Provident Fund – NCLAT Upholds Employees’ Right to Full PF and Gratuity Payments
Provident Fund – Former Jet Airways employees have secured a significant legal victory after the National Company Law Appellate Tribunal (NCLAT) ruled that statutory provident fund and gratuity dues must be paid in full, regardless of whether the employer had maintained separate accounts for these funds.
The appellate tribunal dismissed appeals filed by financial creditors, including the State Bank of India, and confirmed that provident fund and gratuity payments cannot be treated as part of the liquidation assets. The ruling strengthens the legal protection available to employees during corporate insolvency and liquidation proceedings.
Tribunal Confirms Protection for Statutory Benefits
The dispute arose during the liquidation process of Jet Airways after the resolution plan proposed by the Jalan-Fritsch consortium failed in November 2024, bringing the insolvency process to an end. Former employees approached the tribunal, arguing that their provident fund and gratuity dues were protected under Section 36(4)(a)(iii) of the Insolvency and Bankruptcy Code and therefore should remain outside the liquidation estate.
Financial creditors opposed this interpretation, maintaining that such protection should apply only when dedicated provident fund or gratuity accounts actually existed at the time liquidation began. According to the lenders, the absence of separate funds meant these dues should be included in the company’s assets for distribution.
Separate Funds Not Required, Says NCLAT
Rejecting the lenders’ submissions, the NCLAT ruled that statutory obligations toward employees cannot be ignored merely because the employer failed to create separate provident fund or gratuity accounts. The tribunal upheld an earlier order passed by the National Company Law Tribunal in February, directing the liquidator to settle these dues independently of the liquidation estate.
The appellate body observed that payments due under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, and the Payment of Gratuity Act, 1972, must be released to eligible employees in full. It further clarified that these statutory payments remain protected and cannot be distributed among creditors during liquidation proceedings.
Salary Claims to Be Processed Separately
While the tribunal provided relief on provident fund and gratuity claims, it reached a different conclusion regarding unpaid salaries. Former Jet Airways employees had requested that salary dues for the period between January and March 2019, supported by a recovery certificate issued by the Deputy Labour Commissioner, should also remain outside the liquidation estate.
The NCLAT declined this request, stating that unpaid salary claims would continue to be handled under the Insolvency and Bankruptcy Code’s waterfall mechanism. This means salary-related payments will be distributed according to the priority framework established under the insolvency law rather than receiving the same protection as provident fund and gratuity dues.
Insolvency Period Excluded from Time Calculation
The tribunal also addressed the lengthy insolvency proceedings involving Jet Airways. It noted that the corporate insolvency resolution process extended over 1,656 days because of prolonged litigation and legal challenges.
Recognizing that these delays were largely caused by court proceedings, the NCLAT ruled that this entire period should be excluded when calculating the 24-month look-back period applicable to workmen’s dues under the Insolvency and Bankruptcy Code. The clarification is expected to ensure that employees are not disadvantaged because of extended legal proceedings beyond their control.
Wider Significance of the Judgment
Legal experts believe the ruling could influence future insolvency cases involving employee claims across different sectors. By clearly distinguishing statutory retirement benefits from other financial claims, the judgment reinforces that provident fund and gratuity remain legally protected even when employers fail to maintain separate accounts for these obligations.
At the same time, the decision reiterates that unpaid salary claims will continue to follow the established distribution process under the Insolvency and Bankruptcy Code. The ruling provides greater clarity for insolvency professionals, creditors, employers, and employees regarding the treatment of statutory employee benefits during liquidation proceedings.