Jet Airways liquidation: NCLAT backs full provident fund, gratuity for staff

The National Company Law Appellate Tribunal (NCLAT) has delivered a significant ruling in the Jet Airways liquidation, affirming that provident fund, pension, and gratuity dues for former employees must be paid in full and are to be kept outside the general liquidation pool. This decision, in *State Bank of India and Ors. v. Manoj Kumar Das & Ors.*, clarifies that the exclusion of these statutory dues from the liquidation estate is not contingent on the physical existence of segregated funds. Furthermore, the NCLAT directed the liquidator to exclude 1,656 days, representing the period spent in protracted litigation during the Corporate Insolvency Resolution Process (CIRP), when calculating the 24-month look-back period for protected workmen's dues. This judgment reinforces the paramount importance of employee social security benefits under the Insolvency and Bankruptcy Code, 2016 (IBC), even in complex and prolonged insolvency proceedings.

The protracted insolvency proceedings of Jet Airways, once a leading Indian airline, have consistently presented complex legal challenges, particularly concerning the rights of its former employees. A recent landmark judgment by the National Company Law Appellate Tribunal (NCLAT) in *State Bank of India and Ors. v. Manoj Kumar Das & Ors.* has brought significant clarity and relief to these employees. The NCLAT has unequivocally ruled that provident fund, pension, and gratuity dues are to be paid in full and are not part of the liquidation estate, thereby placing them outside the waterfall mechanism for other creditors.

This decision is pivotal for several reasons. It addresses a critical ambiguity regarding the treatment of statutory employee benefits when a corporate debtor enters liquidation, especially in cases where separate funds for these dues may not have been maintained. Moreover, the NCLAT's directive to exclude the substantial period of litigation (1,656 days) from the calculation of the 24-month look-back period for workmen's dues under the Insolvency and Bankruptcy Code, 2016 (IBC), acknowledges the practical realities of delayed insolvency processes. This article will delve into the statutory framework, the NCLAT's reasoning, and the broader implications of this judgment for insolvency practitioners and employee rights in India.

The NCLAT's pronouncement underscores a legislative intent to safeguard the social security of employees, even amidst the financial distress and liquidation of their employer. By prioritizing these specific dues, the tribunal has reinforced the protective ethos embedded within Indian labour laws and the IBC, offering a crucial precedent for future insolvency cases involving employee claims.

The Insolvency and Bankruptcy Code, 2016 (IBC), introduced a comprehensive framework for insolvency resolution and liquidation of corporate persons in India. Central to the liquidation process is Section 53, which establishes a strict 'waterfall mechanism' for the distribution of proceeds from the sale of liquidation assets. This hierarchy prioritizes various creditors, with insolvency resolution process costs and liquidation costs at the top, followed by workmen's dues for a period of twenty-four months preceding the liquidation commencement date, ranking equally with debts owed to secured creditors who have relinquished their security.

However, a crucial carve-out exists under Section 36(4)(a)(iii) of the IBC, which explicitly states that "all sums due to any workman or employee from the provident fund, pension fund and the gratuity fund" shall not be included in the liquidation estate. This provision aims to protect these specific employee benefits, recognizing their distinct nature as trust properties or statutory obligations. The Employees' Provident Funds and Miscellaneous Provisions Act, 1952, and the Payment of Gratuity Act, 1972, further reinforce the special status of these dues, often granting them priority over other debts. For instance, Section 11 of the EPF Act establishes a priority of payment for contributions over other debts.

Jet Airways' Corporate Insolvency Resolution Process (CIRP) commenced on June 20, 2019, initiated by the State Bank of India. The process was exceptionally prolonged, stretching beyond the statutory 330-day limit, largely due to litigation and the eventual failure of the resolution plan proposed by the Jalan-Kalrock Consortium. The Supreme Court ultimately ordered the liquidation of Jet Airways on November 7, 2024, after the resolution plan failed to be implemented. This extended timeline and the subsequent liquidation brought the treatment of employee dues, particularly provident fund and gratuity, under intense scrutiny.

The NCLAT's judgment in *State Bank of India and Ors. v. Manoj Kumar Das & Ors.*, delivered on June 30, 2026, directly addressed two primary contentions raised by the lenders, led by SBI, and the workmen. The first concerned the nature and priority of provident fund, pension, and gratuity dues. SBI argued that these dues should only be excluded from the liquidation estate if the airline had maintained separate, identifiable funds, which it admittedly had not. The NCLAT firmly rejected this interpretation, holding that the provisions of the IBC are 'due-centric' rather than 'asset-centric'. It clarified that the exclusion of these sums from the liquidation estate is not contingent on the physical existence of such segregated funds on the liquidation commencement date. This interpretation aligns with the protective intent of Section 36(4)(a)(iii) of the IBC, which aims to safeguard these essential social security benefits for employees.

The tribunal relied on existing judicial precedents, including a 2022 ruling in the *Jet Aircraft Maintenance Engineers Welfare Association* case and the Supreme Court's decision in *Sunil Kumar Jain v. Sundaresh Bhatt*, which had already established that provident fund, gratuity, and pension dues are carved out of the liquidation estate and are not to be used for recovery in liquidation. This reinforces the principle that these statutory dues, governed by specific labour laws like the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, and the Payment of Gratuity Act, 1972, hold a special status that transcends the general waterfall mechanism of Section 53 of the IBC.

The second significant aspect of the NCLAT's ruling pertained to the computation of the 24-month look-back period for workmen's dues. The tribunal directed the liquidator to exclude the 1,656 days spent in litigation during Jet Airways' extraordinarily prolonged CIRP. This period, which significantly extended the insolvency resolution beyond the statutory 330-day limit, was deemed exceptional. By excluding these days, the NCLAT ensured that the workmen's protected dues for the 24 months preceding the liquidation commencement date (November 26, 2024) would not be unfairly diminished due to the procedural delays and litigation that were beyond their control. This pragmatic approach acknowledges the impact of judicial backlogs and protracted legal battles on the realization of employee claims.

While the NCLAT upheld the full payment of provident fund and gratuity, it declined the employees' request to keep salary dues covered by a recovery certificate outside the liquidation estate. These salary claims, the tribunal ruled, must be dealt with under the Section 53 waterfall mechanism, distinguishing them from the statutorily protected provident fund and gratuity amounts. This highlights a nuanced approach, differentiating between various types of employee claims within the insolvency framework.

The NCLAT's judgment in the Jet Airways liquidation case marks a crucial victory for employee rights in India's insolvency regime. By unequivocally affirming that provident fund, pension, and gratuity dues are to be paid in full and lie outside the liquidation estate, irrespective of whether segregated funds were maintained, the tribunal has provided much-needed clarity and reinforced the social security objectives of the IBC. This ruling sets a strong precedent, ensuring that these vital employee benefits are not diluted or subjected to the vagaries of the liquidation waterfall mechanism.

For practitioners, this decision necessitates a careful review of how employee-related liabilities are assessed and prioritized in insolvency proceedings. Liquidators must now ensure that provident fund, pension, and gratuity dues are treated as a first charge, to be settled outside the general distribution to creditors. The exclusion of litigation periods from the 24-month look-back calculation for workmen's dues also introduces an important consideration for calculating claims in prolonged insolvency cases. This judgment serves as a reminder of the IBC's evolving jurisprudence, continually balancing the interests of various stakeholders while upholding the fundamental protections afforded to employees. Legal professionals should monitor further clarifications or appeals, particularly concerning the practical implementation of recomputing workmen's dues after excluding litigation periods, to ensure full compliance and effective representation of their clients' interests.