Tribunal emphasizes that employee dues must be addressed through resolution plans, not prioritized as CIRP costs.
In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has clarified that gratuity and leave encashment dues for employees do not constitute Corporate Insolvency Resolution Process (CIRP) costs under the Insolvency and Bankruptcy Code, 2016. The decision came in the case of Subir Mukherjee v. Ram Ratan Modi, where the appellant, a former employee of Duncans Industries Limited, sought to classify his gratuity and leave encashment dues as CIRP costs.
The Principal Bench of the NCLAT, comprising Mr. Justice N. Seshasayee, Mr. Arun Baroka, and Mr. Indevar Pandey, underscored that CIRP costs are strictly limited to expenses incurred directly by the Resolution Professional in managing the corporate debtor during the CIRP. The tribunal emphasized that gratuity and leave encashment are statutory and contractual entitlements that fall outside the ambit of CIRP costs and should be addressed as part of the resolution plan or through the statutory waterfall mechanism under Section 53 of the Code.
The case arose when Subir Mukherjee, who served over 25 years at Duncans Industries Limited, retired during the CIRP and sought immediate payment of his dues as CIRP costs. His claim was partially admitted by the Resolution Professional, but the unpaid balance led to the appeal.
The NCLAT noted that the legislative intent behind defining CIRP costs was narrow, focusing on expenses actually incurred by the Resolution Professional. It stressed that gratuity and leave encashment do not qualify as such expenses and cannot be given priority payment over other claims.
The tribunal's decision aligns with previous judgments, reinforcing that statutory dues must be dealt with according to the approved resolution plan, not as CIRP costs. The ruling is expected to have wide implications, ensuring that resolution plans adequately provide for employee dues without disrupting the insolvency resolution process.
Bottom line:-
Gratuity and leave encashment dues of an employee, even if accrued during the CIRP period, cannot be treated as part of CIRP costs under Section 5(13) of the Insolvency and Bankruptcy Code, 2016.
Statutory provision(s): Section 5(13), Section 53 of the Insolvency and Bankruptcy Code, 2016.
Subir Mukherjee v. Ram Ratan Modi, (NCLAT)(Principal Bench, New Delhi) : Law Finder Doc id # 2942982
