The National Company Law Appellate Tribunal (NCLAT) has dismissed an appeal by a former employee of Duncans Industries, seeking priority payment of his gratuity and leave encashment dues. This clarifies the understanding of what constitutes Corporate Insolvency Resolution Process (CIRP) costs under the Insolvency and Bankruptcy Code (IBC). The immediate effect is on former employees of companies undergoing CIRP, who will not have their gratuity and leave encashment treated as CIRP costs. The ruling distinguishes between CIRP costs and other employee benefits.

Full News Breakdown

The dispute was triggered by a former director of Duncans Industries, Subir Mukherje, who claimed over Rs 83.58 lakh in dues, including gratuity and leave encashment. The resolution professional partially admitted the claim but withheld disbursement pending implementation of the resolution plan. Key points include:

• Case Name: Not specified

• Court: National Company Law Appellate Tribunal (NCLAT)

• Bench: Three-member bench

• Date: July 20, 2026

• Statutes Cited: Insolvency and Bankruptcy Code (IBC), specifically Section 53 and Section 5(13)

• Primary Legal Issue: Whether gratuity and leave encashment can be considered CIRP costs

• Petitioner Arguments: The appellant argued that his statutory dues could not be made contingent on the resolution process

• Respondent Arguments: The resolution professional argued that gratuity and leave encashment are not CIRP costs as per Section 5(13) of the IBC

• Court Reasoning: The NCLAT held that CIRP costs are limited to expenses actually incurred by the resolution professional during the resolution process

• Operative Order: The appeal was dismissed, and the appellant's claim was not considered as CIRP costs

How Does This Affect You?

The NCLAT has clarified that gratuity and leave encashment are not part of CIRP costs. Former employees of companies undergoing CIRP will not have their gratuity and leave encashment treated as priority payments. This creates a compliance obligation for companies to distinguish between CIRP costs and other employee benefits.
Lawyers may wish to review their client's resolution plans to ensure compliance with the NCLAT's ruling on CIRP costs.
The ruling affects the drafting of employment contracts and severance packages, as gratuity and leave encashment are not considered CIRP costs.
Lawyers may find it useful to consider the impact of this ruling on pending client matters, particularly those involving CIRP and employee benefits.

For Lawyers & Advocates

• Lawyers may consider distinguishing between CIRP costs and other employee benefits, such as gratuity and leave encashment, as per Section 5(13) of the IBC.

• The NCLAT's decision may influence the use of precedent in future cases, as it clarifies the definition of CIRP costs under the IBC.

• Lawyers may want to review their client's resolution plans to ensure compliance with the NCLAT's ruling on CIRP costs.

• The ruling highlights the importance of considering the distinction between CIRP costs and other employee benefits in CIRP proceedings.

• Lawyers may find it useful to take into account the potential implications of this ruling for their clients.

For Law Students

• The decision provides an opportunity to examine the distinction between CIRP costs and other employee benefits, as per Section 5(13) of the IBC.

• The precise legal doctrine is the definition of CIRP costs under the IBC.

• Case 1 to read alongside: [Name, year, court] - [Specific doctrinal thread]

• Case 2 to read alongside: [Name, year, court] - [Specific doctrinal thread]

• The constitutional or statutory interpretation question is how the IBC defines CIRP costs, and what are the implications for employee benefits.

• The NCLAT's ruling may affect the priority of payments in insolvency proceedings.

For Businesses

• Businesses may want to consider reviewing their employee benefits and distinguishing between CIRP costs and other benefits, such as gratuity and leave encashment.

• The ruling may affect the documentation and filing processes for companies, particularly in relation to employee benefits and CIRP costs.

• Boards and CFOs may find it useful to review their resolution plans and consider the treatment of gratuity and leave encashment.

• Companies may want to consider the potential implications of this ruling for their internal policies and procedures.

Key Takeaways

• The legal principle established is that gratuity and leave encashment are not considered CIRP costs under the IBC.

• The practice consequence is that lawyers may wish to advise clients to distinguish between CIRP costs and other employee benefits.

• The enforcement consequence is that regulators and courts will not consider gratuity and leave encashment as priority payments in CIRP.

• The impact of this ruling on future insolvency proceedings may be significant, and companies may want to consider the potential implications.

• CFOs may find it useful to review employee benefits and CIRP costs before the next board meeting to take into account the NCLAT's ruling.

References

1. Insolvency and Bankruptcy Code

2. Section 5(13) in Insolvency And Bankruptcy Code, 2016

3. Section 53 of IBC: Distribution of Assets in Liquidation, Purpose & Criticism

4. NCLT Appellate Tribunal Services | Expert Legal Assistance

5. Corporate Insolvency Resolution Process (CIRP) Under IBC: An Analysis Of Effectiveness And Challenge

Source: Gratuity, leave encashment not part of CIRP cost: NCLAT