Gratuity Dues of Workers not Part of 'Liquidation Estate' of Corporate Debtor: Calcutta HC [Read Order]
Gratuity payments are classified as excluded dues and therefore, remain outside the scope of asset distribution among creditors under the waterfall mechanism in Section 53 of the IBC
Gratuity Dues – Gratuity Dues of Workers – Workers not Part of Liquidation Estate – Liquidation Estate – Liquidation Estate of Corporate Debtor – Corporate Debtor – taxscan
Gratuity Dues – Gratuity Dues of Workers – Workers not Part of Liquidation Estate – Liquidation Estate – Liquidation Estate of Corporate Debtor – Corporate Debtor – taxscan
The Calcutta High Court ruled that gratuity obligations are not included in the corporate debtor's liquidation estate as defined under the Insolvency and Bankruptcy Code, 2016 (IBC), and are instead statutorily protected by the Payment of Gratuity Act, 1972.
The court determined that gratuity payments, regardless of the settlement plan, must be made in full and fall outside the waterfall process under Section 53 of the IBC. It further noted that Section 14 of the Payment of Gratuity Act has a superseding effect, guaranteeing that workers' legal rights are maintained even throughout bankruptcy procedures.
The petitioner, Stesalit Limited, filed a writ petition against the order issued by the Assistant Labour Commissioner (Central) & Controlling Authority on November 11, 2024 (Shri Arun Roy v. M/s Stesalit Limited). The Controlling Authority had ordered Respondent No. 4, a former employee of the Corporate Debtor, to receive a gratuity and interest under the contested order.
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Among other reasons, the petitioner contested the contested order on the grounds that Respondent No. 4 had previously submitted his gratuity claim to the Interim Resolution Professional (IRP) during the Corporate Insolvency Resolution Process (CIRP), which was duly acknowledged and granted in accordance with the Resolution Plan that had been approved. The authorized Resolution Plan had not been contested before the Adjudicating Authority by Respondent No. 4. Additionally, the petitioner contended that, in accordance with Section 238 of the IBC, the Payment of Gratuity Act, 1972 is superseded by the IBC because it is a special law.
Respondent No. 4, on the other hand, contested the petition's maintainability, claiming that the petitioner had already exhausted all legislative remedies and had an alternative remedy before the Regional Labour Commissioner (Appellate Authority). Additionally, Respondent No. 4 argued that the Petitioner was circumventively contesting Section 10 of the Payment of Gratuity Act, 1972.
The owner pays "gratuity" to his employees after they have served for the allotted amount of time, according to the single bench of Justice Shampa Dutt (Paul). When the business is shut down through liquidation, the employees will get this sum. A "liquidation estate" including all of the debtor's assets is created concurrently by the IBC and dispersed to creditors using the waterfall procedure outlined in Section 53 of the IBC.
The court noted that the problem emerged because the workers might not receive their full compensation if the gratuity is classified as part of the "liquidation estate" and is to be disbursed in accordance with Section 53. The court pointed out that all amounts owed to workers or employees from provident funds, pension funds, and gratuity funds do not belong to the "liquidation estate," as stated in Section 36(4)(a)(iii) of the IBC.
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Despite being taken into consideration, respondent number four's claim was not fully granted. The workers' dues must be paid in full, the court ruled. It was noted that the money collected for the workers' welfare could not be included in the liquidation estate and could only be used to fully satisfy the workers' debts. According to the Payment of Gratuity Act, the court determined that the claim concerned a gratuity for a "employee."
According to Section 36(4) of the Code, the ruling authority had noted that gratuity dues are unique; they are not merely a component of the debtor's assets but rather the employees' earned entitlements. On the other hand, "workmen's dues," as described in Section 53, are a type of compensation for layoffs that occur during liquidation.
The controlling authority had observed that gratuity payments are classified as excluded dues and therefore, remain outside the scope of asset distribution among creditors under the waterfall mechanism in Section 53 of the IBC. It was noted that the employer held no proprietary right over these amounts, as they had accrued through the employees' services.
The court dismissed the writ petition and concurred with the findings of the controlling authority.The bench held that all "employees" are covered under the Payment of Gratuity Act. It further held that the controlling authority had jurisdiction to decide the issue of gratuity since the company had never closed down. The court observed that the entire dues of the workers would not fall under “liquidation assets”; a worker would be entitled to receive his total dues from the assets of the company.
To Read the full text of the Order CLICK HERE
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