Calcutta High Court Rules Gratuity Dues Must Be Paid in Full and Are Not Part of Liquidation Estate Under IBC

In a significant ruling, the Calcutta High Court has clarified the treatment of gratuity dues during the insolvency proceedings of a corporate debtor. The court emphasized that gratuity payments, as mandated by the Payment of Gratuity Act, 1972, are statutory obligations that do not form part of the liquidation estate under the Insolvency and Bankruptcy Code (IBC), 2016. Consequently, these dues are excluded from the distribution mechanism outlined in Section 53 of the IBC and must be paid in full to the entitled employees.

The case arose when the Assistant Labour Commissioner directed the payment of gratuity, along with interest, to a former employee of the corporate debtor. The corporate debtor challenged this order, arguing that the employee had already submitted a claim for gratuity during the Corporate Insolvency Resolution Process (CIRP), which was addressed as per the approved resolution plan. The debtor contended that the IBC, being a special legislation, should override the Payment of Gratuity Act, citing Section 238 of the IBC, which gives the Code precedence over other conflicting laws.

However, the High Court dismissed this argument, underscoring that Section 14 of the Payment of Gratuity Act provides it with an overriding effect, ensuring that employees' rights to gratuity are protected even during insolvency proceedings. The court referenced the National Company Law Appellate Tribunal's (NCLAT) decision in SBI v. Moser Baer Karamchari Union, which held that provident fund, pension fund, and gratuity fund do not constitute assets of the corporate debtor for distribution under Section 53 of the IBC. This position was further reinforced by the Supreme Court in Savan Godiwala, Liquidator of Lanco Infratech Limited v. Apalla Siva Kumar, where it was observed that even if no separate fund for gratuity exists, the liquidator is obligated to make adequate provisions for such payments.

The High Court's ruling aligns with the principle that statutory dues like gratuity are prioritized and safeguarded, irrespective of the financial distress or insolvency status of the employer. This ensures that employees receive their rightful benefits without being subjected to the claims of other creditors during the liquidation process. The judgment serves as a critical reminder to corporate entities and insolvency professionals about the non-negotiable nature of employee benefits enshrined in statutory provisions.

In essence, the Calcutta High Court has reinforced the legal stance that gratuity dues are sacrosanct and must be honored in full, irrespective of the insolvency proceedings under the IBC. This decision upholds the rights of employees to receive their earned benefits and clarifies the non-inclusion of such dues in the liquidation estate of a corporate debtor.