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

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• The company’s management changed hands, and the BIFR proceedings abated after SICA was repealed in 2016.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.