Attachment of Properties by the Recovery Officer, EPFO before CIRP: Not a Violation of Moratorium – By Chidambaram Ramesh

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Attachment of Properties by the Recovery Officer, EPFO before CIRP: Not a Violation of Moratorium

By Chidambaram Ramesh
(Author of the book “The Law of Employees’ Provident Funds: A Case-Law Perspective.)

The National Company Law Appellate Tribunal, New Delhi has recently allowed a Company Appeal filed by the Regional Provident Fund Commissioner-I, Vellore in the matter of M/s Sholingur Textiles Ltd [2020] ibclaw.in 127 NCLAT. The crux of the order is that the attachment of properties made by the statutory authorities under their laws, before the commencement of moratorium, is legally valid. In other words, the moratorium declared under section 14 of the Insolvency & Bankruptcy Code, 2016 (I & B Code, 2016) cannot have the effect of nullifying the attachment orders made before the moratorium period.

Brief facts of the case

M/s Sholingur Textiles Limited (the Corporate Debtor) owes half-a-crore towards the Provident Fund dues. The Recovery Officer, EPF attached the immovable properties belonging to the Corporate Debtor in the exercise of the powers vested in him under Section 8-B of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 for recovery of the arrears. Pertinent to mention here that the order of attachment dates back well before the commencement of the Corporate Insolvency Resolution Process (CIRP). Though the Recovery Officer, EPF attached the immovable properties, the Registration Department had failed to encumber the ownership rights in favour of EPFO, despite a request made by the Recovery Officer in this regard.

After persuasions, the Registration Department had encumbered the attached property in favour of the EPFO. In the meantime, the CIRP had commenced, enforcing the statutory Moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016.

Section 14 of the I & B Code, 2016 imposes a moratorium on the institution of suits or continuation of pending suits or proceedings against a Corporate Debtor undergoing CIRP. It also restrains transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein.

Taking cue of this provision, the Resolution Professional filed a Miscellaneous Application in CP 1037/(IB)/2018 in the National Company Law Tribunal, Chennai Bench praying for cancellation of the order of attachment issued by the Recovery Officer, EPF. The NCLT, Chennai disposed of the case by its order dated 11-10-2019[i] cancelling the encumbrance created by order of attachment issued by the Recovery Officer, EPF and also directed the Sub-Registrar, Sholingur to free the attached properties from encumbrance.

The Regional Provident Fund Commissioner appealed against the order dated 11-10-2019 in the Appellate Tribunal, which allowed the appeal in its order dated 8-6-2020.[ii]

Discussion of the order

In the case under discussion, the NCLAT allowed the appeal on the following points: (i) The Adjudicating Authority (NCLT) has passed its order without considering the reply filed by the Regional Provident Fund Commissioner, resulting in violation of the principles of natural justice. (ii) The attachment of the immovable property had already existed before the initiation of CIRP of the Corporate Debtor. (iii) Section 14 of the I & B Code prohibits transferring, encumbering, alienating or disposing of by the Corporate Debtor any of its assets or any legal right or beneficial interest therein. However, mere registering of encumbrance on a property already under attachment will not tantamount to violation of the Moratorium.

The order assumes importance in the wake of the raging debate whether the Moratorium enforced under Section 14 of the I & B Code gives carte blanche powers to the authorities under the Insolvency law, overriding all other enactments.

            In a similar circumstance, (though the matter of dispute relates to another statute, viz., the Prevention of Money Laundering Act, 2002), the Delhi High Court held that the Moratorium enforced in terms of Section 14 of the I & B Code could not come in the way of statutory authority discharging their statutory duties. The Delhi High Court, in the case of The Deputy Director of Enforcement, Delhi vs Axis Bank and others [ Crl.A.143 of 2019 in Crl.A.2262 of 2018, decided on 2-4-2019] observed as follows:

“An order of attachment under PMLA, if it meets with the statutory pre-requisites, is as lawful as an action initiated by a bank or financial institution, or a secured creditor, for recovery of dues legitimately claimed or for enforcement of secured interest in accordance with RDBA or SARFAESI Act. An order of attachment under PMLA is not rendered illegal only because a secured creditor has a prior secured interest (charge) in the subject property. Conversely,[the] mere issuance of an order of attachment under PMLA cannot, by itself, render illegal the prior charge or encumbrance of a secured creditor, this subject to such claim of the third party (the secured creditor) being bonafide. In these conflicting claims, a balance has to be struck.

In the case mentioned above, the Delhi High Court decided that the Moratorium enforced in terms of Section 14 of the I & B Code cannot come in the way of statutory authority and that a view to the contrary, if taken, would defeat the objective of PMLA by opening an escape route. Thus, when the priority of the provisions of the Insolvency & Bankruptcy Code vis-à-vis the Prevention of Money Laundering Act, 2002 became the bone of contention, the Court decided, “..the objective of legislation in PMLA being distinct from the purposes of the three other enactments, viz., RDBA, SARFAESI Act, and Insolvency Code, the latter cannot prevail over the former. There is no inconsistency. The purpose, the text and context are different.” The same reasoning applies in the case of social welfare legislation also.

            There is another aspect of the issue.  Section 8-B of the EPF & MP Act, 1952 (analogous to Section 222 of the Income Tax Act, 1962) and Schedules II & III, and the Income Tax (Certificate Proceedings) Rules, 1962 together constitute a self-contained code prescribing the various modes for recovery of provident fund arrears. Rule 16 of the Second Schedule to the Income Tax Act, 1961 has the effect of depriving the civil Court of any jurisdiction to issue any process against the process of a defaulter on whom a notice under Rule 2 of the said Second Schedule had been served.[Tax Recovery Officer vs V.A.Ramaswami and others, (1978) 114 IRT 408 (Mad. HC)].

The Supreme Court, in  M/s Embassy Property Developments Pvt Ltd., vs The State of Karnataka and others, (Civil Appeal No.9170 of 2019, decided on 3-12-2019), held that though the NCLT and NCLAT would have jurisdiction to enquire into question “arising out of or in relation to the insolvency resolution” appearing in Clause (c) of Sub-Section (5) of Section 60 of the I & B Code, they would not have jurisdiction to decide upon disputes such as those arising under the other legislations, mainly when the differences revolve around the decisions of statutory or quasi-judicial authorities, which can be corrected only by way of judicial review by the appropriate legal forum. Thus, the jurisdiction of the NCLT to quash the order of attachment issued by the Recovery Officer, who is a quasi-judicial functionary in his own right, under the EPF & MP Act, 1952 is debatable. 

            Another point of interest here is that the NCLAT, in the case of Regional Provident Fund Commissioner-I, Ahmedabad vs Ramchandra D.Choudhary,[iii], held that no provisions of the EPF & MP Act conflict with any of the provisions of the I & B Code. 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 NCLAT, New Delhi, therefore, directed the resolution professional to release the full amount of provident fund, including the interest thereon in terms of the provisions of the EPF & MP Act, 1952 immediately, as these dues are not to be included as an asset of the corporate debtor. On a Civil Appeal filed by the Corporate Debtor, the Supreme Court affirmed the NCLAT order.[iv] This decision of the apex court should settle the issue regarding the priority in payment of the Provident Fund dues over all other debts.

[i] https://nclt.gov.in/sites/default/files/final-orders-pdf/ma-830_0.pdf

[ii] https://nclat.nic.in/Useradmin/upload/6108064105ede171ab1ba4.pdf

[iii] Company Appeal No.1001 of 2019

[iv] In Kushal Limited vs The Regional Provident Fund Commissioner and others, Civil Appeal No.1920 of 2020, decided on May 20, 2020.

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1 comment

  1. The order is a much needed shot in the arm for statutory agencies especially that of the EPFO . The author has given a clear insight into the issue behind the order which is well documented.

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