Service benefits such as Gratuity, LTC, and EL Encashment do not constitute operational debts under the Insolvency and Bankruptcy Code, 2016
- REEDLAW
- Jul 24, 2024
- 2 min read
NCLAT held that Service benefits such as Gratuity, LTC, and EL Encashment do not constitute operational debts under the Insolvency and Bankruptcy Code, 2016.
National Company Law Appellate Tribunal (NCLAT), New Delhi Bench of Justice Ashok Bhushan (Chairperson) and Ms. Shreesha Merla (Technical Member) was hearing an appeal and observed that the service benefits such as Gratuity, LTC, and EL Encashment do not constitute operational debts under the Insolvency and Bankruptcy Code, 2016. Appellate Tribunal Bench determined that these claims are distinct from the statutory definition of operational debt.
The National Company Law Appellate Tribunal (NCLAT) reviewed Company Appeal (AT) (Insolvency) No. 934 of 2021, which arose from an appeal filed by the Appellant Mr. Kishore K. Lonkar against the order dated 06/09/2021 of the National Company Law Tribunal (NCLT), Mumbai Bench, in C.P. (IB) No. 1060/MB/2019. Mr. Lonkar, a former employee of the respondent company, had sought to initiate a Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC).
Mr. Lonkar claimed various service benefits totalling Rs. 16,80,877, including Gratuity, EL Encashment, and LTC, which he alleged were unpaid operational debts. Despite serving a demand notice under Section 8 of the Code, the respondent company failed to clear these dues, prompting Mr. Lonkar to approach the NCLT.
The appellant argued that the Gratuity, EL Encashment, and LTC constituted salary under the definition of operational debt in Section 5(21) of the Code. However, the respondent countered that under Section 14 of the Payment of Gratuity Act, 1972, disputes regarding gratuity are to be resolved by the Regional Labour Commissioner, not the NCLT.
Moreover, the NCLAT noted a previous case involving similar claims by another individual, Mr. Harsh S. Pinge, and observed that the payment of Gratuity had already been settled partly. The NCLAT emphasized that the IBC's objective is to resolve debts concerning goods and services and that service benefits like LTC and EL Encashment while arising from employment, are distinct from operational debts intended under the IBC.
After evaluating the arguments and legal provisions, the NCLAT concluded that the claims made by Mr. Lonkar did not qualify as operational debts under the IBC. The Tribunal upheld the NCLT's decision to dismiss the application for CIRP initiation, stating that the payment of Gratuity was already resolved partially and that issues regarding interest were beyond the jurisdiction of the IBC. Therefore, the appeal by Mr. Kishore K. Lonkar was dismissed by the NCLAT, affirming the order of the Adjudicating Authority. No costs were awarded in the matter.
Ms. Pratiksha Sharma, Kunal Katariya and Ankit Acharya, Advocates pleaded for the Appellant while D. Ray Choudhuri, Sr. Advocate with Deendayal G. Dhanure, Advocate were present for the Respondent.
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