A Critical Analysis of NCLAT’s Recent Decision on Provident Fund Dues
-By Chidambaram Ramesh
[Author of The Law of Employees’ Provident Funds – A Case-law Perspective]
This article explains and evaluates the recent judgement of the NCLAT in Mr B.Parameshwara Udpa, RP of M/s Easun Reyrolle Ltd. vs. Assistant Provident Fund Commissioner, EPFO. Initially, the article describes the case’s facts. Second, the article explains and analyses the NCLAT’s ruling, including how the decision contradicts the language and spirit of the Insolvency legislation and Supreme Court decisions. The article finishes with some views on the repercussions and negative impacts of the ruling on workers’ social security rights.
Brief Facts of the Case
The bank accounts of M/s Easun Reyrolle Limited (the Corporate Debtor) were attached by the Assistant Provident Fund Commissioner for the recovery of statutory dues outstanding under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. This occurred before initiating the Corporate Debtor’s Insolvency Resolution Process. Upon the beginning of the CIRP, the Resolution Professional (RP) applied with the NCLT, Chennai Bench, requesting that the Provident Fund Organisation’s attachment orders be lifted and that he be permitted to take control of the Corporate Debtor’s assets. Considering the provision contained in Section 36(4)(a)(iii) of the Insolvency and Bankruptcy Code, 2016 – which expressly excludes Provident Fund dues from the definition of “Liquidation Estate” – the NCLT disposed of the Application with a direction to the RP to make adequate provisions concerning the amount claimed in the orders of attachments towards the Provident Fund, and subject to the RP making adequate provisions to the satisfaction of the EPFO, the Assistant Provident Fund Commissioner could remove the orders of attachment of the bank accounts of the Corporate Debtor.
The above NCLT decision was challenged before the NCLAT, Chennai Bench. The Appellant-RP argued that the order of the NCLT was contrary to Section 14 of the Insolvency & Bankruptcy Code, 2016 and that the adjudicating authority failed to take into account that the Provident fund dues referred to in Section 36(4)(a)(iii) apply only to “Provident Fund Accounts” as defined in Section 16-A of the EPF & MP Act, 1952. The NCLAT granted the Appeal after accepting the Appellant-RP’s arguments.
What Were the Issues Before the NCLAT?
(i) Can an Attachment Order on the Bank Account of the Corporate Debtor imposed before the initiation of CIRP continue during the Moratorium under Section 14 of the Code, 2016?
(ii) Whether the Resolution Professional is duty-bound to make adequate provisions for Provident Fund even though the Corporate Debtor did not have a separate Provident Fund Account.
(iii) Whether the Adjudicating Authority can direct Resolution Professional to make provisions for Provident Fund without receiving claims for the same from the concerned Authority?
The Decision of the NCLAT
- The Corporate Debtor did not have a Separate Employees Provident Fund as provided in Section 16-A of the Employees Provident Fund and Miscellaneous Provisions Act, 1952. The Provident Fund referred to Section 36(4)(a)(iii) of the 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 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 16A of the Employees Provident Fund, Miscellaneous Provisions Act,1952 and not otherwise.
- The NCLAT, vide order dated 11.02.2020 passed in Company Appeal (AT) (Insolvency) No.1229 of 2019 in the matter of Mr Savan Godiwala, Liquidator of Lanco Infratech Ltd., vs Mr Apalla Siva Kumar, has dealt on a similar case where the issue was regarding payment of Gratuity as against payment of provident fund in the present Appeal. The facts of the case are similar to the present Appeal. This Tribunal gave a clear verdict that where a Company creates no fund, the Liquidator should not have been directed to make provision for payment of Gratuity to the Workmen. In the present case, therefore, as per the ratio of the NCLAT in the Godiwala Case, the Corporate Debtor has not created any specific fund for Provident Fund and therefore, the direction to the Resolution Professional to make adequate provisions towards the demand of the Respondents is not correct.
- The Respondents had not filed their Claims within the prescribed time with the Resolution Professional and sought to enforce their Claim(s) merely based on Orders of Attachment passed much before the commencement of the CIRP. This Tribunal disagrees with the Adjudicating Authority, which gave such directions to the Resolution Professional.
The NCLAT’s order is based on a wrong premise:
The NCLAT relied solely on Section 16-A of the EPF & MP Act, 1952, to distinguish between the Private Provident Fund kept by employers and the statutory fund maintained by the Central Board of Trustees, EPFO.
Section 16-A reads as under: –
“16-A Authorising certain employers to maintain provident fund accounts – (1) The Central Government may, on an application made to it in this behalf by the employer and the majority of employees in relation to an establishment employing one hundred or more persons, authorise the employer, by an order in writing, to maintain a provident fund account in relation to the establishment, subject to such terms and conditions as may be specified in the Scheme: Provided that no authorisation shall be made under this sub-section if the employer of such establishment had committed any default in the payment of provident fund contribution or had committed any other offence under this Act during the three years immediately preceding the date of such authorisation. (2) Where an establishment is authorised to maintain a provident fund account under sub-section (1), the employer in relation to such establishment shall maintain such account, submit such return, deposit the contribution in such manner, provide for such facilities for inspection, pay such administrative charges, and abide by such other terms and conditions, as may be specified in the Scheme.”
Regrettably, the NCLAT overlooked certain crucial facts. Section 16-A of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, was inserted by Act 33 of 1988. Still, the provision has not been brought into force till now. Just as a law duly passed by the Parliament can have no effect unless it comes or is brought into force, an amendment of the Act can have no effect unless it comes or is brought into force. The NCLAT has mistakenly believed that the clause mentioned above is in effect. Thus, the NCLAT relied on a provision that is not notified nor enforced, and as a result, suffers from legal infirmity.
NCLAT failed to appreciate the Legislative History regarding the protection of the EPF dues:
Though the Provident Fund dues were not safeguarded in the draft Code in the early stages, the representatives of the Employees’ Provident Fund Organisation briefed the Joint Parliamentary Committee during the course of deliberations that the payment of the Provident Fund dues on priority over any other debts under Sec.11 of the EPF & MP Act, 1952 will be rendered null and void, if adequate provisions are not made in the I & B Code. The EPFO officials also called the Committee’s attention to the Supreme Court decisions holding that the EPF dues take precedence over all other payments, including the secured creditors. Taking due note of the above submissions, the Joint Parliamentary Committee, in its report submitted to the Lok Sabha on 28th April 2016, observed, “[the] provident fund, [the] pension fund and the gratuity fund provide the social safety net to the workmen and employees and hence need to be secured in the event of liquidation of a company or bankruptcy of partnership firm.” The Committee recommended that all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund should not be included in the liquidation estate assets and estate of the bankrupt.
In the case of Sunil Kumar Jain and others vs Sundaresh Bhatt and others, the Supreme Court threw light on the legislative history of the protective clause provided in the Insolvency law regarding the workers’ Provident Fund and Pension fund dues. The Court observed:
“The issue of giving priority to the workmen’s dues have been considered time and again in the various Committee’s Reports. In the Bankruptcy Law Reforms Committee (Volume 1) (November 2015), it was agreed that the assets held in by the entity in trust (such as employee pensions), assets held as collateral to certain financial market institutions and assets held as part of operational transactions where the entity has right over the asset but is not the owner of the same shall be excluded from the liquidation estate. Furthermore, it was also debated with respect to the waterfall mechanism under the Code and was agreed that the workmen dues capped up to 3 months will be given the second priority with the secured creditor after the cost of the corporate insolvency and resolution process and liquidation. Subsequently, a report of the Joint Committee on the Insolvency and Bankruptcy Code, 2015 was prepared and presented in Lok Sabha on 28.04.2016 wherein the issue of exclusion of provident fund, pension fund and gratuity fund from the liquidation estate assets and estate of bankrupt was debated. The Committee, after in depth examination, was of the view that provident fund, pension fund and gratuity fund provide the social safety net to the workmen and employees and hence, need to be secured in the event of liquidation of a company or bankruptcy of [a] partnership firm. The Committee observed that the workers are the nerve centre of any company, and in the event of any company becoming insolvent or bankrupt, the workmen get affected adversely and therefore, priority must be given to their outstanding dues. Therefore, all sums due to any workman or employee from the provident fund, gratuity fund or pension fund should not be included in the liquidation estate assets. Thus, to protect the interest of the workmen, the Committee decided that the workmen dues for a period of 12 months, as provided under Section 53 of the Code, be increased to 24 months preceding [the] liquidation commencement date. In the light of the same, the Section 36 of the Code has clearly given outright protection to workmen’s dues under Provident Fund, Pension Fund and Gratuity Fund, which is not treated as liquidation assets, and Liquidator has no claim over such funds. Therefore, this share of workmen’s dues has consciously been taken outside the liquidation process.”
NCLAT considers EPFO to be a stakeholder, which is not the case:
Nearly everyone affiliated with the Corporate Debtor is categorised as a stakeholder. Nonetheless, Section 2(k) of the IBBI (Liquidation Process) Regulations, 2016, defines the term stakeholder. It states that “stakeholders” are those entitled to a distribution of proceeds under section 53.
Section 36 (4) of the Insolvency & Bankruptcy Code 2016 mandates explicitly that the assets owned by a third party that are in possession of the corporate Debtor shall not be included in the liquidate estate assets. In other words, any amount due to the workers from the provident fund, pension fund, and gratuity fund will not form a part of the liquidation estate of the corporate Debtor and will not be used for recovery in liquidation. The Provident Fund and Pension Fund dues payable by the Corporate Debtor expressly fall within the above clause under sub-clause (a) (iii) to Section 36(4) of the I & B Code. The Code makes a legal fiction that these dues, being the statutory dues payable by the Corporate Debtor to his workers, constitute the workers’ assets lying with the Corporate Debtor – analogous to the third-party assets in possession of the corporate Debtor. The above provision debars the Liquidator from distributing the money to the stakeholders of the Corporate Debtor under Section 53 of the I & B Code without liquidating the entire EPF arrears (including the Penal damages and Sec.7Q interest).
As the Provident Fund/Pension Fund dues are excluded from the meaning of the ‘liquidation estate,’ and the EPF dues do not fall under the ambit of the waterfall mechanism stipulated under Section 53 of the I & B Code, the EPFO does not fall within the meaning of ‘stakeholder’ as defined under Section 2(k) of the IBBI (Liquidation Process) Regulations, 2016.
The NCLAT failed to decipher the “Legal Fiction” included in Code section 36(4):
The assets belonging to a third party cannot be utilised towards resolving the insolvency of a corporate debtor, as held by the Supreme Court in the Embassy Property case. The Supreme Court emphasised that Section 18 of the I & B Code – which deals with the duties of an IRP –mandates that the IRP can take over the control of any of the assets over which the Corporate Debtor has ownership rights as recorded in the balance sheet of the Corporate Debtor. Moreover, it is expressly clarified that the term ‘assets’ does not include those assets owned by a third party in possession of the corporate debt. A combined reading of the Explanation to Section 18 and Section 36(4)(a)(iii) of the I & B Code makes it clear that the Liquidator cannot take possession of the properties of the Corporate Debtor to the extent of the third-party rights included in it. In another way, the Provident Fund contributions – particularly the workers’ share deducted from their wages – can be treated as ‘assets owned by a third party (workers) in possession of the corporate debtor held under trust.’ This aspect of the law is further strengthened by clause (3) of Paragraph 32 of the Employees’ Provident Funds Scheme, 1952, which reads, “Any sum deducted by an employer or a contractor from the wages of an employee under this Scheme shall be deemed to have been entrusted to him to pay the contribution in respect of which it was deducted. Thus, it is a deemed entrustment and any default on the part of the Corporate Debtor to make the payments to the EPF authorities in time is equivalent to ‘criminal breach of trust within the meaning of Section 405 of the IPC. In such cases, legal proceedings can be instituted or continued against the employers of the companies concerned.
The NCLAT has completely disregarded Supreme Court precedents:
The law declared by India’s Supreme Court is binding on all courts throughout the country. The purpose of the concept of precedent is to ensure that the law of the nation is clear, uniform, and unambiguous so that the courts will follow it without question. But the NCLAT’s order under consideration violates this precedent. There are many cases where the Supreme Court has prioritised payment of the Provident Fund dues.
In the case of Sunil Kumar Jain and others vs Sundaresh Bhatt and others, the Supreme Court examined whether the Provident Fund, Gratuity Fund, and Pension Fund owed and payable to workers and employees should be considered outside the purview of the liquidation process. After discussing the legislative history of the relevant provisions, the Supreme Court observed as follows:
“Now, so far as the dues of the workmen/employees on account of provident fund, Gratuity and pension are concerned, they shall be governed by Section 36(4) of the IB Code. Section 36(4)(a)(iii) of the IB Code specifically excludes “all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund” from the ambit of “liquidation estate assets.” Therefore, Section 53(1) of the IB Code shall not be applicable to such dues, which are to be treated outside the liquidation process and liquidation estate assets under the IB Code. Thus, Section 36(4) of the IB Code has clearly given outright protection to workmen’s dues under [the] provident fund, gratuity fund and pension fund, which are not be treated as liquidation estate assets, and the Liquidator shall have no claims over such dues. Therefore, the concerned workmen/employees shall be entitled to provident fund, gratuity fund and pension fund from such funds which are specifically kept out of [the] liquidation estate assets and as per Section 36(4) of the IB Code, they are not to be used for recovery in the liquidation.”
Another case of importance for the current discussion is Kushal Ltd., the facts of which are as follows. In the Corporate Insolvency Resolution Process of M/s Rainbow Paper Limited (Corporate Debtor), the Resolution Professional filed an application under Sec.30(6), read with Section 31 of the Insolvency & Bankruptcy Code, 2016, seeking approval of the Resolution Plan submitted by M/s Kushal Limited (Successful Resolution Applicant). The Resolution Plan submitted to the Adjudicating Authority suggested payment of partial dues relating to Provident Funds. The NCLT, Ahmedabad Bench approved the same on 27th February 2019. The Regional Provident Fund Commissioner-I, Ahmedabad, challenged the NCLT order contending that the Resolution Plan was violative of section 30(2)(e) of the I & B Code [which stipulates that the resolution plan does not contravene any of the provisions of the law for the time being in force]. The RPFC contended that the successful resolution applicant was supposed to pay the entire provident fund dues (including the penal damages and simple interest charged under Section 7Q of the EPF & MP Act, 1952). Still, only part of the amount has been allowed in the Resolution Plan, which was against the provisions of Section 36(4)(a)(iii) of the I & B Code [according to which the Provident Fund dues should be excluded from the meaning of liquidation assets]. Refuting it, M/s Kushal Limited (successful resolution applicant) stated that the approved resolution plan had duly taken care of all the statutory dues and the order passed by the Provident Fund authorities levying punitive damages and Section 7Q interest in the post-CIRP period is not permissible under the law. They further contended that the I & B Code provisions, by Section 238, have an overriding effect on Sections 7Q and 14B of the EPF & MP Act, 1952. The appellate authority (NCLAT), in its order dated 19th December 2019, rejected the contentions described above of the resolution applicant and observed that “as no provisions of the Employees’ Provident Funds and Miscellaneous Provisions 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)(a)(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 NCLAT further directed the successful resolution applicant to immediately release the entire provident fund and interest/penal damages following the EPF & MP Act’s provisions, 1952. M/s Kushal Limited challenged the order of the NCLAT in Civil Appeal No.1920 of 2020 before the Supreme Court. After the hearing, the Supreme Court refused to interfere with the order of the NCLAT. In other words, the Supreme Court affirmed the order of the NCLAT directing payment of the entire provident fund dues, including the penal damages and interest elements.
In Bhupender Singh vs Unitech Limited,the Supreme Court held that the order of moratorium should not foreclose the statutory entitlement of the EPFO to enforce the claims for the payment of EPF and other related statutory dues following the law against the erstwhile management. The NCLAT seems to have ignored all these orders of the Supreme Court.
The Non-payment of Provident Fund dues will render the Resolution Plan void:
Even if it is acknowledged that the RP does not have a statutory responsibility to pay Provident Fund dues if the Corporate Debtor does not maintain a separate Provident Fund, the legal validity of the Resolution Plan faces a further obstacle. The Supreme Court, in the case of Ebix Singapore Private Ltd. vs CoC of Educomp Solutions Ltd. and another, held that the Resolution Plan would have to conform to the statutory provisions of the IBC. The Supreme Court held that a Resolution Plan that ignores the statutory dues is liable to be rejected. It observed, “Under Section 31 of the IBC, a resolution plan as approved by the Committee of Creditors under Sub-section (4) of Section 30 might be approved by the Adjudicating Authority only if the Adjudicating Authority is satisfied that the resolution plan as approved by the Committee of Creditors meets the requirements as referred to in Sub-Section (2) of Section 30 of the IBC. The condition precedent for approval of a resolution plan is that the resolution plan should meet the requirements of Sub-Section (2) of Section 30 of the IBC.
NCLAT is not meant to enter uncharted territory:
At this juncture, it is helpful to recall the Supreme Court’s cautionary remarks on the matter in the case of M/s Embassy Property Development Pvt. Ltd. vs The State of Karnataka and others. The Court held that the NCLTs and the NCLATs would not have the jurisdiction to adjudicate disputes relating to other statutes. Those cases involving the interpretation of public laws can be called into question only in a superior court vested with the power of judicial review. NCLT or NCLAT, being the creatures of a special statute for discharging certain specific functions, cannot be elevated to the status of a superior court having the power of judicial review. The Supreme Court further observed that a decision taken by the government or statutory authority concerning a matter in the realm of public law could not be brought within the fold of Section 60(5) of IBC.
Until the Central Government officially implements the provision in Section 16-A of the EPF & MP Act, 1952, there is no provision for a separate Provident Fund to be managed. Since the NCLAT has ruled that the Resolution Professional’s statutory obligation to pay the Provident Fund dues in priority would only emerge if the Corporate Debtor maintained a separate provident fund, the existing rules cannot stand. Since the Corporate Debtors would maintain no distinct fund, if the NCLAT’s view is adopted, there would be no need for the RP to pay the provident fund dues on priority. Such an interpretation will defeat the very purpose of the exclusion clause provided under Section 36(4)(a)(iii) of the I & B Code.
In this regard, the decision of the NCLT, Mumbai Bench, in the matter of Precision Fasteners Limited vs Employees’ Provident Fund Organisation, where the remarks were more illuminating, is worth a look. The NCLT observed,
“[…] it is an operation of law that says when [the] provident fund is payable to the workmen or employees, such payment dues have to be deemed as an asset of the workmen or the employees, it makes no difference whether it has been maintained in a separate account or not, in view of this deeming fiction, the workmen/employees not need prove that whether any sum (interest) has been explicitly vested with them or not […] an overreaching interest and title has been created in favour of the workmen in respect to provident fund, etc. Under the old regime to say that provident fund dues will have [an] overriding effect over all other dues, including secured and unsecured creditors, Court used to fall back upon EPF Act provisions, but whereas now, by [the] exclusion of provident fund dues to the workmen/employees from the liquidation estate, it has not only extended the earlier law that was in existence but also strengthened the right of workmen regarding PF/Pension/Gratuity fund dues, by altogether excluding this asset from the liquidation estate leaving it to open to the workmen or to the PF Authority to realise their provident fund/pension fund/gratuity fund dues without standing in the line of waterfall mechanism.”
The NCLAT’s decision has factual and legal flaws, and the ruling will create a bad precedent for future instances. This ruling would have a devastating effect on workers’ rights. Throughout the nation, thousands of crores of workers’ funds are locked up in the CRIP. It is time for the Provident Fund authorities to dispute the NCLAT’s decision in the Supreme Court to protect the workers’ social security interests.
  ibclaw.in 191 NCLAT
 A.K. Roy and others vs. Union of India and others, (1982) 1 SCC 271
 Mr.Heera Lal Samariya, the then Central Provident Fund Commissioner, Mr. Rajesh Bansal, and Mr. Jag Mohan, Additional Central Provident Fund Commissioners.
 (2022) ibclaw.in 23 SC
 M/s Embassy Property Development Pvt. Ltd. vs The State of Karnataka and others,  ibclaw.in 12 SC
 (2022) ibclaw.in 23 SC
 Civil Appeal No.1920 of 2020 (decided on 20th May 2020)
 (2019) ibclaw.in 463 NCLAT decided on 19th December 2019
 (2020) ibclaw.in 110 SC, decided on 20-01-2020
 (2021) ibclaw.in 153 SC
  ibclaw.in 12 SC
  ibclaw.in 10 NCLT
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