The Priority of Provident Fund dues under the Insolvency Regime – By Mr. Chidambaram Ramesh

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The Priority of Provident Fund dues under the Insolvency Regime

– By Mr. Chidambaram Ramesh [Author of The Law of Employees’ Provident Funds – A Case-law Perspective]

            The Insolvency and Bankruptcy Code, 2016 (I & B Code) expressly excludes the Provident Fund, Gratuity and Pension Fund dues from the meaning of ‘liquidation estate’ or the ‘assets of the bankrupt’. 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. What does not form part of the liquidation estate cannot be appropriated or sold by the Liquidator and cannot be distributed to the stakeholders of the Corporate Debtor under Section 53 of the I & B Code. However, there have been many instances where the Liquidators have refused to accept the above proposition of law and sought to bring the Provident Fund dues also under the waterfall mechanism. This negation has resulted in an increased number of litigations in the NCLTs between the Liquidators and the Provident Fund authorities. Why this confusion and the growing number of disputes despite the I & B Code’s explicit provisions?

            The Liquidator is cast with the statutory duty to take possession only those properties which form the liquidation estate. To carve out the property so exactly as to match the provident fund arrears from the properties of the Corporate Debtor (including those which do not fall within the liquidation asset) before taking possession of the liquidation assets is practically impossible – like carving out only a pound of flesh, and no more, not even a drop of blood. The poetic justice depicted in the trial scene of the Shakespeare’s drama The Merchant of Veniceputs into question the ordinary view about what belongs together and what may come apart. Likewise, the Liquidator needs to distinguish what belongs to the Corporate Debtor and what not.

            In a recent order [Nagalingam Muthiah, Resolution Professional vs Officer of the Recovery Officer, EPFO][1] the NCLT, Chennai Division Bench has attempted to sort out the issues in detail. In this case, the Employees’ Provident Fund Organisation had attached the movable properties belonging to M/s S.A.S. Autocom Engineers India Private Limited (the Corporate Debtor) right before the Corporate Insolvency Resolution Process (CIRP) commencement. Also, it proceeded with the auction sale of the attached properties when the moratorium declared under Section 14 of the I & B Code was in force. Pertinently, the Provident Fund authorities had not filed any claim with the Liquidator and proceeded with the sale of the attached properties – a unilateral action that prompted the Liquidator to knock the doors of the NCLT. Considering the facts, the NCLT ordered a stay of the auction sale. During the status quo order was in force, the Liquidator proceeded with the auction sale of the corporate Debtor properties. On a Writ Petition filed by the Provident Fund authorities against the order of the NCLT, a Division Bench of the Madras High Court had directed the NCLT to consider the issue of jurisdiction with specific reference to the provisions contained under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 vis-à-vis the Insolvency and Bankruptcy Code, 2016.[2]

On reconsideration of the matter, the NCLT, Chennai Bench, has made the following observations.

  1. The term ‘claim’ under Section 3(6) and a combined reading of sub-sections (a) and (b) of Section 6 of the I & B Code reveals a diverse spectrum with the only pre-condition that there must exist a right to payment on the part of the claimant and a duty on the part of the Corporate Debtor to make a payment. At this stage, there is no categorisation of the claimants. The call made by the IRP is concerning all the claimants having a claim over the Corporate Debtor so that the IRP is in a position to collate the claims. Thus, filing the claim with the IRP puts him on notice about the claim, and hence it is mandatory.[3]
  2. The Provident Fund authorities are entitled to the satisfaction of the full claim concerning the Provident Fund dues, including the interest following the decision of the NCLAT in Company Appeal (AT)(Insolvency) No.1001 of 2019. [Regional Provident Fund Commissioner-I, Ahmedabad vs Ramchandra D.Choudhary]
  3. Since the attachment of properties made by the Provident Fund authorities for the recovery of their dues before the commencement of the CIRP will not be hit by the declaration of moratorium under Section 14 of the I & B Code, following the ratio of the NCLAT decision in Company Appeal (AT) (Insolvency) No.1521 of 2019. [Regional P.F. Commissioner vs T.V. Balasubramanian (R.P.) (Sholingur Textiles Ltd.)&another]
  4. The auction of the Liquidator in conducting an auction while the matter was pending before the NCLT dealing inter-alia with the said property cannot be sustained because of the statutory first charge prevalent on the assets of the Corporate Debtor concerning Provident Fund dues and not being discharged as provided under Section 11 of the E.P.F & M.P. Act, 1952 read with Section 36(4)(a)(iii) of the I & B Code, 2016.

            In addition to the above, the NCLT Bench has directed that if the Liquidator is in a position to provide and pay off the amount claimed by the Provident Fund authorities to their satisfaction and in priority to all other debts, the Provident Fund authorities may grant two weeks to the Liquidator to proceed with the sale of properties by availing the provisions of the E.P.F.& M.P. Act, 1952 read with the Second Schedule to the Income Tax Act, 1961, failing which the Provident Fund authorities are free to proceed with recovery action as per the provisions of the E.P.F.& M.P. Act, 1952. Any surplus left after appropriation of Provident Fund dues shall be lodged with the Liquidator, and this will be made part of the Liquidation Estate Assets of the Company under liquidation.

            In a nutshell, the recent NCLT order has driven home the point that the Provident Fund dues payable by the Corporate Debtor – not being the assets owned by him but belong to the workers – are not included within the liquidation estate. The liquidation estate is realised, with the proceedings being distributed to the stakeholders under the waterfall mechanism in section 53 of the I & B Code. What does not form part of the liquidation estate cannot be appropriated or sold by the Liquidator and cannot be distributed to the stakeholders of the Corporate Debtor – any violation of which would amount to ‘unjust enrichment,’ not contemplated by law. 


Reference

[1][1] I.A.No.31/2020 in MA/868/2019/567(IB)/2018

[2]The Recovery Officer, EPFO vs The Dy. Register, NCLT and others, W.P.(C) No.9036 of 2020, decided on 31st August 2020 (Mad. HC (DB))

[3]A concurrent reading of the NCLT, Kochi Bench’s order in V-con Integrated Solutions Pvt. Ltd. vs Acharya Techno Solutions (India) Pvt. Ltd and another [I.A./176/KOB/2020 in MA/05/KOB/2020 in TIBA/01/KOB/2019 (order dated 18-2-2021)] reveals that the RP/Liquidator should be informed of the dues, though not by way of filing Form G [Proof of claim by any other stakeholder in terms of Regulation 20 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016]

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