Employee Benefits Constitute Operational Debt


Status as on- 24/02/2020

NCLT Bengaluru initiated Corporate Insolvency Process against the Corporate Debtor under a petition filed by an Ex- Associate Vice President under Section 9 of the Insolvency and Bankruptcy Code, 2016. The Operational Creditor in his application stated himself to have been employed by the respondent-corporate debtor and the claim was made in respect of the non-payment of pending salary and other settlement benefits such as leave encashment, Leave Travel Allowance, and bonuses.

Stand Taken by Corporate Debtor

The Corporate Debtor had raised objections on technical formalities of the Demand Notice under Section 8 of the Insolvency and Bankruptcy Code had not been duly fulfilled. The Adjudicating Authority gave the Operational Creditor the liberty to withdraw the application and file afresh once the defects were duly rectified.  

On refiling of the Petition the Corporate Debtor in its statement of objections.

claimed that the debt does not constitute as “debt” under Section 5(20) and (21) and the applicant was not an operation creditor as ‘Leave Travel Allowance’ or ‘Leave Encashment’ or ‘Bonus’ cannot be claimed as a matter of right by an employee. The Corporate Debtor further stated ‘Leave Travel Allowance’ or ‘Leave Encashment’ or ‘Bonus’ cannot be claimed as a matter of right by an employee and that in any event the debt was barred by Limitation. 

Observations by the Adjudicating Authority 

The NCLT took an adverse view of the plethora of pending cases against the Corporate Debtors in several courts all over India to conclude that the Corporate Debtor was not a solvent company as claimed. It further held the Debt to be an Operational Debt having been acknowledged by the Corporate Debtor in previous email communications with the Operational Creditor. Thus the NCLT dismissed the objections raised by the Corporate Debtor of the petition being malafide abuse of process as moonshine defenses and admitted the Corporate Debtor to Corporate Insolvency Resolution Process.

Present Status: NCLAT Inherent Powers

The Corporate Debtor instead of preferring an appeal on the merits of the case entered into settlement negotiations. 

However, as the CIRP process had been duly instituted the process of constituting Committee of Creditors was underway. Notice was issued to the Operational Creditor and the Committee of Creditors was constituted on 4th February 2020 curiously on 5th February 2020, the settlement had been reached between the parties and formal agreement of Settlement was reached in a stamp paper on 6th February 2020. 

Thus the NCLAT in the exercise of its inherent powers under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 accepted the settlement and thereby allowed the Operational Creditor to withdraw the application under Section 9. The Appellate Authority cited the decision of the Hon’ble Supreme Court in “Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors which held

“We make it clear that at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in the exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the concerned parties and considering all relevant factors on the facts of each case”

The NCLAT held that in the interest of justice it would be prudent for the section 9 application to be withdrawn as the Corporate Insolvency Resolution Process would delay the completion of the housing projects which the Corporate Debtor was responsible for and unjustly harm a large number of allottees that are dependent on the ‘Corporate Debtor’.


Disclaimer– The above article is based on the personal interpretation of related laws, which may differ from person to person. The readers are expected to take expert opinion before relying on this article. For more clarification, the readers can be expected at support@centrik.in  

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