The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench has held that provident fund and gratuity dues payable to workmen and employees do not form part of the liquidation estate under the Insolvency and Bankruptcy Code (IBC), even if no separate provident fund or gratuity fund has been maintained by the corporate debtor.
The bench of Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member), dismissed appeals filed by a consortium of financial creditors led by the State Bank of India and upheld the National Company Law Tribunal (NCLT), Mumbai’s order directing the liquidator of Jet Airways to pay provident fund and gratuity dues in accordance with the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Payment of Gratuity Act, 1972.
The Jet Airways ceased operations in April 2019 following severe financial distress. Insolvency proceedings commenced after the State Bank of India initiated proceedings under Section 7 of the IBC. Although a resolution plan submitted by the Jalan-Fritsch Consortium was approved, the Supreme Court subsequently held that the successful resolution applicant had failed to implement the approved plan and, in November 2024, ordered liquidation of Jet Airways while invoking its powers under Article 142 of the Constitution. A liquidator was thereafter appointed by the NCLT.
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Following commencement of liquidation, hundreds of Jet Airways workmen approached the NCLT seeking directions that their provident fund and gratuity dues be excluded from the liquidation estate under Section 36(4)(a)(iii) of the IBC and be paid in full before any distribution under the statutory waterfall mechanism.
The consortium of financial creditors argued that exclusion under Section 36(4)(a)(iii) applies only where identifiable and segregated provident fund, pension fund or gratuity fund assets actually exist on the liquidation commencement date.
According to the lenders, since Jet Airways had no separate funds available, the dues should merely be treated as workmen’s claims falling within Section 53 of the IBC and be paid through the waterfall distribution mechanism alongside other creditors. They contended that granting payment outside the waterfall would effectively confer an impermissible “super-priority” on such claims.
The workmen opposed the appeals, arguing that entitlement to provident fund and gratuity is a statutory right and is not dependent upon whether a separate fund has been maintained by the employer.
They relied upon the earlier NCLAT judgment rendered during Jet Airways’ corporate insolvency resolution process, wherein the Tribunal had already directed payment of unpaid provident fund and gratuity dues. They further contended that Section 36(4)(a)(iii) excludes “all sums due” to workmen from the liquidation estate and nowhere makes such exclusion conditional upon existence of a segregated fund.
After examining the statutory framework under the IBC, the Employees’ Provident Funds and Miscellaneous Provisions Act, the Payment of Gratuity Act and the Companies Act, the Appellate Tribunal rejected the financial creditors’ interpretation.
The Tribunal observed that while the Companies Act referred to funds “maintained by the company”, Parliament consciously omitted those words while drafting Section 36(4)(a)(iii) of the IBC.
According to the Tribunal, this legislative change clearly demonstrates that exclusion from the liquidation estate is based on the statutory dues payable to employees rather than the physical existence of segregated assets or accounts.
The Bench further emphasized that gratuity and provident fund are statutory rights earned through long and continuous service and cannot be diluted merely because the employer failed to maintain separate funds.
Affirming the NCLT’s directions, the Tribunal held that the liquidator is obligated to pay provident fund and gratuity dues payable under the respective labour welfare statutes and such amounts cannot be included in the liquidation estate.
Accordingly, the financial creditors’ appeals challenging these directions were dismissed.
The workmen had also challenged the refusal of the NCLT to exclude 1,656 days spent in prolonged litigation while computing the 24-month period preceding the liquidation commencement date under Section 53(1)(b) of the IBC.
The NCLAT accepted this contention.
The Tribunal held that the extraordinary period consumed in litigation beyond the maximum permissible Corporate Insolvency Resolution Process (CIRP) period of 330 days should be excluded while determining the relevant 24-month period for workmen’s dues.
Consequently, it ruled that the workmen’s dues during the 24 months preceding liquidation cannot be treated as nil, thereby granting substantial relief to employees.
However, the Tribunal declined to grant another relief sought by the workmen regarding a Recovery Certificate issued by the Deputy Labour Commissioner for salary dues relating to January–March 2019.
It held that such a recovery certificate could not automatically be kept outside the liquidation estate and would have to be adjudicated by the liquidator in accordance with the provisions of the IBC.
The Appellate Tribunal dismissed the appeals filed by State Bank of India and other financial creditors, upheld the NCLT’s direction requiring payment of provident fund and gratuity dues outside the liquidation estate. Partly allowed the workmen’s appeal by directing exclusion of 1,656 days while computing the 24-month period under Section 53(1)(b).
The tribunal has held that workmen’s dues for the relevant 24-month period cannot be treated as nil and has declined to exclude the labour recovery certificate from the liquidation estate.
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