This Appeal emerges from the Order passed by the Adjudicating Authority, whereby the Adjudicating Authority had ordered the Liquidator to pay the Gratuity to the employees, and further observed that the Liquidator could not ignore the liability to pay Gratuity to the employees on the basis that the Corporate Debtor didn’t have separate funds for payment of gratuity.

The Adjudicating Authority further ordered the Liquidator to provide enough provision for payment of Gratuity, in accordance with the eligibility of the employees. By the impugned order, the Adjudicating Authority has dismissed the contention of the Liquidator that payment of Gratuity cannot be treated as a portion of Liquidation Estate.

The Applicant contended that according to the requirement of the payment of Gratuity Act, 1972 and Section 36(4)(a)(iii) of the Code, the charge will remain in force, against the assets of the Corporate Debtor‘, until the gratuity dues have been paid off, before making any payment, to any entity falling under waterfall mechanism, devised under Section 53 of the Code. The Insolvency and Bankruptcy Code gives statutory priority to the amount payable to the employees on account of gratuity, over other debts of the Corporate Debtor‘.

Issues

The issue in the present case was whether a liquidator can be directed to make payment of gratuity to the employees of the company, in case no fund is created by a company, in violation of the statutory provision of the Payment of Gratuity Act, 1972.

Judgment

It is the settled position of law, that the provident fund, the gratuity fund, and the pension 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 Gratuity Fund, Pension Fund, and Provident Fund cannot be utilized, attached, or distributed by the liquidator, to satisfy the claim of other creditors. Sec 36(2) of the 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 part of the Liquidation Estate. In a case, where no fund is created by a company, in violation of the Statutory provision of the Sec 4 of the Payment of Gratuity Act, 1972, then in that situation also, the Liquidator cannot be ordered to make the payment of gratuity to the employees because the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not a portion of the liquidation estate.

National Company Law Appellate Tribunal (NCLAT) further held that in this case, we are not concerned with determination about the entitlement of Gratuity by the employees of the Corporate Debtor. Payment of Gratuity to employees depends on their entitlement of Gratuity, subject to the fulfillment of the conditions laid down under the payment of Gratuity Act, 1972, and also on the availability of the fund in this regard. Based on the judgment of this Appellate Tribunal in the case of the State Bank of India Vs. Moser Baer Karamchari Union and Another, it is clear that in terms of sub-Section (4)(a)(iii) of Section 36 all sums due to any workman or employees from the Provident Fund, Pension Fund, and the Gratuity Fund, do not form part of the liquidation estate or liquidation assets of the Corporate Debtor. Therefore, the question of distribution of Provident Fund or the Gratuity Fund or the Pension Fund in order to prioritize, and within such period as prescribed under Section 53(1), does not arise.

It is further held in the above case that 53(1)(b)(i) of the Code, in regard to the distribution of assets, relating to workmen‘s dues is confined to a duration of twenty-Four months, preceding the liquidation commencement date. This question has already been decided that the Gratuity Fund does not form the part of the liquidation asset.

Thus, 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 the order to the Liquidator that, the Liquidator cannot ignore the liability to pay Gratuity to the employees, on the basis, that Corporate Debtor‘ did not maintain separate funds, even if, there is no fund maintained, the Liquidator has to provide adequate provision for payment of Gratuity to the Applicants according to their eligibility.