Gratuity Payable To Retiring Employee Cannot Be Equated With Salary, Not Part Of CIRP Costs: NCLAT

The National Company Law Appellate Tribunal (NCLAT) in Delhi has held that gratuity payable to an employee who retires during the corporate insolvency resolution process cannot be treated as part of the insolvency resolution process costs.

It held that gratuity is a terminal benefit and not an expense incurred by the Resolution Professional (RP) in running the insolvency process.

A bench of Judicial Member Justice N. Seshasayee and Technical Members Arun Baroka and Indevar Pandey upheld an order of the National Company Law Tribunal (NCLT), Kolkata. The tribunal had rejected a former director and employee's plea to classify his gratuity and leave encashment dues as CIRP costs.

Explaining why gratuity falls outside the scope of CIRP costs, the bench observed:

"Therefore, IRP cost essentially means those costs which are actually incurred by the resolution professional during the insolvency resolution process, but slated for deferred payment to be paid first in the order of priority when payment happens as per Sec.53 formula. Very obviously, the obligation to pay gratuity is not an expense which the resolution professional has actually incurred. Indeed, it accrues to an employee as an aspect of his terminal benefit and hence cannot even be equated to the salary payable to an employee during an insolvency resolution process."

The appeal was filed by Subir Mukherjee, a former director and employee of Duncans Industries Limited. He challenged the NCLT's September 4, 2024 order, which held that his gratuity and leave encashment claims had to be dealt with under the resolution plan rather than treated as CIRP costs.

Duncans Industries entered the insolvency resolution process on March 5, 2020. Mukherjee, who had served the company for over 25 years, retired on April 30, 2021, while the insolvency process was underway.

After the public announcement inviting claims, he submitted a claim of about ₹83.58 lakh. The RP initially admitted about ₹44.16 lakh and later revised the admitted gratuity amount to about ₹52.82 lakh. Despite admitting the claim, the RP did not release the payment saying that the would be dealt under resolution plan. 

Aggreived, Mukherjee then moved the NCLT, seeking payment of his gratuity, leave encashment, and interest. The tribunal rejected his plea, holding that the claim did not fall within the definition of CIRP costs. The resolution plan was approved a few weeks later, on October 18, 2024.

Before the appellate tribunal, Mukherjee argued that gratuity and other retirement benefits are statutory entitlements and not ordinary claims. He submitted that the company's failure to maintain a gratuity fund could not deprive him of that right. He also argued that making him wait until the resolution plan was implemented caused serious prejudice and defeated the objective of protecting employees' dues under the insolvency framework.

The RP opposed the appeal, arguing that gratuity and leave encashment do not qualify as CIRP costs. It submitted that gratuity is ordinarily payable from a gratuity fund and, where no such fund exists, the claim has to be dealt with under the resolution plan in accordance with the waterfall mechanism under the Code.

The RP also argued that the approved resolution plan earmarked ₹25 crore towards gratuity payments and that Mukherjee's admitted claim could be satisfied under the plan. Treating his claim as a CIRP cost, the RP contended, would give him priority over similarly placed creditors.

Interpreting the definition of CIRP costs, the appellate tribunal held that the legislature had adopted a narrow definition.

The bench observed, "The legislature has opted for a narrower definition when it used the word 'means', which implies nothing which is not stated to mean an insolvency resolution process costs within the definition can be read into it."

The tribunal further held that, except for the remuneration payable to the Resolution Professional, the remaining components of CIRP costs relate to expenses actually incurred by the RP during the insolvency resolution process.

Since gratuity accrues to an employee as a terminal benefit, it cannot be treated as a CIRP cost.

Holding that the appellant's claim was misconceived, the tribunal dismissed the appeal as devoid of merits.