Gratuity Can't Be Withheld To Recover Loan Default Even If Retired Employee Was Guarantor : Orissa HC

Background Facts

The respondent was employed as a Deputy Manager in the appellant-Bank. She attained the age of superannuation and retired from service with effect from 31.07.2010. Her service record was unblemished, no disciplinary proceedings were pending or initiated against her during her employment. However, the appellant-Bank withheld the payment of her retiral benefits, the gratuity amount. Therefore, the respondent approached the Authority under the Payment of Gratuity Act, 1972, for the release of her gratuity.

The appellant-Bank argued that the respondent had stood as a guarantor for a loan disbursed by the Bank to a principal borrower. The principal borrower had defaulted on the loan repayment, therefore, liability to pay the outstanding amount was coextensive with the guarantor. Thus, the gratuity was withheld to recover the debt.

The Authority did not find merit in the Bank's argument and directed the payment to be made. Then the Bank challenged the order before the Appellate Authority under the Payment of Gratuity Act, but was unsuccessful. Then Bank filed a writ petition challenging the Appellate Authority's order. However the petition was dismissed by the writ Court.

Aggrieved by the same, the appellant Bank filed the appeal against single judge order.

It was contended by the appellant-Bank that the respondent had stood as a guarantor for a loan disbursed to a principal borrower, she shared a coextensive liability for the defaulted amount. It was submitted that the gratuity amount could be withheld until the entire loan was liquidated. On the other hand, it was contended by the respondent her lawful retiral benefits were unjustly withheld by the appellant-Bank despite her attaining superannuation with an unblemished service record.

Findings of the Court

It was observed by the court that the power of an employer to forfeit gratuity is strictly confined to the conditions explicitly enshrined in the Payment of Gratuity Act, 1972. Section 4 of the Act was relied upon by the court where Sub-section (6) of the section commences with a non-obstante clause, giving it an overriding effect over the other provisions.

It was held by the court that the gratuity of an employee can be forfeited only when the employee's services have been terminated for an act of wilful omission or negligence which has caused any damage or loss to, or destruction of the employer's property. The legislature has intentionally restricted the applicability of this provision, and any attempt to include other contingencies not contemplated by the law is illegal and unsustainable.

It was further held that gratuity is neither a bounty nor a bonanza granted at the whim of the employer, but is a deferred payment of salary earned by an employee for successful service. It was observed by the court that this statutory entitlement cannot be denied or withheld in the absence of a clear power conferred by the Act upon the employer.

It was further observed by the court that the respondent had attained the age of superannuation and was not terminated from service, therefore forfeiture of gratuity cannot be allowed. The appellant-Bank's action of withholding gratuity to recover a debt from the employee in her capacity as a loan guarantor was inconsistent with the powers conferred in the Act.

Furthermore, it was held by the court that both the original and the Appellate Authority had concurrently found the Bank's action to be without legal authority, and the Single Bench had rightly refused to entertain the writ petition. Therefore, no ground warranting interference with the judgment was found by the court.

With the aforesaid observations, the writ appeal filed by the appellant Bank was dismissed by the court.

Case Name : Cuttack Central Co-operative Bank Ltd. Vs. The Joint Labour Commissioner & Others

Case No. : WA No.323 of 2025

Counsel for the Appellant : Patanjali Tripathy, Advocate

Counsel for the Respondents : Sanjay Rath, AGA, S. Sunandini, Advocate