When Corporate Debtor Does Not Create A Gratuity Fund, No Gratuity Is Payable: NCLT Chandigarh

Background Facts

International Mega Food Park Ltd. ("Corporate Debtor") was admitted into Corporate Insolvency Resolution Process ("CIRP") by the Adjudicating Authority on 28.02.2019. Mr. Sumat Gupta was appointed as the Resolution Professional.

Mr. Rakesh Sharma ("Applicant") has worked in the Corporate Debtor as AGM Accounts and Finance for 7 years and his services were terminated post commencement of CIRP on 18.05.2019. The Applicant had sought full and final clearance of pending Gratuity dues, Leave Encashment and salary from the Corporate Debtor. When the amounts were not released, the Applicant filed an application before the Adjudicating Authority, seeking release of Gratuity dues, Leave Encashment and salary during the CIRP period, as the same does not form part of the liquidation estate of the Corporate Debtor.

Contentions Of Resolution Professional 

The Resolution Professional submitted that the Corporate Debtor had not created any Gratuity Fund. Thus, no funds were available for payment of Gratuity to the Applicant for services rendered prior to commencement of CIRP. Further, no details were furnished by the Applicant regarding period of leave encashment and there was no Leave Encashment Fund created by the Corporate Debtor either.

It was argued that Gratuity liability, if any, cannot be part of liquidation estate since only assets can be part of liquidation estate. Had there been any gratuity fund of the Corporate Debtor as contemplated under Section 36(4)(a)(iii) of IBC or Section 4A of the Payment of Gratuity Act, 1972, only then the issue of inclusion or non-inclusion in liquidation estate would arise.

Decision Of NCLT

The Bench observed that it is undisputed that the Applicant worked for the Corporate Debtor during CIRP. Thus, the expenses incurred by Applicant will come under the Insolvency Resolution Process cost under Section 5(13)(c) of IBC.

"The issue at hand is whether Gratuity is payable when no Gratuity fund is created. The Resolution Professional cannot be directed to make payment of gratuity to the applicant as there is no gratuity fund created by the corporate debtor."

The Bench held that in absence of a Gratuity Fund created by the Corporate Debtor, the Resolution Professional cannot be directed to pay gratuity to employee. Further, the salary and leave encashment of employees accrued during CIRP period fall within the definition of insolvency resolution process cost under Section 5(13)(c) of IBC.

Reliance was placed on the Supreme Court judgment in Sunil Kumar Jain and others v Sundaresh Bhatt and others, (2022) ibclaw.in 23 SC, wherein it was held that the Wages/Salaries of the Workmen/Employees during CIRP period can only be included in the CIRP costs if it is established that the IRP/Resolution Professional managed the operations of the Corporate Debtor as a going concern and the concerned workmen/employees actually worked during the CIRP.

The Bench directed the Resolution Professional to make provisions for payment of salary and leave encashment to the Applicant after taking necessary information. Also, as per the Applicant's entitlement, the Resolution Professional may modify the resolution plan to that extent with the approval of CoC. The application was disposed off accordingly.

Case Title: Small Industries Development Bank of India (SIDBI) v International Mega Food Park Limited

Case No.: CP (IB) No.174/Chd/Chd/2018

Counsel For the Applicant: Mr. Nitin Kant Setia, Advocate

Counsel for the Respondent: Dr. Rajansh Thukral, Advocate

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