Treatment of Provident Fund dues during CIRP.

Let’s look into the issues from a different angle.

Claims of EPFO have the following components;

1. Employee’s contribution (deducted from the wages of the employee)

2. Employer’s contribution.

3. Interest & penalties

A. Employee’s contribution towards PF (deducted from the wages of the employee) The amount deducted from the salary of the workmen & employees for onward remittance to EPFO for credit to the PF account of the concerned workman or employee, are the trust funds in the hands of the employer (CD). As per section 18(1)(f) of the Code, IRP is required to take control and custody of any asset over which the CD 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, with the exceptions as mentioned in the explanation in the section;

• 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.

In my opinion IRP/RP cannot take possession of the amount deducted from the salary of workmen & employees, lying with CD, pending onward remittance to EPFO. The situation is similar to Section 36(4), which provides for the details of assets which do not form the part of the Liquidation Estate, and are required to be paid off prior to the distribution as per Section 53. Similarly, Employee’s contribution towards PF, should be paid prior to distribution under resolution plan.

B. Employer’s contribution with Interest & penalties

Let’s look into the provisions of the Code & E.P.F & M.P. Act, 1952.

I & B Code, 2016

# Section 30. Submission of resolution plan. -

(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:

E.P.F & M.P. Act, 1952 

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

(1).  Where any employer is adjudicated insolvent or, being a company, an order for winding up is made, the amount due.   . . . . . . . . 

(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 , 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. 

Conjoint reading of the above two provisions, will reveal that provision of payment of Employer’s contribution with Interest & penalties is required to be made in  priority to any other secured creditor in the resolution plan.

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.