Distribution of funds in the Liquidation Process - PF Dues.
There had been contradicting judgements on the issue of Priority of payment of Dues towards Provident Fund, Pension Fund & Gratuity Fund of the workmen & employees during liquidation process..
1. As a social security measure, under the provisions of EPF & MP Act.1952, employer (CD) is required to contribute a certain amount (12%) of pay of the employees & a matching amount is deducted from the salary of the concerned employee, and this amount is remitted to EPFO for credit to provident fund & pension fund account of the individual employees,
2. In case of default on the part of the employer, EPFO under the provisions of EPF & MP Act.1952, can assess & recover the provident fund dues from the employer, which carries first charge on the assets of the employer [under the section 7A read with section 11(2)].
# (2) Without prejudice to the provisions of sub-section (1), if any amount is due from an employer 8[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.
3. Under the provisions of EPF & MP Act.1952, EPFO can recover interest & penalty from the employer under section 7Q & 14B respectively of the Act.
4. Under the provisions of Act (Section 16A) certain institutions/employers, with the prior permission of GOI, can maintain these provident fund & pension funds at the organisation level as administrative separate funds, instead of remitting the money to EPFO, ensuring minimum benefits as per the provisions of EPF & MP Act.1952. Employers are free to provide additional benefits as per the terms of service contract.
5. Similarly, under the provisions of “Payment of Gratuity Act, 1972, employers are under obligation to subscribe to an insurance policy or maintain a separate administrative fund “Gratuity Fund” under section 4 of the PGA, 1972.
6. Now under IBC,2016, to ensure that these administrative funds i.e. Provident Fund, Pension Fund & Gratuity Fund, are not utilised by the Liquidator to pay off the creditors under section 53, these funds are exempted from their inclusion in “Liquidation Estate” under section 36(4)(a)(iii).
7. Following are the case laws on the above subject matter.
i). NCLAT (2022.09.30) in Mr. B. Parameshwara Udpa RP of M/s. Easun Reyrolle Ltd. Vs. Assistant PF Commissioner EPFO [Company Appeal (AT) (CH) (Ins) No. 231 of 2021] held that;
The `Provident Fund’ referred to Section 36(4)(a)(iii) of the I & B Code, 2016 applies to `Provident Fund Accounts’, maintained as per Section 16-A of the `Employees Provident Fund’ & `Miscellaneous Provisions Act, 1952’.
If we read Section 14(1)(a), it can be inferred that there shall be complete embargo to continue any proceeding against the ‘Corporate Debtor’ by any `Authority’ till the ‘Corporate Insolvency Resolution Process’ is completed and `Moratorium’ is lifted by the ‘Adjudicating Authority’ or it result into `Liquidation’ on failure of the ‘Corporate Insolvency Resolution Process’.
Thus, it can be presumed that `Attachment of Bank Account’ of the `Corporate Debtor’ by `EPFO’ cannot be continued when `Moratorium’ is declared under I & B Code, 2016 and proceedings are required to be kept in abeyance till lifting of moratorium.
It is therefore evident that amount deducted for `Provident Fund’, purely belongs to an `Employee’ and not to be treated as an `Asset’ of the ‘Corporate Debtor’ and cannot be touched by an `Interim Resolution Professional’/`Resolution Professional’/ `Liquidator’ as the case may be.
Therefore, it can be concluded that `Resolution Professional’ is right in seeking lifting of `Attachment Orders’ on `Bank Account’ of ‘Corporate Debtor’ and the ‘Adjudicating Authority’ should have done accordingly.
The Provident Fund referred to Section 36(4)(a)(iii) I & B Code, 2016 applies to Provident Fund Accounts maintained as per Section 16-A of the Employees Provident Fund & Miscellaneous Provisions Act, 1952.
The Exclusion from the Liquidation Estate Assets as well as from Recovery in Liquidation, as stipulated in Section 36(4)(a)(iii) of I&B Code, 2016, applies in respect of sums due to any workman or employee from the Provident Fund, when the Corporate Debtor has maintained an Establishment fund in terms of Section 16-A of the Employees Provident Fund, Miscellaneous Provisions Act,1952.
This `Tribunal’ gave clear verdict that where no fund is created by a Company, the `Liquidator’ should not have been directed to make provision for payment of Gratuity to the Workmen.
Based on this, the only inference which can be drawn is that Pension Fund, Gratuity Fund and Provident Fund cannot be utilised, attached or distributed by the liquidator, to satisfy the claim of other creditors.
Section 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 the Section 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.
Therefore, the `Resolution Professional’ is not duty bound to make adequate provisions for ‘Provident Fund’ when the `Corporate Debtor’ did not have separate `Provident Fund Account’.
Further, in terms of Regulation 13, the ‘Resolution Professional’ is mandated to verify the `Claim’ and subsequently determine the amount of `Claim’ as per Regulation. 14. It is therefore, necessary that any person having `Claim’ over the ‘Corporate Debtor’ has to prefer `Claim’ as stipulated in such regulations.
[ Link Synopsis ]
Under this judgement the contours of Section 36(4)(a)(iii) vis-a-vis Provident Fund, Pension Fund & Gratuity Funds have been clearly noticed by the Hon’ble Appellate Tribunal.
8. However Hon’ble Appellate Tribunal in Truvisory Insolvency Professionals Pvt. Ltd. (IPE) Vs. Employees’ Provident Fund Organisation and Ors. (with the same bench strength) has con-joined PF dues (Assessment of EPFO under sections 7A, 7Q & 14B of EPF & MP Act.1952) with the provisions of IBC under Section 36(4)(a)(iii) and carved out priority of payment prior to distribution under Section 53, in effect even prior to the payment of CIRP cost & Liquidation cost.
NCLAT (2024.09.11) in Truvisory Insolvency Professionals Pvt. Ltd. (IPE) Vs. Employees’ Provident Fund Organisation and Ors. [(2024) ibclaw.in 591 NCLAT, Company Appeal (AT) (Ins.) No. 580 of 2023] held that;
We hold that provident fund dues were entitled to be paid in full. In view of the judgment of Supreme Court in “Maharashtra State Cooperative Bank Limited vs. Assistant Provident Fund Commissioner & Others” (Supra), the claim of Appellant was to be satisfied in full, otherwise breach of provision of Section 30(2)(e) would have occurred. We, thus, are inclined to issue direction to the Successful Resolution Applicant to make payment of the admitted claim of the Appellant towards provident fund dues to save the plan from invalidity.
It is clear from the discussion above that even if no separate fund is available for provident fund, gratuity fund and pension fund they have to be paid out of existing funds of the CD.
The decision of this Tribunal in the aforesaid matter means that in the case of Provident Fund, the employees contribution, employers contribution, the interest if any to be paid by the employer in case of delay in payment and damages as provided in Sections 11 and Section 7A, 7Q, 14B and 15 (2) of Employees Provident Funds and Miscellaneous Provision Act, 1952 [Act 19 of 1952] are covered under the provisions of Section 36(4)(a)(iii) of the Code and are not part of the liquidation estate and hence are not subject to distribution under Section 53 (1) of the code.
The aforesaid decision of the Tribunal was a case of CIRP and its resolution and the payment for PF dues had to be made by successful resolution applicant. However, the ratio is equally applicable in case of liquidation as the principles relating to components of PF dues not forming part of the liquidation estate has been decided in this case.
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.
The Judgment supra (Tourism Finance Corporation of India Ltd) of the three members bench of this Tribunal upheld the contention of RPFO that dues under 7Q namely interest payable by employer and Section 14B relating to recovery of damages by the provident fund authority from the employer in default are covered under Section 36(4)(a)(iii) of the code and do not form part of the liquidation estate. It further held that no provisions of employees fund Provident Fund and Miscellaneous Provision Act, 1952 are in conflict with IBC.
The Hon’ble Supreme Court (Maharashtra State Cooperative Bank supra) further held that interest payable by the employee under Section 7Q and the damages levied under Section 14B of the EPF Act will also be covered as dues from the employers for the purpose of Section 11(2) of the EPF Act.
The claims of all the eight EPFO’s are to be treated on par and the entire amount of claim under Section 7A, 7Q and 14B of the EPF Act has to be paid to respective PF authority from the funds available in the attached bank accounts of CD. In case the amount available is not sufficient the same shall be met from disposal of other assets of the CD. Balance left after meeting the claims of the EPFO Authorities shall form part of the liquidation estate.
[ Link Synopsis ]
9.Here it is important to note that Liquidation Estate (Section36 of IBC, 2016) is supposed to comprise assets of the CD. How come PF dues (a liability) can be considered/ discussed as a part or not part of liquidation estate.
10. Doctrine of binding precedents;
Constitution Bench of Hon’ble Supreme Court (2020.03.02) in Dr. Shah Faesal and Ors. vs Union of India and Anr.[Writ Petition (Civil) No. 1099 of 2019] held that;
Doctrine of precedents and stare decisis are the core values of our legal system. They form the tools which further the goal of certainty, stability and continuity in our legal system. Arguably, judges owe a duty to the concept of certainty of law, therefore they often justify their holdings by relying upon the established tenets of law.
The doctrine of binding precedent is of utmost importance in the administration of our judicial system. It promotes certainty and consistency in judicial decisions. Judicial consistency promotes confidence in the system, therefore, there is this need for consistency in the enunciation of legal principles in the decisions of this Court.”
The two Judge Bench in Santosh Devi [Santosh Devi v. National Insurance Co. Ltd., (2012) 6 SCC 421 7] should have been well advised to refer the matter to a larger Bench as it was taking a different view than what has been Stated in Sarla Verma [Sarla Verma v. DTC, (2009) 6 SCC 121] , a judgment by a coordinate Bench. It is because a coordinate Bench of the same strength cannot take a contrary view than what has been held by another coordinate Bench. (emphasis supplied)
11. To remove doubts & confusion, it is advisable to amend/insert (text highlighted & marked in bold) the provisions of the Code as under;
# Section 36. Liquidation estate. -
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(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;
(ii) bailment contracts;
(iii) all sums due to any workmen or employee from the provident fund, the pension fund (both created under section 16A of EPF & MP Act.1952) and the gratuity fund (created under section 4 of the Payment of Gratuity Act, 1972);
# 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: -
PF, Pension & gratuity dues of the workmen & employees.
the insolvency resolution process costs and the liquidation costs paid in full;
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;
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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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, commercial or otherwise. One 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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