2020 (8) TMI 491 - AT - Insolvency and Bankruptcy

Payment of Gratuity to the employees - Adjudicating Authority had directed the Liquidator to pay the Gratuity to the employees, and further observed that the Liquidator could not avoid the liability to pay Gratuity to the employees on the ground that the Corporate Debtor didn't have separate funds for payment of gratuity - HELD THAT - It is the settled position of law, that the provident fund, the pension fund and the gratuity fund, do not come within the purview of liquidation estate for the purpose of distribution of assets under Section 53 of the Code. Based on this, the only inference which can be drawn is that Pension Fund, Gratuity Fund and Provident Fund can t be utilised, attached or distributed by the liquidator, to satisfy the claim of other creditors. Sec 36(2) of the I B Code 2016 provides that the Liquidator shall hold the Liquidation Estate in fiduciary for the benefit of all the Creditors. The Liquidator has no domain to deal with any other property of the corporate debtor, which is not the part of the Liquidation Estate. On perusal of the statutory provision of Section 5 of the Employees Provident Fund and Miscellaneous Provisions Act, 1952. It is apparent that the establishment, to which the said Scheme of Employees Provident Fund applies, has to create a fund in accordance with the provision of the Act and the Scheme. Section 5(1-a) provides that the Fund shall vest in, and be administered by the Central Board constituted under Section 5(a). The question of distribution of the Gratuity Fund in order of priority, provided under Section 53(1) of the Code does not arise. However, the Adjudicating Authority has given direction to the Liquidator that, the Liquidator cannot avoid the liability to pay Gratuity to the employees, on the ground, that Corporate Debtor did not maintain separate funds, even if, there is no fund maintained, the Liquidator has to provide sufficient provision for payment of Gratuity to the Applicants according to their eligibility - this Appellate Tribunal is of the considered opinion that the Adjudicating Authority erred in directing the Liquidator to make provision for payment of Gratuity to workers, as per their entitlement. Appeal allowed.

Summary

Issues Involved:
1. Whether the Liquidator is obligated to pay gratuity to employees despite the absence of a separate gratuity fund.
2. Whether gratuity dues should be treated as part of the liquidation estate.
3. Applicability of Section 36(4)(a)(iii) of the Insolvency and Bankruptcy Code (IBC), 2016 in relation to gratuity dues.
4. Priority of gratuity payment over other creditors under the waterfall mechanism in Section 53 of the IBC.
5. Legal precedents and statutory provisions relevant to the payment of gratuity.

Issue-wise Detailed Analysis:

1. Obligation of the Liquidator to Pay Gratuity:
The Adjudicating Authority directed the Liquidator to pay gratuity to employees as per the Payment of Gratuity Act, 1972, despite the Corporate Debtor not maintaining a separate gratuity fund. The Liquidator was instructed to make necessary arrangements for the payment of gratuity according to the eligibility of the employees. The Liquidator contended that since the Corporate Debtor never maintained a separate gratuity fund, gratuity could not be paid from the running accounts of the Corporate Debtor.

2. Gratuity Dues as Part of the Liquidation Estate:
The Adjudicating Authority rejected the Liquidator's contention that payment of gratuity cannot be treated as part of the liquidation estate. Section 36(4)(a)(iii) of the IBC excludes gratuity dues from the liquidation estate assets, treating them as assets of the employees lying with the Corporate Debtor. Therefore, gratuity dues should not be treated at par with other creditors' claims.

3. Applicability of Section 36(4)(a)(iii) of the IBC:
Section 36(4)(a)(iii) of the IBC specifically excludes sums due to any workman or employee from the provident fund, pension fund, and gratuity fund from the liquidation estate. This statutory provision mandates that these funds cannot be utilized, attached, or distributed by the Liquidator to satisfy the claims of other creditors.

4. Priority of Gratuity Payment:
The Applicant argued that under Section 36(4)(a)(iii) of the IBC, gratuity dues should be paid in priority to any payment made under the waterfall mechanism in Section 53 of the IBC. The Adjudicating Authority supported this view, emphasizing that the Liquidator must arrange for the payment of gratuity to eligible employees, giving it priority over other claims.

5. Legal Precedents and Statutory Provisions:
The judgment referenced the case of State Bank of India v. Moser Baer Karamchari Union and Another, where it was held that provident fund, pension fund, and gratuity fund do not form part of the liquidation estate for the purpose of asset distribution under Section 53 of the IBC. Additionally, the Payment of Gratuity Act, 1972, mandates the payment of gratuity to employees who have rendered continuous service for not less than five years.

Conclusion:
The Appellate Tribunal concluded that the Adjudicating Authority erred in directing the Liquidator to make provision for the payment of gratuity without a separate fund being maintained by the Corporate Debtor. The appeal was allowed, and the impugned direction to the Liquidator to make provision for gratuity payment was set aside. The Tribunal emphasized that the Liquidator has no domain to deal with properties of the Corporate Debtor that are not part of the liquidation estate.