Calcutta High Court Upholds Employee's Right to Gratuity Despite CIRP Under IBC

Stesalit Ltd. v. Union of India & Ors. (WPA 532 of 2025, Decided on 21-Feb-2025)

Facts of the Case:

• The writ petition was filed by Stesalit Ltd. challenging an order dated 11.11.2024 by the Assistant Labour Commissioner (Central) & Controlling Authority under the Payment of Gratuity Act, 1972, directing the company to pay gratuity along with interest to an ex-employee, Arun Roy. The ex-employee had resigned in 2014 and later filed a claim for gratuity under the Gratuity Act. The petitioner company, having undergone a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC), argued that the claim had been settled under the approved Resolution Plan, which awarded only ?38,808.43/- against the gratuity claim.
• The company contended that:The IBC overrides the Gratuity Act as per Section 238 of the Code.The employee’s gratuity claim was already considered and settled under CIRP.The petition was an attempt at forum shopping, bypassing the IBC framework. The Labour Commissioner upheld the employee’s right to gratuity, leading to the present writ petition before the Calcutta High Court.

Key Legal Issues:

1. Whether an employee can claim full gratuity under the Payment of Gratuity Act despite a resolution plan approved under IBC.
2. Whether the IBC overrides the Payment of Gratuity Act, 1972, in cases where a company is undergoing CIRP but has not gone into liquidation.
3. Whether gratuity claims must be treated as excluded assets and paid in full to employees, independent of CIRP proceedings.

Legal Position Clarified by the Calcutta High Court:

1. Gratuity Must Be Paid in Full Even Under CIRP: The court reaffirmed that gratuity dues cannot be extinguished under IBC proceedings, as they are earned entitlements of employees, distinct from other claims under the resolution process.
2. The non-maintenance of a gratuity fund does not absolve the company from its statutory obligation to pay gratuity in full. The High Court emphasized that gratuity is a statutory right, and Section 14 of the Gratuity Act provides that it prevails over conflicting laws, including IBC. Section 36(4)(a)(iii) of IBC expressly excludes gratuity, provident fund, and pension fund from the liquidation estate, reinforcing that these payments must be made in full.
3. Workers’ Dues Take Priority Over Creditors’ Claims: Even though the company had been taken over under CIRP and not liquidated, the court held that workers' statutory dues must be paid in full, irrespective of the resolution plan.
4. New Management Liable to Pay Gratuity Under "Caveat Emptor" Doctrine: he court noted that River Rail, the new management, failed to account for gratuity obligations during CIRP. It ruled that the buyer assumes liability for statutory dues unless explicitly exempted in the resolution plan.

Precedents Relied Upon by the Court:

The judgment draws support from several past rulings:

1. Ghanshyam Mishra vs. Edelweiss Asset Reconstruction Co. Ltd. (2021) 9 SCC 657: Held that all claims not part of an approved resolution plan are extinguished. However, this does not apply to statutory obligations like gratuity, which fall outside the resolution process.
2. Hindustan Newsprint Limited (NCLAT Decision): Ruled that such dues to be paid in full, irrespective of CIRP proceedings.
3. State Bank of India vs. Moser Baer Karamchari Union & Ors.: Clarified that gratuity, provident fund, and pension dues cannot be included in the liquidation estate and must be paid outside the resolution process.
4. Savan Godiwala, Liquidator of Lanco Infratech Ltd. vs. Apalla Siva Kumar (SC, 2023): The Supreme Court ruled that a liquidator must ensure full of such dues even if no fund was maintained by the corporate debtor.
5. Jet Aircraft Maintenance Engineers Welfare Association vs. Ashish Chhawchharia (NCLAT, 2021): Held that statutory dues of workmen are excluded from the liquidation estate, reaffirming that it is a worker’s statutory entitlement.

Critical Issues for Stakeholders in CIRP Under IBC:

1. Resolution Applicants Must Account for Gratuity Obligations: Any company acquiring a stressed asset under CIRP must ensure that statutory dues of workmen like gratuity are adequately provided for.
2. Gratuity Cannot Be Treated as an Operational Debt: Failing to consider these obligations could lead to post-acquisition liabilities: Unlike other operational creditor claims, gratuity is protected under labour laws and must be paid in full regardless of the resolution plan.
3. New Management Cannot Evade Past Statutory Liabilities: The ruling reinforces the Caveat Emptor (Buyer Beware) principle, making the new management responsible for outstanding statutory dues.
4. IBC Cannot Override Labour Welfare Legislations: The Payment of Gratuity Act has overriding authority and remains unaffected by the IBC's provisions on debt resolution.
5. Labour Authorities Have Jurisdiction Even After CIRP: Employees can approach the Controlling Authority under the Gratuity Act even after the approval of a resolution plan under IBC. CIRP does not bar such statutory claims, and companies cannot deny gratuity on the pretext of insolvency resolution.

Final Ruling: The Calcutta High Court dismissed the writ petition filed by Stesalit Ltd., upholding the Labour Commissioner's order. The court directed the company to pay the gratuity amount of ?2,11,154/- along with 10% simple interest per annum within 30 days. I

#InsolvencyAndBankruptcyCode #IBC #CorporateInsolvency #GratuityAct #LabourLaws #NCLT #CIRP #DebtResolution #CorporateLaw #WorkersRights #LegalUpdate #MoserBaer #JetAirways #SupremeCourt #CalcuttaHighCourt #EmployeeRights #LegalPrecedent #InsolvencyProceedings #ResolutionPlan #BuyersBeware #CaveatEmptor