Conundrum around admission and payment of provident fund dues as per IBC
Rohit Sharma
Partner, Consultepreneurs LLP
Advocates and Solicitors, Mumbai
Introduction
By way of a judgement dated 10.07.2024[1], in the matter of Mr. Anuj Bajpai, Liquidator of Shirt Company (India) Limited vs. Employee Provident Fund Organisation & Ors., the Hon’ble National Company Law Appellate Tribunal, New Delhi Bench, has inter alia held that the claim amount of the provident fund department (“PF Department”) will have to admitted in full by the liquidator, that is, the admitted claim of the PF Department shall include principal, interest, damages and penalties levied by the PF Department and the said admitted claim of the PF Department, should be kept out of the liquidation estate and be paid in priority over other creditors.
The author argues that the said proposition of law, in a way, will render a dominating position to the PF Department, for its claim pertaining to even penalties and damages, over other statutory creditor whose rank is much below the secured creditor as per Section 53 of the Insolvency and Bankruptcy Code, 2016 (“Code”). It is a settled position of law that the PF Department dues pertaining to workmen and employees is to be kept outside the liquidation estate and is to be paid in priority over other creditors. Pertinently, the restriction in law is limited to the dues pertaining to workmen and employees and not the dues which benefits the PF Department, as such.
However, the aforesaid judgement has held that the entire claim of the PF Department, including penalties and damages (which benefits the PF Department only), be excluded from the liquidation estate and be paid in priority, which seriously jeopardises the chances of recovery of claims of other creditors. The context of such jeopardy can be understood from an example being: suppose, a company, namely ABC Private Limited is under liquidation, having total admitted claims of 50 crores and PF Department dues stands at Rs. 10 crores. Now, if there are no available funds in a corporate debtor and the liquidator has been able to recover about 15 crores by liquidating the entire assets of the Corporate Debtor, then out of the recovered 15 crores, 10 crores will be paid to the PF department to satisfy its due and out of the remaining 5 crores, fees of the Liquidator will be paid and finally the remaining amount will be paid equally to workmen’s dues and secured creditors, as per Section 53 of the Code. But if the total recovery is only 5 crores, the entire amount will be paid to the PF Department, leaving behind nothing to be paid towards CIRP and liquidation cost or towards secured creditors of a corporate debtor.
Law governing dues of PF Department
Section 36(4)(a)(iii) of the Code, states as follows:
XXX
- Liquidation estate.-
XXX
(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation:-
(a) assets owned by a third party which are in possession of the corporate debtor, including –
(i) assets held in trust for any third party;
(ii) bailment contracts;
(iii) all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund;
XXX
Section 36(4)(a)(iii) of the Code, states that the PF Department dues payable to employees or workmen is to be kept out of the liquidation estate and is to be paid in priority over other creditors and there is no specific provisioning in law for penalties and damages. While that being the case, claims lodged by the Provident Fund Department (PF department) does not only include principal and interest (as is the case in almost all claims lodged by creditors) but also includes damages and penalty for belated or non-depositing of the provident fund amount by the employer (corporate debtor). Further, in most of the cases, damages/ penalty is determined by the competent authority of PF Department after CIRP is initiated against a corporate debtor and just before filing of the claim. Section 7Q of The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (“EPF Act”), which states inter alia that the employer becomes liable to pay interest for belated submission of provident fund amount at the rate of 12% till the date of actual payment. While, Section 14B of the EPF Act grants power to the PF department to claim damages from the employer for default committed by the employer in depositing the provident fund amount.
Judicial precedence
The Hon’ble National Company Law Appellate Tribunal, New Delhi Bench, vide its judgement dated 19.08.2019[2], in the matter of State Bank of India vs. Moser Baer Karamchari Union & Anr., had held inter alia that the amounts due to provident fund, gratuity fund and pension fund shall be kept out of the liquidation estate. While the said judgement dealt with the factual position of law regarding exclusion of provident fund, gratuity fund and pension fund out of the liquidation estate but the quantum of the amount to be admitted or rejected by an insolvency professional was not dealt with in the said judgement. Hence, the manner of admission of quantum of provident fund departments varied amongst insolvency professionals.
Further, in the matter of Jet Aircraft Maintenance Engineers Welfare Association vs. Ashish Chhawchharia, Resolution Professional of Jet Airways (India) Ltd. & Ors., the Hon’ble NCLAT, vide its judgement dated 21.10.2022[3], held inter alia that the resolution applicant will have to pay entire admitted dues of the provident fund department including damages and penalty, in addition to the resolution amount which has been approved by the committee of creditors of the corporate debtor.
The said judgement gave food for thought to interested resolution applicants of a corporate debtor to have a prior understanding of any pending provident fund dues in a corporate debtor during corporate insolvency resolution process (“CIRP”), as the dues of the provident fund, as admitted by the resolution professional will have to be paid in full to the provident fund department in addition to the resolution amount for acquisition of the corporate debtor.
The judgement of Jet Aircraft (Supra) was further relied on by the Hon’ble NCLAT, Chennai Bench, while passing the judgement in the matter of Mrs. C.G Vijaylakshmi vs. Shri Kumar Rajan, Resolution Professional of Hindustan Newsprint Limited & Ors.,dated 08.02.2023[4], wherein the issue of maintenance of provident fund account by the erstwhile promoter/director for treating the dues of PF Department out of Section 53 of the Code, was held irrelevant.
In the meantime, a contradictory judgement came to be passed by the Hon’ble NCLT, Hyderabad Bench, in the matter of Employees’ Provident Fund Organisation vs. Kanakadhara Ventures Private Limited, vide its judgement dated 26.02.2024[5], held inter alia that the preferential payments to PF department for its dues cannot be granted after the commencement of the liquidation proceedings against a corporate debtor. The Hon’ble NCLT, Hyderabad Bench placed reliance on the judgement of Moser Baer (Supra) and held that the Hon’ble Apex Court has categorically held in the said judgement regarding non-applicability of Section 326 of the Companies Act, 2013 (which offers preferential payments to workmen dues) during the liquidation of a corporate debtor. It was held that as there cannot be any preference granted to the dues of the PF department, its dues are to be considered in terms of Section 53 of the Code.
Conclusion
Section 36(4)(a)(iii) of the Code stipulates regarding exclusion of dues towards provident fund to be paid to employees or workmen, while the damages and penalty is purely for the benefit of the PF department, however, the Hon’ble NCLAT in Anuj Bajpai (Supra) has directed to admit the entire claim of the PF department, which puts the chances of recovery of dues by the secured creditors also in jeopardy, let alone chances of recovery to operational creditors. Further, the major repercussion due to the judgement in Anuj Bajpai (Supra) is to be faced not only by the creditors of the corporate debtor, but also by the liquidator of a corporate debtor.
In the humblest opinion of the author, since the inception there has been numerous amendments/ notifications which has been bought out by the Insolvency and Bankruptcy Board of India, while none of which aided the cause of the operational creditors. Now with the judgement of Anuj Bajpai (Supra) in place, not only is the cause of operational creditors in jeopardy but also hampers the chances of recovery for secured creditors of a corporate debtor. Further, it cannot be gainsaid that while the entire CIRP proceeding/ liquidation proceeding is conducted by the members of the committee of creditors/ stakeholders’ consultation committee and resolution professional/ liquidator of a corporate debtor, but in case of lesser recovery than the admitted dues of the PF department, these creditors or insolvency professionals will not receive a single penny for all the efforts. This proposition of law sets the entire liquidation process of a corporate debtor in dilemma, for on one hand insolvency professionals would not be willing to take up any litigation matter as no fees maybe paid to the insolvency professional for the liquidation period and on other hand, the secured creditors may choose to realise its security interest on their own. The position of PF department dues during CIRP and liquidation, has to be settled at the earliest in order to strengthen the confidence of the stakeholders.
References:
[1] (2024) ibclaw.in 437 NCLAT
[2] (2020) ibclaw.in 206 NCLAT
[3] (2022) ibclaw.in 861 NCLAT
[4] (2023) ibclaw.in 123 NCLAT
