The corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC) is a powerful tool designed to resolve corporate insolvency. However, it is important to understand that CIRP is not the remedy if your welfare benefits are due, such as leave travel concession (LTC) or leave encashment. These unpaid benefits are classified as welfare claims, not operational debts, and therefore, cannot be used to initiate CIRP. The case of Kishore K. Lonkar v. Hindustan Antibiotics Limited provides critical clarity on this issue.
Definition of operational debt under legal framework of IBC
Under IBC, operational debt refers to dues arising from the provision of goods, services, or employment in the ordinary course of business. These debts are eligible to trigger CIRP. However, benefits such as leave encashment and LTC fall under a different category. These benefits are welfare benefits that accrue after employment has ended (for example, after retirement or superannuation), and thus, do not meet the criteria of an operational debt as defined under the IBC.
The Kishore K. Lonkar case: Clarity on welfare benefits and CIRP
The case of Kishore K. Lonkar is crucial in understanding the distinction between service claims and welfare claims. In this case, the petitioner, who had retired from his position, sought to initiate CIRP against his former employer on the grounds of unpaid gratuity, leave encashment, and LTC. The National Company Law Tribunal (NCLT) rejected the application, ruling that these claims were welfare benefits and could not trigger insolvency proceedings.
The National Company Law Appellate Tribunal (NCLAT) carefully considered the nature of claims in the context of the CIRP under IBC to determine whether unpaid benefits arising out of employment, such as LTC and leave encashment, can trigger the insolvency proceedings. The NCLAT distinguished between two types of claims: service claims and welfare claims. It observed that service claims arise during the course of employment in exchange for services rendered, such as wages, salaries, and bonuses. On the other hand, welfare claims arise after the cessation of employment and typically include benefits such as gratuity, leave encashment, and LTC, which depend on the duration of the employee’s service and are typically paid post-employment (i.e., upon retirement or termination).
The NCLAT rejected the idea that welfare claims, like LTC and leave encashment, can trigger insolvency proceedings. While such claims arise from employment, they do not qualify as operational debts, which are debts incurred in the ordinary course of business. The NCLAT pointed out that the objective of IBC is not to address the recovery of unpaid welfare benefits, which are not considered operational debts under the IBC and upheld the decision of the NCLT.
Why welfare benefits are not covered by CIRP
- Nature of benefits arising out of employment: Benefits like LTC and leave encashment are provided post-employment, based on the terms of the employee’s service contract. These are welfare benefits that arise after cessation of service, not in the course of regular business operations.
- IBC’s objective: IBC is intended for resolving financial distress and managing the insolvency of corporate debtors. It is not a tool to resolve employee dues related to post-employment benefits. The primary goal is to resolve operational and financial debts to maximize asset value and ensure the resolution of the company, not the recovery of welfare benefits.
- Welfare claims are separate: Employees are entitled to welfare benefits, but these benefits must be addressed separately through established procedures, not as part of the CIRP process. The Kishore K. Lonkar case highlights that such claims should not be used to trigger the insolvency process, as they are not aligned with the IBC’s primary objectives.
The remedy lies before different forums
While unpaid welfare benefits cannot trigger CIRP, employees are not left without a remedy. If employees are owed welfare benefits, such as LTC, leave encashment, or gratuity, they should seek redressal through the appropriate legal forums. The appropriate forums for such claims are labour courts, industrial tribunals, or other relevant judicial bodies that specialize in employment-related disputes. These forums are specifically designed to handle disputes between employers and employees, including claims related to post-employment benefits. CIRP should not be seen as a tool to recover welfare benefits. While employees have the right to claim unpaid benefits, the IBC is primarily focused on resolving corporate financial distress and not employment-related disputes.
Filing claims for welfare benefits once CIRP is initiated
Although welfare benefits like LTC, leave encashment, and gratuity cannot be used as grounds to trigger CIRP, employees can still file claims for these benefits once the CIRP has been initiated. Once CIRP is triggered, employees can submit claims for unpaid welfare benefits as a part of the overall claims process.
If employees are owed these benefits, they should file their claims in Form D during the insolvency proceedings, which is prescribed under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. This ensures that their claims are considered as part of the resolution process, even though the claims cannot initiate the insolvency process themselves. Employees must submit their claims within the prescribed time limits to ensure they are addressed during the CIRP. It is important to note that proper documentation, such as proof of employment and outstanding dues, is essential for the successful processing of these claims.
Conclusion and key takeaways:
- CIRP cannot be initiated for unpaid welfare benefits: The case of Kishore K. Lonkar makes it clear that CIRP is not an appropriate mechanism for recovering unpaid welfare benefits such as LTC, leave encashment, or gratuity. These are welfare claims and not operational debts and thus cannot serve as grounds for triggering the insolvency process. Therefore, employees must be aware of the proper procedures to recover their dues and safeguard their rights within the insolvency framework or otherwise.
- Initial remedies should be sought through other forums: Employees seeking unpaid welfare benefits should pursue remedies through labour courts or industrial tribunals before CIRP is initiated. These forums are designed to address employment-related claims and provide appropriate redressal.
- Filing claims during CIRP: Once CIRP has been initiated, employees can submit their unpaid welfare benefit claims as part of the larger claims process during the resolution phase. They must file these claims using Form D, which ensures that the claims are recognized and processed as per the IBC.
Dhruv Doshi, Associate and Anshu Bhanot, Of Counsel | Veyrah Law
The authors can be reached at [email protected] and [email protected], respectively.
Views expressed above are for information purposes only and should not be considered as a formal legal opinion or advice on any subject matter therein.