Insolvency Law: First Right for EPF on the Company assets
By Chidambaram Ramesh
(Author of the book “The Law of Employees’ Provident Funds: A Case-Law Perspective.)
Conflicting judgments by the various benches of the National Company Law Tribunal (NCLT) relating to the status of the Provident Fund dues under the newly enacted Insolvency and Bankruptcy Code, 2016 and the consequent lack of clarity on the issue not only makes the workers and other stakeholders confused but also, on a broader perspective, poses a threat to one of the basic tenets of the legal system – legal certainty.
For instance, in the case of Karpagam Spinners, the Regional Provident Fund Commissioner, Tirunelveli filed an appeal to direct the resolution professional to drop the categorization of the Provident Fund dues under Section 53(1)(f) of the I& B Code. The NCLT, Chennai Bench, dismissed it, stating that the Liquidator has correctly recorded the verification and admission of the claim of the appellant. This decision is contrary to the express provisions contained in the I & B Code.
In another case, the National Company Law Appellate Tribunal, New Delhi held that in a case where no fund is created by a Company, in violation of the statutory provision of the Payment of Gratuity Act, 1972, then the Liquidator cannot be directed to make the payment of gratuity to the employees. Because the Tribunal reasoned, the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the liquidation estate. [Savan Godivala (the Liquidator of Lanco Infratech Ltd vs. Apalla Siva Kumar, Company Appeal (AT)(Ins.) No.1229 of 2019, decided on 11-2-2020]. These sorts of rulings run counter to the law laid down by the Parliament.
Importance of Provident Fund dues
It is an accepted view that the workers, due to their lower socio-economic backgrounds, do not necessarily understand the complexities of insolvency proceedings and consequently remain more exposed to the bankruptcy of the corporate debtor. Sometimes, “strategic bankruptcies” may be used as a way of unscrupulous employers to evade the statutory dues and to re-negotiate the wages and other rights of the workers.
There was no safeguard provided for the provident fund and allied dues in the draft Insolvency Code. The representative of the Employees’ Provident Fund Organisation [Shri.Heera Lal Samariya, the then Central Provident Fund Commissioner, Shri.Rajesh Bansal and Shri. Jag Mohan Additional Central Provident Fund Commissioners] during deliberations briefed the Joint Parliamentary Committee that the priority of payments of debts under the Code should be changed. They explained that the 11th Schedule of the Code proposes that Section 326 and 327 of the Companies Act, 2013 shall not be applicable in the event of liquidation under the Code. By this, the provisions of Section 11 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 are rendered null and void. The representatives of EPFO also drew the attention of the Committee to the Supreme Court judgments holding that the Provident Fund dues should get priority over all other debts, including secured creditors.
The Joint Parliamentary Committee, after that, modified its view. In its report submitted to the Lok Sabha on 28th April 2016, it 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.
The dues payable under the Employees’ Provident Funds and Miscellaneous Provisions Act,1952 are statutory dues, ultimately owed to the workers. It forms an intrinsic part of their right to life. Thus, there is a sharp distinction between the rights of the workers under a statutory social welfare scheme – one which is well-protected from the creditors and wages which are not protected. The Joint Parliamentary Committee, therefore, decided that the following words shall substitute clause 36(4)(a)(iii) in the Code – “all sums due to any workman or employee from the provident fund, the pension fund, and the gratuity fund.” Similarly, the JPC recommended insertion of new sub-clause 155(2)(d) after the clause 155(2)(c): “all sums due to any workman or employee from the provident fund, the pension fund, and the gratuity fund.’ Clause 155(2) was also renumbered 155(2)(d).
Section 155 of the Code stipulates that the estate of the bankrupt shall include all property belonging to, or vested in the bankrupt at the bankruptcy commencement date. The estate of the bankrupt shall not include (a) excluded assets (b) property held by the insolvent on trust for any other person (c) all sums due to any workman or employee from the provident fund, the pension fund, and the gratuity fund.
Similarly, gratuity funds of workers are safeguarded from being attached when the employer is winding up or in liquidation. In harmony with the abovesaid provision, the Insolvency and Bankruptcy Code, 2016, excludes the gratuity fund of workers which may be in possession of the corporate debtor from being the part of the liquidation estate or the estate of the bankrupt. Since the provident funds, pension funds, and the gratuity funds provide a social safety net for workers and the employees, the proceeds from such funds have been secured. They shall not be included in the liquidation estate assets or the bankrupt’s estate.
Thus, the Code deliberately and expressly does keep the Provident Fund and Pension Fund arrears away from the clutches of the liquidation process. These dues are well-protected under section 36 of the Code. The Resolution Professional can take control and custody of the ‘liquidation assets’ only after liquidating the entire dues payable by the corporate debtor under the provisions of the EPF & MP Act, 1952. In other words, these dues should be paid on priority well before the commencement of the liquidation process itself. They should not be subject to the mercy of the creditors or the priority-ladder of the waterfall mechanism.
Legal Fiction regarding EPF dues
There is no doubt that many of the statutes are remarkably difficult to understand. But the problem exists in many other areas like the interpretation of an enactment. There is a concept called ‘legal fiction‘ or ‘fictions in the law’ (fictio juris) – which is mostly ignored while interpreting a statute. It is an acceptance of something as real, for the sake of convenience – a legal pretence. One prime example of a typical legal fiction is the status of a company as a ‘person’ in Indian company law. The fiction exists primarily so that the companies can be subject to the personal jurisdiction of the courts. Another example is the Explanation I to Section 405 of the Indian Penal Code, which creates a legal fiction that an employer who had deducted the workers’ share of provident fund contributions but failed to remit it ‘shall be deemed to have dishonestly used‘ the money. Even if the employer had not misused the funds, the legal assumption is so.
There is a legal fiction contained in Section 36(4)(a) of the Insolvency & Bankruptcy Code, 2016, which expressly provides for the exclusion of assets owned by a third-party which are in possession of the corporate debtor, from the meaning of ‘liquidation estate.’ In a similar vein, it treats the “provident fund, pension fund, and gratuity funds’ due to the workers payable by the Corporate Debtor as a ‘third-party’ asset in possession of the Corporate Debtor. In other words, the Corporate Debtor is supposed to have remitted these statutory dues in time; if he had failed to do so, it is assumed by a legal fiction that the ‘dues so payable’ are still lying as a part of the current assets of the Corporate Debtor. While taking possession of the ‘liquidation assets,’ the resolution professional is obliged to exclude these assets as they do not constitute part of the ‘liquidation assets.’ Thus, the Corporate Debtor himself has no ‘ownership rights’ on his properties, to the extent of the dues he owed to the Provident Fund/Pension Fund/Gratuity Fund, on the date of commencement of the Corporate Insolvency Resolution Process(CIRP). This proposition of law is expressly provided for in the Explanation to Section 18 of the I & B Code, which stipulates that the term ‘assets’ shall not include ‘the assets owned by a third party in possession of the corporate debtor held under trust.‘ In other words, an asset owned by a third party but in possession of the Corporate Debtor shall not be included under Clause (f) of sub-section (1) of section 18 of the I & B Code.
EPF dues should be liquidated right before taking possession of assets
The NCLTs/NCLAT has upheld, in a few cases, the proposition of law that the Provident Fund, Pension Fund, and Gratuity Fund should be paid before taking ownership of the assets of the Corporate Debtor. They also clarified that these dues do not fall within the waterfall mechanism provided under Section 53 of the I & B Code.
In the case of State Bank of India vs. Moser Baer Karamchari Union, the question whether the provident fund, pension fund, and gratuity fund come within the meaning of assets of ‘corporate debtor’ for distribution under Section 53 of the Insolvency and Bankruptcy Code, 2016, came for consideration of the NCLAT, New Delhi. The facts of the case are as follows:
The Liquidator, by email communication, denied the payment of Provident Fund and Pension Fund preferentially and included the same for the payments under the ‘waterfall mechanism’ under section 53 of the Insolvency & Bankruptcy Code, 2016. The workers’ union (Moser Baer Karamchari Union) pleaded for directions to exclude the amount due to them towards provident fund and pension fund from the ‘waterfall mechanism’ under Section 53 of the Code, as these dues will not constitute part of the liquidation estate. NCLT, New Delhi held that the provident fund dues, being excluded from the meaning of liquidation assets, cannot be a part of section 53 of the Code. State Bank of India, being a secured creditor, challenged the order in a Company Appeal filed in the NCLAT, New Delhi.
The Appellate Tribunal held that the appellant could not derive the meaning of ‘workmen’s dues’ as assigned to it in section 326 of the Companies Act, 2013, which deals with the ‘overriding preferential payments.’ There is a difference between the distribution of assets and priority of workmen’s dues, as mentioned under Sec.53(1)(b) of the I&B Code and Sec.326(1) (a) of the Companies At, 2013. While applying the provisions contained in Section 53 of the I&B Code, Section 326 of the Companies Act, 2013 is relevant for the ‘limited purpose’ of understanding workmen’s dues which can be more than the provident fund, pension fund, and gratuity fund kept aside and protected under Sec.36(4)(iii) of the I& B Code.
The appellate body further clarified that the appellant cannot derive any advantage of the provisions contained in the Explanation (iv) to Section 326 of the Companies Act, 2013, to determine workmen’s dues under Sec.53(1)(b) of the I & B Code. Provisions of the I & B Code do have an overriding effect in case of inconsistency in any other law for the time being enforced. Sec.53(1)(b) read with Sec.36 (4) will have an overriding effect on Sec.326(1)(a), including the Explanation (iv) to Section 326 of the Companies Act, 2013. Clarifying the above points, the appellate Tribunal declined to interfere with the order of the NCLT holding that the provident funds do not come within the meaning of ‘liquidation estate’ for distribution of assets under Sec.53 of the I & B Code.
The Bench said that the Liquidator has unnecessarily taken a perverse view. “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,” the Bench directed. [Alchemist Asset Reconstruction Co. Ltd. vs. Moser Baer (India) Ltd., 2019 SCC OnLine NCLT 118, order dated 19-3-2019]
Reiterating the importance of the Provident Fund dues, the NCLT, Chennai Bench, in the case of The Assistant Provident Fund Commissioner & Recovery Officer, EPFO vs. Florind Shoes Private Limited and another (M.A.278 of 2019 in CP/522/IB/2018, decided on 5-12-2019] observed as follows:
“….the liquidator counsel himself has stated that the payments to be made to the EPF authority cannot be treated as part of the liquidation estate, for maximization of the assets of the company, since it is not feasible to separately sell off the assets proportionate to the claim of the applicant herein (Recovery Officer, EPF), the liquidator can sell the assets of the Corporate Debtor as stated under Insolvency and Bankruptcy Code and first pay off the dues payable to the applicant before distributing the assets as stated under Section 52 and Section 53 of the Insolvency and Bankruptcy Code.”
Importance of the ‘First Charge’ Clause in Sec.11(2) of the EPF Act
In UCO Bank, Asset Management Recovery Branch vs. The Recovery Officer, EPFO, and others, the facts of the case were as follows. The Recovery Officer, EPFO, attached the immovable properties belonging to Pondicherry Textile Corporation Limited – against which the Corporate Insolvency Resolution process was initiated on a later date. During the pendency of the CIR Process, the Recovery Officer, EPF, proposed to sell off the properties attached by him. Auction-sale of the properties was contested by the UCO Bank – one of the financial creditors of the company. The Madras High Court, placing reliance on a Division Bench order of the Gujarat High Court in Indian Overseas Bank vs. Employees’ Provident Fund Organisation and others dismissed the Writ Petition. The Court observed, “while extracting the statement of objects and reasons of the amended SARFAESI Act, the Division Bench arrived conclusion that “inclusion of Section 31B does not change the position insofar as the primacy of claim under the provisions of the EPF Act is concerned. The mention of Government dues which would include revenues, taxes, cesses and rates due to the Central Government, State Government or local authority would not take into its fold, the first charge created by operation of law in the form of Section 11(2) of the EPF Act.” The Division Bench concluded – “What is sought to be recovered by the petitioner-Bank from Respondent No.2 is its debts which are included in Section 11(2) of the EPF Act. Therefore, there is no hesitation in holding that the Provident Fund Organisation was within its power to issue the order of attachment.” Thus, a harmonious construction of the provisions contained in Section 11(2) of the EPF & MP Act, 1952, and those listed in the I & B Code, 2016, it is clear that the provident fund dues assume the first charge on the assets of the corporate debtor.
Coercive action against the defaulting Corporate Debtors
The provisions in Section 14(1)(a) of the I & B Code are extensive and appear to be a complete bar against the institution or continuation of suits or any legal proceedings against a corporate debtor on the declaration of moratorium by the adjudicating authority. It makes an apprehension whether the prosecution complaints also cannot be instituted against the defaulting employers if the company goes on liquidation.
The Delhi High Court, in Power Grid Corporation of India Ltd. vs. Jyoti Structures Ltd., has interpreted the terms such as ‘proceedings,’ ‘including,’ and ‘against the corporate debtor,‘ as they appear in Section 14 of the I & B Code. The Court held that the word ‘proceedings’ in Sec.14(1)(a) does not mean “all proceedings.”; it would be restricted to the nature of action that follows it, that is, debt recovery action against the assets of the corporate debtor. The use of a narrower term viz., “against the corporate debtor” in Section 14(1)(a), as opposed to the broader phrase “by or against the corporate debtor” used in Section 33(5) of the Code further, makes it evident that Sec.14(1)(a) is intended to have a restrictive meaning and applicability. The term ‘including’ is clarificatory of the scope and ambit of the word ‘proceedings.’
While considering the prosecution of the directors (who were in charge of the affairs of the company at the time of the commission of the offence) for violations of the provisions of EPF & MP Act, the Supreme Court in Rabindra Chamrior vs. Registrar of Companies, considered the scope of the expression ‘any proceedings’ appearing in Sec.633 of the Companies Act. The Court held that it could not save directors of the company from liability or prosecution for violating these provisions. It stated that such relief could be granted only in case of proceedings arising under the Companies Act and not under other statutes. The Supreme Court observed,
“Under S.633 of the Companies Act relief cannot be extended in respect of any liability under any Act other than the Companies Act. The expression ‘any proceedings’ in S.633 cannot be read out of context and treated in isolation. It must be construed in the light of the penal provisions. Otherwise, the penal clauses under the various other Act would be rendered ineffective by application of S.633. Again, if Parliament intended Sec.633 to have a coverage wider than the Act, it would have specifically provided for it as, otherwise, it is a sound rule of construction to confine the provisions of a statute to itself. The powers under sub-section (2) of S.633 must be restricted in respect of proceedings arising out of the violation of the Companies Act. Subsection (2) cannot apply to proceedings instituted against the officer of the company to enforce the liability arising out of violation of provisions of other statutes.”
Recently, in Bhupinder Singh v Unitech Ltd. (Civil Appeal No.10856 of 2016, decided on 20-1-2020), the Supreme Court of India agreed 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 per law against the erstwhile management. There can be no legal impediment to prosecution proceeding, even if the company is under the CRIP.
Management of an on-going concern
Upon appointment of the Interim Resolution Professional, the control of the corporate debtor immediately vests with the IRP, and the powers of the Board of Directors/Partners are suspended. IRP plays a vital role in the management of the affairs of the corporate debtor and the administration of the CIR process. Section 17(2) (e) provides that the IRP will be responsible for complying with the statutory requirements under applicable laws while managing the affairs of the corporate debtor during the CIRP. Thus, the IRP is the person responsible for timely payment of the EPF and allied dues during this period if the corporate debtor is taken over as an on-going concern.
Assessment proceedings under Section 7A, 7B, 7C, 14-B, and 7Q
It is not uncommon to feel apprehensive about the status of continuing inquiries or commencement of quasi-judicial proceedings against the corporate debtor during the CIRP. The Allahabad High Court held that assessment proceedings do not fall within the scope of “other legal proceedings” and do not automatically come to a halt the moment the company goes into liquidation or when the Corporate Insolvency Resolution Process commences. In a case relating to the assessment of tax by the Income Tax Department, the Court observed:
“the company in liquidation is still an assessee, and income-tax proceedings up to the stage of assessment do not fall within the scope of the words “other legal proceedings” as used in Section 446 of the Companies Act, 1956.
Thus, there are no legal impediments against the initiation of inquires in terms of Sections 7A, 7B, 7C, 14-B, and 7Q of the EPF & MP Act, 1952 during the period of the CIRP.
The Supreme Court recently pointed out that the interim resolution professional or the resolution professional, as the case may be, is obliged to represent and act on behalf of the Corporate Debtor with third parties. He should exercise rights for the benefits of the Corporate Debtor in judicial and quasi-judicial proceedings whenever the need arises at the time of taking control and custody of an asset over which the corporate debtor has ownership rights or after that. This proposition of law shows that inquiry authority can summon the IRP/RP for the quasi-judicial inquiries under the EPF & MP Act, 1952, to represent the case of the employer (corporate debtor). The Supreme Court further clarified that wherever the corporate debtor has to exercise his rights in a judicial or quasi-judicial proceeding, he has to do so. He cannot short circuit the same and bring the claim directly before the NCLT taking advantage of Section 60(5) of the I & B Code. [M/s Embassy Property Developments Pvt. Ltd. vs. The State of Karnataka and others (Civil Appeal No.9170 of 2019, decided on 03-12-2019 (SC)],
Dues inclusive of Penal Damages and interest components also
In the case of Tourism Finance Corporation of India Ltd. vs. Rainbow Papers Ltd., and others, the Regional Provident Fund Commissioner filed an appeal before the NCLAT, New Delhi, claiming that the successful resolution applicant is supposed to pay the total provident fund amount. Still, only a part of the amount has been allowed by him. The resolution professional stated that the approved resolution plan has duly taken care of all the statutory dues, and the principal amount of ‘provident fund’ has been taken into consideration. In contrast, the order of levying of interest by the Provident Fund authorities after the commencement of the CIRP is not permissible under the law. He further claimed that the provisions contained in Section 7Q and Section 14-B of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, cannot be relied upon as the provisions of the I & B Code have an overriding effect on the same in terms of Section 238 of the Code.
After hearing both the sides, the NCLAT rightly declared 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.
NCLT cannot decide matters falling outside its domain
Section 60 (5) of the I & B Code, 2016 states that notwithstanding anything to the contrary contained in any other law for the time being in force, the NCLT shall have jurisdiction to entertain and dispose of (a) any application or proceeding by or against the Corporate Applicant or corporate person (b) any claim made by or against the Corporate applicant or Corporate person by or against any of its subsidiaries situated in India; and (c) any question of properties or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the Corporate applicant or Corporate person under the Code.
Hon’ble Supreme Court in the case of M/s Embassy Property Developments Pvt. Ltd. vs. The State of Karnataka and others (Civil Appeal No.9170 of 2019, decided on 03-12-2019 (SC)) held that the NCLT and NCLAT do not have the jurisdiction to decide upon disputes under any other enactments. In that case, the Government of Karnataka had cancelled the lease granted to the Embassy Property Developments Pvt Ltd., as per the provisions of the Mines and Minerals (Development and Regulation) Act, 1957 which was under challenge. The Supreme Court held that the State Government is the statutory authority under the MMDR Act. Hence the refusal to extend the lease in the public domain law – which can be challenged only in the appropriate legal forum which is vested with the power of judicial review over administrative action. The relevant portion of the order reads as follows:
“From a combined reading of Subsection (4) and Subsection (2) of Section 60 with Section 179, it is clear that one of them holds the key to the question as to whether NCLT would have jurisdiction over a decision taken by the Government under the provisions of MMDR Act, 1957 and the Rules issued thereunder. The only provision which can probably throw light on this question would be Subsection (5) of Section 60, as it speaks about the jurisdiction of the NCLT. Clause (c) of Subsection (5) of Section 60 is very broad in its sweep, in that it speaks about any question of law or fact, arising out of or in relation to insolvency resolution. But a decision taken by the Government or a statutory authority in relation to a matter which is in the realm of public law, cannot, by any stretch of imagination, be brought within the fold of the phrase “arising out of or in relation to the insolvency resolution” appearing in Clause (c) of Sub-section (5). Let us take, for instance, a case where a corporate debtor had suffered an order at the hands of the Income Tax Appellate Tribunal, at the time of initiation of CIRP. If Section 60(5)(c) of IBC is interpreted to include all questions of law or facts under the sky, an Interim Resolution Professional/Resolution Professional will then claim a right to challenge the order of the Income Tax Appellate Tribunal, before the NCLT, instead of moving a statutory appeal under Section 260 of the Income Tax Act, 1961. Therefore, the jurisdiction of the NCLT delineated in Section 60(5) cannot be stretched so far as to bring absurd results. (It will be a different matter, if proceedings under statutes like Income Tax Act had attained finality, fastening a liability upon the corporate debtor, since, in such cases, the dues payable to the Government would come within the meaning of the expression “operational debt” under Section 5(21), making the Government an “operational Creditor” in terms of Section 5(20). The moment the dues to the Government are crystalised and what remains is only [the] payment, the claim of the Government will have to be adjudicated and paid only in a manner prescribed in the resolution plan as approved by the Adjudicating Authority, namely the NCLT.”
In the light of the Supreme Court order, it is clear that the NCLTs/NCLAT has no jurisdiction to deal with the quantum of assessment made under the provisions of the EPF & MP Act, 1952, scrutinizing the legality of the attachment orders or any other recovery action, etc., which can be done by the Central Government Industrial Tribunals under Section 7-I of the EPF & MP Act or the High Courts/Supreme Court only.
 2019 SCC OnLine NCLAT 447
 W.P.No.21976 of 2019, decided on 27-11-2019 (Mad.HC)
 Special Civil Application No.4879 of 2017, decided on 10-4-2017
 1992 (Supp) (2) SCC 10
 Tika Ram and Sons (Pvt.) Ltd. v Commissioner of Income Tax, (1964) 51 ITR 403 (All).
 Company Appeal (AT) (Insolvency) No.354 of 2019