretal amount awarded by the Civil Court, Kanpur Nagar in respect of gratuity along with 8% till the date of filing of Petition which constitutes a sum of Rs. 1,23,725 is above the threshold limit of Rs. 1.0 Lakh as specified under Section 4 of the IBC,2016."

Core principles established include:

- Gratuity claims crystallized by final awards and remaining unpaid qualify as operational debt under the IBC;

- Filing of suits by the corporate debtor that do not contest the debt but seek to restrain claims based on other grounds do not constitute pre-existing disputes barring Section 9 applications;

- Prematurity of a Section 9 application (filing before expiry of 10 days from demand notice) is a valid ground for dismissal, but such dismissal does not bar fresh claims filed after the period;

- Trade unions represent operational creditors and can file joint applications under the IBC;

- Insolvency proceedings are appropriate for resolution of long-standing dues of workmen where the corporate debtor is non-operational.

The final determination was that the Section 9 application filed by the operational creditor was maintainable, no pre-existing dispute barred its admission, and the prior dismissal of a related application did not operate as res judicata. The appeal was dismissed accordingly.

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