The Code on Social Security, 2020 and its relevance to the Insolvency Law – By Chidambaram Ramesh

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The Code on Social Security, 2020 and its relevance to the Insolvency Law

  Chidambaram Ramesh
[Author of the book ‘The Law of Employees’ Provident Funds – A Case Law perspective]

Sweeping reforms are taking place in the labour laws. The second National Commission on Labour (2002), under the chairmanship of Ravindra Varma, was assigned with the task of proposing a type of umbrella legislation to cover the unorganised workers, particularly regarding wages, hours of work, working conditions, safety and social security. The Commission reviewed the current labour legislation and proposed that it be reconsolidated into broader classes such as industrial relations, wages, social security and welfare and working conditions. It emphasised the need for uniform and adequate social security coverage to prevent compromising workers’ basic needs. It suggested the simplification and unification of current laws towards this end. As a result of these recommendations, the Parliament has enacted the Code on Social Security, 2020.

 The purpose of this article is to provide an analytical framework embracing the principal relationship between the newly enacted Social Security Code and the provisions of the Insolvency and Bankruptcy Code.

There was a general opinion that the Insolvency and Bankruptcy Code (IBC) was relatively more advantageous to the workers than the past regime of handling sick companies through Bureau of Industrial and Financial Reconstruction (BFIR) under the Sick Industrial Companies Act, 1985 (SICA). Except for the Provident Fund, Pension Fund and Gratuity dues, the workers’ claims are next to the first priority of meeting the resolution cost and their claims have also been put on an equal footing with those of other operational creditors. What changes did the Social Security Code introduce?

The Statement of Objects and Reasons of the Social Security Code Bill, among other things, sought “to provide that the money dues shall be the charge on the assets of the employer and shall be paid on a priority basis following the provisions contained in the Insolvency and Bankruptcy Code, 2016. Thus, the Parliament intends to align the provisions relating to recovery of arrears in line with the requirements contained in the I & B Code. This purpose has been expressly and effectively carried out in the following provisions of the Social Security Code.

Recovery of Provident Fund and Pension Fund arrears

            Chapter III of the Social Security Code deals with the Employees’ Provident Fund. Section 19 of the Code provides for the priority of payment of contributions over other debts. It has a non-obstante clause which reads, “Notwithstanding anything contained in any other law for the time being in force, any amount due under this Chapter shall be the charge on the assets of the establishment to which it relates and shall be paid in priority in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.”

The Standing Committee on Labour expressed its apprehension that the provision contained in Section 19 may have the effect of severe deprioritisation of the EPF dues, which may deter significant recovery of the workers’ dues. The Committee further observed that when section 36(4) of the I & B Code itself stipulates that the Provident Fund dues are excluded from the meaning of ‘liquidation estate’ of the corporate debtor and thus remains outside the prioritisation scheme of Section 53, the ‘first charge’ of the Provident Fund dues as mentioned in Section 11 of the existing Act ought to be retained to protect the interest of the workers.[1]

The recommendation of the Standing Committee has been ignored by the Government. It is thus not uncommon for any person to have apprehensions regarding the priority of provident fund dues, as the word ‘first’ has been consciously omitted despite the strong recommendations made by the Standing Committee on Labour. Still, as observed by the Committee, the entire dues relating to Provident Fund, Pension Fund and gratuity have been kept out of the clutches of the Corporate Insolvency Resolution Process (CIRP) in the I & B Code itself by excluding them from the meaning of ‘liquidation estate.’ Thus, it remains that the liquidator should pay the Provident Fund dues before taking possession of the liquidation estate.

Recovery of Employees’ State Insurance

            A provision analogous to Section 19 has been made in Section 47 of the Social security code relating to recovery of the ESI contributions. It provides that the contribution due to the ESI Corporation shall have priority over other debts and that any amount due under Chapter -IV (which deals with the Employees’ State Insurance) to the ESI Corporation shall be the charge on the assets of the establishment to which it refers and shall be paid in priority to all other debts following the provisions of the Insolvency and Bankruptcy Code, 2016.

Compensation – Liability in case of insolvency of the employer

Section 87 of the Code provides for liability in case of insolvency of the employer. Where an employer has entered into a contract with any insurers in respect of any liability under chapter-VII (Employees’ Compensation) relating to compensation to any employee, then, in the event of the employer becoming insolvent or making a composition or scheme of arrangement with his creditors or, if the employer is a company, in the event of the company having commenced to be wound up, the rights of the employer against the insurers as respects that liability shall be transferred to and vest in the employee, and upon any such transfer, the insurers shall have the same rights and remedies and be subject to the same liabilities as if they were the employer.

            Apart from the above, a common priority clause following the I & B Code has been provided for in Section 151 of the Social Security Code concerning Provident Fund dues, ESI dues, employees’ compensation dues, maternity benefits dues, and gratuity arrears.

Provision for waiver of penal damages for CIRP cases

 Section 128 of the Social Security Code provides for levy of penal damages when an employer makes default in payment in the payment of any contribution under the Employees’ Provident Fund and the Employees’ State Insurance. The proviso to Section 128 of the Social Security Code provides for waiver or reduction of the penal damages by the Central Board of Trustees, EPF and the ESI Corporation, as the case may be, to an establishment for which a resolution plan or repayment plan recommending such waiver has been approved by the adjudicating authority established under the I & B code.

          Thus, the provision relating to waiver or reduction of penal damages for sick industries available under the Employees’ Provident Funds Scheme, 1952 has been effectively extended to the companies undergoing the Corporate Insolvency Resolution Process also (subject to the notification by the Central Government). This clause will help reduction of the Corporate Debtor’s total liability and ensure a smooth resolution process.

 

Reference

[1] This issue was raised before the Standing Committee on Labour by the author of this article.

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