PF, Pension & Gratuity dues - Claims Management in CIRP/Liquidation process

Query - Whether the dues of workmen or employees in respect of PF, Pension & Gratuity which are pending before commencement of CIRP can be paid during CIRP./Liquidation.

A. PF, Pension & Gratuity dues can be categorized broadly as under;

• 1. Workmen & employees contribution towards provident fund deducted from the salary but not deposited by the employer (CD) with EPFO / Exempted PF Trust / NPS. 

• 2. Dues in respect of employer’s (CD’s) contribution for Provident Fund / pension fund for paid salaries, not deposited with EPFO / Exempted PF Trust / Pension Fund Trust / NPS.

• 3. Dues in respect of employer’s (CD’s) contribution for PF / Pension in respect of unpaid salaries.

• 4. Dues in respect of employer’s (CD’s) contribution for gratuity fund, in respect of both paid & unpaid salaries.(Section 4 of Payment of Gratuity Act, 1972)

• 5. Balance outstanding in provident fund, pension fund & gratuity fund at the time of commencement of liquidation.

PF, Pension & Gratuity are terminal benefits that are basically employees’ dues under statutory provisions which are provided through contributions to the dedicated funds, out of expenditure head - “workmen/employees cost'' by a company. For PF, the contributions are placed with the EPFO or with the exempted PF Trust. For Pension, Gratuity, dedicated funds are created either internally (plan funds) or with trust created for management of these funds. Liability of the company (CD) towards these plan funds/trusts is calculated as per “Accounting Standard 15 (AS 15): Employee Benefits''

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B. Insolvency & Bankruptcy Code, 2016;

# Section 5. Definitions. –

(20) “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

(21) “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;

# Section 18. Duties of interim resolution professional. -

(f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including -

• (i) assets over which the corporate debtor has ownership rights which may be located in a foreign country;

• (ii) assets that may or may not be in possession of the corporate debtor;

• (iii) tangible assets, whether movable or immovable;

• (iv) intangible assets including intellectual property;

• (v) securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies;

• (vi) assets subject to the determination of ownership by a court or authority; 

(g) to perform such other duties as may be specified by the Board.

Explanation. – For the purposes of this section, the term “assets” shall not include the following, namely: -

• (a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment;

• (b) assets of any Indian or foreign subsidiary of the corporate debtor; and

• (c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator.

Author’s comments; Workmen & employees contribution towards provident fund deducted from the salary but not deposited by the employer (CD) with EPFO / Exempted PF Trust / NPS, are trust funds in the hands of CD, as such can be paid during CIRP. Whereas the employer’s contribution towards PF etc. is CD’s liability under the provisions of PF Act. hence operational credit & is a secured operational credit under section 11 of the PF Act. 

# Section 30. Submission of resolution plan. -

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(2) The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan -

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(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than-

• (i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under section 53; or

• (ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53,

whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.

Explanation 1. — For removal of doubts, it is hereby clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.

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(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board:

Author’s Comments; As the PF dues (Employer’s & Employees’  contribution both) have statutory first charge on the assets of the CD (Section 11 of “EPF & MP Act,1952), these needs to be paid in priority under resolution plan.[Section 30(2) read with Section 30(4)].

# Section 33 Initiation of liquidation. -

(7) The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator.

Author’s Comments; This notice of discharge tantamount to retrenchment of employees / workmen & accordingly retrenchment compensation becomes payable in terms of section 2(oo) read with section 25F of “The Industrial Disputes Act” & gratuity under “Payment of gratuity Act, 1972”, irrespective of quantum of provisions under gratuity fund. 

# Section 36. Liquidation estate. -

(4) The following shall not be included in the liquidation estate assets and shall not be used  for recovery in the liquidation: -

(a) assets owned by a third party which are in possession of the corporate debtor, including (i) assets held in trust for any third party;

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• (iii) all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund;

Author’s comments; Funds created internally (plan funds, supra above) for PF, Gratuity Pension, Leave encashment etc. will not form part of Liquidation Estate.

# Section 53 Distribution of assets. -

(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely: -

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following:

• (i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and

• (ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

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(f) any remaining debts and dues;

Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

# Regulation 19. Claims by workmen and employees.

(4) The liquidator may admit the claims of a workman or an employee on the basis of the books of account of the corporate debtor if such workman or employee has not made a claim.

Author’s comments; PF, Pension & Gratuity dues are basically employees’ dues payable under statutory provisions & are provided through contributions to the statutory funds (EPF) / dedicated funds, out of expenditure head - “workmen/employees cost” by a company. Whether Liquidator is required to calculate the amount of claim in respect of these arrears, on the basis of account of the CD, under regulation 19(4) ?

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C. Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952.

# Section 2. Definitions.- In this Act, unless the context otherwise requires,-

(b) “basic wages” means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include -

# Section 6. Contributions and matters which may be provided for in Schemes. - The contribution which shall be paid by the employer to the Fund shall be ten per cent. of the basic wages, dearness allowance and retaining allowance (if any) for the time being payable to each of the employees (whether employed by him directly or by or through a contractor), and the employees‟ contribution shall be equal to the contribution payable by the employer in respect of him and may, if any employee so desires, be an amount exceeding ten per cent. of his basic wages, dearness allowance and retaining allowance (if any), subject to the condition that the employer shall not be under an obligation to pay any contribution over and above his contribution payable under this section:

# Author’s Comments; Employer is liable to deposit PF dues in respect of basic wages, dearness allowance and retaining allowance (if any) for the time being payable to each of the employees, irrespective of the wages/ salaries paid or payable.

# Section 11. Priority of payment of contributions over other debts.—

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(2) Without prejudice to the provisions of sub-section (1), if any amount is due from an employer whether in respect of the employee’s contribution (deducted from the wages of the employee) or the employer’s contribution, the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority to all other debts.

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D. The Companies Act, 2013,

Proviso to Section 325(1) provides as under:-

Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen‘s portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debts, opts to realise his security,

• (i) the liquidator shall be entitled to represent the workmen and enforce such charge; (ii) any amount realised by the liquidator by way of enforcement of such charge shall be applied rate-ably for the discharge of workmen‘s dues; and…………

Author’s comments - As the workmen’s dues have pari passu charge with the secured creditors, now the question arises about the treatment of dues of workmen, for a period exceeding twenty four months, will they be covered under 6th priority, as “any remaining debts and dues” under the waterfall [Section 53(1)] or ignored due to non-obstante clause as

per Section 238 of the Code.

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E. Case Law (CIRP)

i). NCLT New Delhi (04.12.2018) in Sanjay Gupta V/s Garg Inox Ltd. [CP (IB) No. 194 (ND) / 2017 ] In the resolution plan approved by AA, only dues of secured creditor “State Bank of India '' were to be paid, and all other dues including PF dues were not provided for in the approved resolution plan.

• # 16. While the aforesaid plan provides for writing off the dues towards Operational Debtors and seeks waiver of any statutory dues, no specific waiver is being granted by this Bench, other than what is statutorily provided for and is legally permissible under the Code, more specifically applicable to Government dues and taxes to which the applicant is entitled to under laws enacted for facilitating Resolution of Insolvent Corporates.

ii). NCLAT (19.12.2019) in Regional Provident Fund Commissioner-I, Ahmedabad  Vs. Ramchandra D. Choudhary [Company Appeal (AT) (Insolvency) No. 1001 of 2019] held that; 

• However, as no provisions of the ‘Employees Provident Funds and Miscellaneous Provision Act, 1952’ is in conflict with any of the provisions of the ‘I&B Code’ and, on the other hand, in terms of Section  36 (4) (iii), the ‘provident fund’ and the ‘gratuity fund’ are not the assets of the ‘Corporate Debtor’, there being specific provisions, the application of Section 238 of the ‘I&B Code’ does not arise.

• Therefore, we direct the ‘Successful Resolution Applicant’- 2nd Respondent (‘Kushal Limited’) to release full provident fund and interest thereof in terms of the provisions of the ‘Employees Provident Funds and Miscellaneous Provision Act, 1952’ immediately, as it does not include as an asset of the ‘Corporate Debtor’. The impugned order dated 27th February, 2019 approving the ‘Resolution Plan’ stands modified to the extent above. The appeal preferred by ‘Regional Provident Fund Commissioner’ is allowed with aforesaid observations and directions. No costs.

In appeal the Hon'ble Supreme Court (20.05.2020) In Kushal Limited vs The Regional Provident Fund Commissioner and others (Civil Appeal No.1920 of 2020) upheld the orders of NCLAT on the matter as under;;

• “We find no ground to interfere with the impugned order passed by the Tribunal. The appeal is, accordingly, dismissed.

• Pending interlocutory application(s), if any, is/are disposed of.”

iii). SCI (2020.01.20) in Bhupinder Singh Vs. Unitech Ltd.[Civil Appeal No(s).10856/2016] held that;

• “At this stage, it would be appropriate if the Board of Directors constituted by the Union government submits to this Court a report within a period of two months suggesting the resolution framework.

• We issue the following directions:

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• (x) The order of moratorium shall not foreclose the statutory entitlement of the EPFO to enforce the claims for the payment of EPF and other related statutory dues in accordance with law against the erstwhile management;

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F. Case Law (Liquidation Process) 

i). NCLT Mumbai (12.09.2018) in Asset Reconstruction Co. (India) Ltd. vs. Precision Fasteners Ltd. [ MA 576 & 752 of 2018 in CP No. (IB) -1339(MB) / 2017] held that dues in respect of Provident Fund / Pension Fund / Gratuity Fund shall not be treated as part of the liquidation estate.

• # 33. Now in alignment with the provisions of EPF Act, in section 36(4)(1)(3), the Code has gone ahead saying that the dues in respect to Provident Fund / Pension Fund / Gratuity Fund shall not be treated as part of the liquidation estate, as long as such dues are not treated as part of liquidation estate, the provisions of IBC will not be applicable for realisation of such dues from the asset of the Corporate Debtor. The intriguing aspect lying in this scenario is that though it is a due payable by the Corporate Debtor, as to provident Fund / Pension Fund / Gratuity Fund dues are considered, the Code has treated it as an asset of the workmen lying with the Corporate Debtor.

•  # 34. In view thereof, the overriding effect of section 238 of this Code will not have any bearing over the asset of the workmen lying in the possession of the Corporate Debtor because that asset is not considered as the part of the liquidation estate, moreover, to apply section 238 over any other law for the time being in force, the other law must be inconsistent with the provisions of the Code, since section has excluded the PF dues of the workmen from the liquidation estate assets treating it as an asset of the workmen lying with the corporate debtor, section 53 is not applicable  to say that these dues fall within the ambit of liquidation estate. Therefore, this argument of inconsistency raised by the Liquidator counsel has no merit, hence the same is rejected.

ii). NCLT Chennai (21.01.2019) in RPF Commissioner Vs. Karpagam Spinners [MA/99/2018 in TCP / 225 (IB)/2017 ] held that EPF Dues won’t get any priority.

• # 1. Under adjudication is MA/99/2018 filed in TCP/225(IB)/CB/2017. The application has been filed by the Applicant viz. The Regional Provident Fund Commissioner -1 with prayers as follows;

• i. Accord first priority to EPFP dues over all other dues as envisaged in Section 11(2) of the EPF & MP Act, 1952……

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• Iv. Direct the RP to drop the categorization of EPFO dues under 53(1)(f) as ‘other remaining debts & dues’.

• # 39 In light of the facts and circumstances and the legal position stated above, the verification and admission of the claim of the applicant viz. EPFO has correctly been recorded by the Liquidator vide his statement of verification, admission, rejection and determination of quantum of claim dated 23.04.2018. Therefore, the application filed by the applicant viz., EPFO is devoid of merits and stands rejected.

iii). NCLT (PB) New Delhi (19.03.2019) in Alchemist Asset Reconstruction Co. Ltd vs. Moser Baer India Ltd. [Item No.119 (IB)-378(PB) 2017] Citing ruling of NCLT Mumbai (12.09.2018) in Asset Reconstruction Co. (India) Ltd. vs. Precision Fasteners Ltd. [MA 576 & 752 of 2018 in CP No. (IB) -1339 (MB) / 2017 ] held that; dues in respect of Provident Fund / Pension Fund / Gratuity Fund shall not be treated as part of the liquidation estate.

• # 4. A perusal of the aforesaid para shows that the provident fund dues, pension fund dues and gratuity dues are not treated as a part of the liquidation estate and would not, therefore, be recovered by Section 53 of the Code which provides for waterfall mechanism.

• - # 5 ………….If there is any deficiency to the Provident Fund, Pension Fund, and Gratuity Fund, then the liquidator shall ensure that the fund is made available in the aforesaid accounts, even if their employer had not diverted the requisite amount,"

In appeal to the above orders of NCLT dated 19.03.2019, NCLAT (19.08.2019) in State Bank of India vs. Moser Baer Karamchari Union & Anr.[CA (AT) (Insolvency) No. 396 of 2019] held that; the provident fund, the pension fund and the gratuity fund do not come within the meaning of ‘liquidation estate & found no ground to interfere with the impugned order dated 19th March, 2019.

• # 16. In terms of sub-section (4) (a) (iii) of Section 36, as all sums due to any workman or employees from the provident fund, the pension fund and the gratuity fund, do not form part of the liquidation estate / liquidation assets of the ‘Corporate Debtor’, the question of distribution of the provident fund or the pension fund or the gratuity fund in order of priority and within such period as prescribed under Section 53(1), does not arise.

• # 24. Once the liquidation estate / assets of the ‘Corporate Debtor’ under Section 36(1) read with Section 36 (3), do not include all sum due to any workman and employees from the provident fund, the pension fund and the gratuity fund, for the purpose of distribution of assets under Section 53, the provident fund, the pension fund and the gratuity fund cannot be included. 

• # 25. The Adjudicating Authority having come to such finding that the aforesaid funds i.e. the provident fund, the pension fund and the gratuity fund do not come within the meaning of ‘liquidation estate’ for the purpose of distribution of assets under Section 53, we find no ground to interfere with the impugned order dated 19th March, 2019. 

iv). NCLAT (11.02.2020) in Savan Godiwala Vs Apalla Siva Kumar [ CA (AT) (Insolvency)  No.1229 of 2019] held that if CD had not created fund for PF & Gratuity, than Liquidator is not under any obligation to provide for the same.

• # 25 …………….Thus it is the settled position of law, that the provident fund, the pension fund and the gratuity fund, do not come within the purview of liquidation estate‘ for the purpose of distribution of assets under Section 53 of the Code. Based on this, the only inference which can be drawn is that Pension Fund, Gratuity Fund and Provident Fund can‘t be utilized, attached or distributed by the liquidator, to satisfy the claim of other creditors. Sec 36(2) of the I B Code 2016 provides that the Liquidator shall hold the Liquidation Estate in fiduciary for the benefit of all the Creditors. The Liquidator has no domain to deal with any other property of the corporate debtor, which is not the part of the Liquidation Estate. In a case, where no fund is created by a company, in violation of the Statutory provision of the Sec 4 of the Payment of Gratuity Act, 1972, then in that situation also, the Liquidator cannot be directed to make the payment of gratuity to the employees because the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the liquidation estate……….

• - ………….In this case, we are not concerned with determination about the entitlement of Gratuity by the employees of the Corporate Debtor‘. Payment of Gratuity to employees depends on their entitlement of Gratuity, subject to the fulfilment of the conditions laid down under the Payment of Gratuity Act, 1972 and also on the availability of the fund in this regard………

• - …………..The annual cash flow statement for the ending 31st March, 2017 shows that Gratuity Fund was proposed. However, it is noticed that no such fund was created. In the circumstances, the Liquidator should not have been directed to make provision for the payment of gratuity to the workmen as per their entitlement.

Now with these two orders of NCLAT, mentioned supra above, an interesting situation has been created. NCLAT in it’s orders dated 19.08.2019 had upheld the orders of NCLT dated

19.03.2019, inter alia ruling under the “doctrine of merger” as under;

• # 5 ………….If there is any deficiency to the Provident Fund, Pension Fund, and Gratuity Fund, then the liquidator shall ensure that the fund is made available in the aforesaid accounts, even if their employer had not diverted the requisite amount,"

Whereas, NCLAT in it’s orders dated 11.02.2020 had ruled that;

•  ………….In this case, we are not concerned with determination about the entitlement of Gratuity by the employees of the Corporate Debtor‘. Payment of Gratuity to employees depends on their entitlement of Gratuity, subject to the fulfilment of the conditions laid down under the Payment of Gratuity Act, 1972 and also on the availability of the fund in this regard………

•  …………..The annual cash flow statement for the ending 31st March, 2017 show that Gratuity Fund was proposed. However, it is noticed that no such fund was created. In the circumstances, the Liquidator should not have been directed to make provision for the payment of gratuity to the workmen as per their entitlement.

Thus, the above two orders of NCLAT, are contradictory to each other, in respect of providing

for deficiency in “Gratuity Fund”, which is against the “Doctrine of Binding Precedent” as enumerated by the Constitution bench of Hon’ble SCI in Union of India v. Raghubir Singh [(1989) 2 SCC 754]:

•  "The doctrine of binding precedent has the merit of promoting certainty and consistency in judicial decisions, and enables an organic development of the law, besides providing assurance to the individual as to the consequence of transactions forming part of his daily affairs. And, therefore, the need for a clear and consistent enunciation of legal principle in the decisions of a court."

v). NCLT Chennai ( 08.04.2021) Mr. Nagalingam Muthiah Vs. Office of the Recovery Officer [IA/370/2020, IA/31/2021 and MA/868/2019 in CP/567(IB)/CB/2018] 

• CONCLUSION

• (i) In relation to the Claim of the PF Authorities in the instant case, the PF Authorities are entitled to the satisfaction of the full claim in relation to the PF dues including interest in a sum of Rs.36,11,902/- as well as any additional amounts as may be found due under the EPF & MP Act, 1952 as reflected in the Proclamation of Sale Notice issued dated 23.07.2019 following the decision of the Hon’ble NCLAT in Regional Provident Fund Commissioner Ahmedabad vs Ramachandra D. Choudhry [Company Appeal (AT)(Insolvency) No.1001 of 2019] referred supra.

• (iii) As the Order of Attachment issued by the PF Authorities-Respondent dated 25.04.2018 is held to be not hit by the provisions of the moratorium declared thereafter and for the reasons stated in paragraph supra, the action of the Liquidator in conducting an auction on 12.02.2020 while the matter was pending before this Tribunal dealing inter-alia with the said property as well under attachment, is required to be set aside as the same cannot be sustained in view of the statutory first charge prevalent on the assets of the Corporate Debtor in relation to PF dues and not being discharged as provided under Section 11 of the EPF & MP Act, 1952 read with Section 36(4)(iii)(a)(iii) of IBC, 2016.

• (iv) In case if the Liquidator is in a position to provide and pay off the amount due and claimed under the provisions of the EPF & MP Act , 1952 by the Respondent, including any amount found to be due since August 2019, to the satisfaction of the Respondent and in priority to all other debts, the Liquidator in this regard shall avail the provisions of EPF & MP Act, 1952 read with the Second Schedule to the Income Tax Act, 1961 and to enable the Liquidator to adopt such a course of action and for which purpose a period of two weeks shall be granted by the Respondent to the Liquidator, prior to auctioning of the properties under attachment for which a Proclamation of Sale Notice has been issued on 23.07.2019 failing which as a consequence, the PF Authorities are free to proceed as per the provisions of EPF & MP Act, 1952 for the recovery of PF dues as per the provisions of EPF & MP Act, 1952 in priority to all other claims. However, such an action thereafter shall be completed with in a period of 8 weeks failing which the Respondent shall re-locate the movables under attachment detailed in the Warrant of Attachment for the Liquidator to proceed with the Liquidation Process. Any surplus left after appropriation of PF dues by the PF Authorities/Respondent shall be duly lodged with the Liquidator, who will accept the same as part of Liquidation Estate Assets of the Company under liquidation.

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G. Enforcement of security Interest under SARFAESI, prior to CIRP.

NCLAT (03.03.2021) in Tarun International Ltd. Vs. Vikram Bajaj, RP for Anil Special Steel Industries Ltd. & Ors. [Company Appeal (AT) (Insolvency) No.1194 of 2019] held that;

• Having dealt with the issue raised in this appeal in the context of material on record, respective contentions of parties, arguments advanced and the case law cited at the Bar, we are of the considered opinion that the Appellant auction purchaser had accepted the acquisition of Unit No.1 subject to condition of ‘as is where is basis, as is what is basis, whatever there is basis’ and being fully aware of the nature of liabilities passing on to it in consequence of such sale besides being aware of the issuance of demand notice by Respondent No.2- ‘Rashtriya Anil Steel Majdoor Sangh’, thus the liabilities said to have been acquired by the Appellant in terms of the impugned order cannot be held to be an erroneous conclusion warranting interference.

Facts of the case;

"Anil Special Steel Industries Ltd" (CD) is an industrial company. It defaults, prompting OCs  to initiate Sec. 9 application, which is allowed by NCLT.

Prior to initiation of CIRP, "Allahabad Bank" (AB) the Financial Creditor, took over CD’s (Unit -1, Anil Special Steel Industries Ltd) Industrial Undertaking and auctioned it under SARFAESI to recover dues on a "as is where is, as is what is and whatever there is" basis . Tarun International Ltd.(TI) emerged the successful auction purchaser.

RP approaches NCLT to determine who'd pay liabilities of Workmen and Employees. NCLT rules Tarun International Ltd.(TI) would be liable for dues as the purchase was on a AIWI basis.

NCLAT upholds NCLT's decision citing that the Auction notice had clarified this. Further, Tarun International Ltd.(TI) was aware of potential liabilities.

Author's Comments; Now the question is, when PF dues deemed to have statutory first charge on the assets of the CD, how come subsequent charge holders,  "Allahabad Bank" took possession of the unit of CD and auctioned the same under SARFAESI. Any realization of assets by a secured creditor is subject to satisfaction of the first/prior charge holder.

Secondly, whether "Allahabad Bank" carried the consent of other prior / pari-passu charge holders & secured creditors, (PF dues & workmen dues), prior to enforcement of security interest, in terms of section 13(9) of the SARFAESI Act. & whether NCLT/NCLAT were competent forum to decide the disputes/matter arising out of actions taken under SARFAESI Act. Debts Recovery Tribunal is the competent forum to decide the disputes/matters as per Section 17 of the SARFAESI Act. 

Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952.

# Section 11. Priority of payment of contributions over other debts.—

(2) Without prejudice to the provisions of sub-section (1), if any amount is due from an employer whether in respect of the employee’s contribution (deducted from the wages of the employee) or the employer’s contribution, the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority to all other debts.

The Companies Act, 2013,

Proviso to Section 325(1) provides as under:-

Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen‘s portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debts, opts to realise his security,

• (i) the liquidator shall be entitled to represent the workmen and enforce such charge;

• (ii) any amount realised by the liquidator by way of enforcement of such charge shall be applied rate-ably for the discharge of workmen‘s dues; and…………

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (The SARFAESI Act, 2002)

# Section 13. Enforcement of security interest;-

(9) In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than sixty per cent. in value of the amount outstanding as on a record date and such action shall  be binding on all the secured creditors:

# Section 17. Application against measures to recover secured debts - 

(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, may make an application along with such fee, as may be prescribed, to the Debts Recovery Tribunal having jurisdiction in the matter within forty-five days from the date on which such measure had been taken:

Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
# Regulation 37. Realization of security interest by secured creditor;

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(7) The provisions of this Regulation shall not apply if the secured creditor enforces his security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) or the Recovery of Debts and Bankruptcy Act, 1993 (51 of 1993).

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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