Claim for Unpaid Gratuity Is an Operational Debt Under the IBC, and Workmen Can Invoke Insolvency Proceedings for Its Recovery

Posted On - 30 June, 2025 • By - King Stubb & Kasiva

Summary

The National Company Law Appellate Tribunal (NCLAT) Principal Bench, New Delhi, in Company Appeal (AT) (Insolvency) No. 214 of 2024, addressed whether a claim for gratuity with interest qualifies as “operational debt” under Section 5(21) of the Insolvency and Bankruptcy Code (IBC). The appeal was filed by a suspended director of M/s. Juggilal Kamlapat Jute Mills Company Limited (now Geo Jute Ltd.), challenging the order of the Adjudicating Authority (NCLT, Allahabad Bench) that admitted a Section 9 application filed by a workman, Devi Prasad, for unpaid gratuity and interest. 

Facts 

  • JK Jute Mills Company Limited underwent a series of legal proceedings, beginning with a reference to the Board of Industrial and Financial Reconstruction (BIFR) in 1994 under the Sick Industrial Companies Act. 
  • The company’s management changed hands, and the BIFR proceedings abated after SICA was repealed in 2016. 
  • Various suits and writ petitions were filed by and against the company and its workmen, including challenges to asset sales and demands for payment of workmen dues. 
  • Devi Prasad, a workman, sent a demand notice for unpaid gratuity and subsequently filed a Section 9 application under the IBC. 
  • The Adjudicating Authority admitted the application, holding that the claim for gratuity with interest constituted an operational debt, and initiated the Corporate Insolvency Resolution Process (CIRP). 

Issues

  • Whether a claim for payment of gratuity with interest falls within the definition of “operational debt” under Section 5(21) of the IBC. 
  • Whether the Section 9 application was barred by res judicata due to earlier proceedings involving similar claims. 
  • Whether there existed any pre-existing dispute between the parties that would bar the admission of the Section 9 application. 
  • Whether the application was filed within the limitation period. 

Held 

  • The NCLAT upheld the Adjudicating Authority’s order, confirming that gratuity with interest awarded by the Labour Commissioner qualifies as “operational debt” under Section 5(21) of the IBC. 
  • The Tribunal found that there was no pre-existing dispute regarding the gratuity claim, as the Labour Commissioner’s award had become final and was not challenged by the company. 
  • The argument of res judicata was rejected since the earlier proceedings were dismissed on technical grounds (prematurity) and not on merits. 
  • The Section 9 application was found to be within limitation, and the CIRP was rightly initiated. 

Analysis

  • The Tribunal emphasized that “operational debt” includes claims arising from employment, such as gratuity, which is a statutory right of the employee. 
  • The award of gratuity with interest by the Labour Commissioner was considered a crystallized debt, and the company’s failure to challenge the award or pay the amount constituted a default. 
  • The pendency of civil suits filed by the company did not amount to a pre-existing dispute concerning the gratuity claim, as those suits pertained to other issues and did not challenge the Labour Commissioner’s award. 
  • The Tribunal distinguished the present case from previous judgments cited by the appellant, noting that in those cases, the gratuity had already been paid, or the claims were of a different nature (e.g., leave encashment). 
  • The Tribunal also observed that the CIRP process was the only viable remedy for workmen to recover their statutory dues, given the prolonged closure and financial distress of the company.