EPFO is more than a stakeholder in the Liquidation Process
– By Mr. Chidambaram Ramesh [Author of The Law of Employees’ Provident Funds – A Case-law Perspective]
In some cases, the Liquidators have reportedly issued notice to the EPFO for participation in the stakeholders’ consultation committee meeting, treating them as operational creditors or Government agencies. In general terms, almost everyone associated with the Corporate Debtor is considered a stakeholder. However, Section 2(k) of the IBBI (Liquidation Process) Regulations, 2016 provides for a definition of the term ‘stakeholder.’ It reads, “stakeholders” means the stakeholders entitled to distribution of proceeds under section 53. This gives rise to a larger question: Does the EPFO come within the meaning of ‘stakeholder’ for the I & B Code and the connected liquidation process? This article is intended to address this concern.
The Insolvency and Bankruptcy Code, 2016 (I & B Code) and the attendant rules and regulations cast a major role on the Liquidator concerning the stakeholders. He has to prepare a list of stakeholders and file it with the Adjudicating Authority. He can make modifications to the list with the approval of the Adjudicating Authority. Based on the list of stakeholders, he has to constitute the Stakeholders’ Consultation Committee. He has the power to consult any of the stakeholders entitled to a distribution of proceeds under Section 53 of the I & B Code. Who are the stakeholders? In common parlance, the stakeholders originally included the shareowners, employees, customers, suppliers, lenders and the society. It is a group without whose support a company would cease to exist. Under the insolvency law, Regulation 31-A of the IBBI (Liquidation Process) Regulations, 2016 categorises the stakeholders into the following classes.
- Secured financial creditors
- Unsecured financial creditors
- Workmen and employees
- Operational Creditors
- Shareholders, or partners, if any.
No doubt, these stakeholders are the prime members whose active participation in the CIRP is essential. Nonetheless, in some cases, the Liquidators have reportedly issued notice to the EPFO for participation in the stakeholders’ consultation committee meeting, treating them as operational creditors or Government agencies. In general terms, almost everyone associated with the Corporate Debtor is considered a stakeholder. However, Section 2(k) of the IBBI (Liquidation Process) Regulations, 2016 provides for a definition of the term ‘stakeholder.’ It reads, “stakeholders” means the stakeholders entitled to distribution of proceeds under section 53. This gives rise to a larger question: Does the EPFO come within the meaning of ‘stakeholder’ for the I & B Code and the connected liquidation process?
The EPF dues are outside the purview of the Liquidation Process
Section 36 (4) of the Insolvency & Bankruptcy Code 2016 specifically mandates that the assets owned by a third party that are in possession of the corporate Debtor shall not be included in the liquidate estate assets. In other words, any amount due to the workers from the provident fund, pension fund, and gratuity fund will not form a part of the liquidation estate of the corporate Debtor and will not be used for recovery in liquidation. The Provident Fund and Pension Fund dues payable by the Corporate Debtor expressly falls within the above clause by virtue of sub-clause (a) (iii) to Section 36(4) of the I & B Code. 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. The above provision debars the Liquidator from distributing the money to the stakeholders of the Corporate Debtor under Section 53 of the I & B Code without liquidating the entire EPF arrears (including the Penal damages and Sec.7Q interest).
As the Provident Fund/Pension Fund dues are excluded from the meaning of the ‘liquidation estate,’ and the EPF dues do not fall under the ambit of the waterfall mechanism stipulated under Section 53 of the I & B Code, the EPFO does not fall within the meaning of ‘stakeholder’ as defined under Section 2(k) of the IBBI (Liquidation Process) Regulations, 2016.
Case-laws affirming the exclusion of PF dues from the Liquidation Estate
Section 36(3) of the I & B Code defines the components of the liquidation estate. However, sub-section (3) of Section 36 is subject to the exemption clause contained in sub-section (4). Sub-Section 4(a)(iii) excludes all sums from the liquidation estate due to any workman or employee from the Provident Fund, Pension Fund and Gratuity Fund. The word ‘due’ is important as it connotes that even if the Corporate Debtor has not allocated any separate funds for this purpose, what is due to the workers towards Provident Fund ought to be paid from and out of the properties of the Corporate Debtor before the Liquidator takes possession of the same. The aforesaid proposition of law has been reiterated in various orders of the NCLT/NCLAT across the country. The following orders are of importance.
- Precision Fasteners Ltd. vs Employees’ Provident Fund Organisation.
- State Bank of India vs Moser Baer Karamchari Union.
- V-Con Integrated Solutions Private Limited vs Acharya Techno Solutions (India) Private Ltd., and another.
- Alchemist Asset Reconstruction Co. Ltd. vs Moser Baer India Limited. 
- Nagalimgam Muthiah vs Officer of the Recovery Officer.
- Regional Provident Fund Commissioner-I, Ahmedabad vs Ramchandra D. Choudhary.
- Kushal Ltd. vs Regional Provident Fund Commissioner-I and others.
In the Precision Fasteners case, the Liquidator sought a declaration that the attachment of properties of the Corporate Debtor by the EPFO was null and void so that he could dispose of the properties alongside the other assets of the Corporate Debtor. The Adjudicating Authority observed that the creditors have a property right over the Corporate Debtor’s assets, whereas the workmen dues were interwoven with the right to life. The former right is subordinate to the latter right, and they cannot be treated at par. Because the process of liquidation cannot be obliterated by the attachment of assets of the Corporate Debtor, the NCLT ordered the vacation of the attachment with a direction to the Liquidator to sell the assets and pay off the Provident Fund dues in priority to all other claims payable by the Corporate Debtor in liquidation. The NCLT also held that the overriding effect of Section 238 of the I & B Code would not have any bearing over the asset of the workmen lying in possession of the Corporate Debtor because that asset will not be considered as part of the liquidation estate.
In the State Bank of India case, a financial creditor filed an appeal that workmen’s dues have the same meaning as assigned to it in section 326 of the Companies Act, 2013, which is inclusive of the provident fund dues also. Negating such argument, the NCLAT held: “In terms of sub-section (4)(a)(iii) of Section 36, as all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund, do not form part of the liquidation estate/liquidation assets of the Corporate Debtor, the question of distribution of the provident fund or the pension fund or the gratuity fund in order of priority and within such period as prescribed under Section 53(1) does not arise.”
In the V-Con Integrated Solutions Private Limited case, the Liquidator applied to the Adjudicating Authority to issue appropriate directions to deal with the claim of EPFO. It was contended by the EPFO that Section 53 of the I & B Code is not applicable for the recovery of dues that do not form part of the Liquidation estate under Section 36(4)(a)(iii). They also cited the decision of the Supreme Court in the matter of Kushal Ltd. vs Regional Provident Fund Commissioner and others in support of their contentions. The NCLT, Kochi Bench, in its order dated 18-02-2021, made it clear that the contributions, interest and penal damages payable by the Corporate Debtor are statutory dues and not claims which can be submitted to the Liquidator in Form-G. The order also acknowledges that the EPFO has got the first charge over the defaulter’s assets in terms of Section 11 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
In Moser Baer case, the NCLT directed the Liquidator that in cases where there is any deficiency to the Provident, Pension or the Gratuity Funds, the Liquidator should ensure that the funds are available in all these accounts, “even if their employer has not diverted the requisite amount.”
In the Nagalimgam Muthiah case, the Liquidator sought a priority over the company’s assets under liquidation for the benefit of the creditors; on the other hand, the EPFO contended priority of the Provident Fund dues over any other debts. After hearing both the parties, the NCLT, Chennai decided as follows:
(a) The EPFO is entitled to the satisfaction of the full claim concerning the Provident Fund dues, including the interest.
(b) As the properties of the Corporate Debtor were attached by the EPF authorities before the commencement of the CIRP, it would not amount to a violation of the moratorium under Section 14 of the I & B Code (following the ratio of the NCLAT order in the Regional Provident Fund Commissioner vs T.V. Balasubramanian, Resolution Professional, Sholingur Textiles Ltd.).
(c) The auction conducted by the Liquidator during the pendency of the matter before the NCLT is not sustainable because the order of attachment made by the EPFO before the commencement of the CIRP is legally valid and that the statutory first charge prevalent on the assets of the Corporate Debtor concerning PF dues and not being discharged as provided under Section 11 of the EPF & MP Act, 1952 read with Section 36(4)(a)(iii) of IBC, 2016.
(d) In case the Liquidator is not able to pay off the amount due and claimed by the EPFO within the time stipulated by the NCLT, the EPFO is free to proceed with the sale of the attached properties following the provisions of the EPF & MP Act, 1952 and the sales proceeds, if any leftover after appropriation of EPF dues, shall be refunded to the Liquidator.
PF dues are third party assets held in trust by the Corporate Debtor
The assets belonging to a third party cannot be utilised towards the resolution of insolvency of a corporate debtor, as held by the Supreme Court in the Embassy Property case. The Supreme Court emphasised that Section 18 of the I & B Code – which deals with the duties of an IRP –mandates that the IRP can take over the control of any of the assets over which the Corporate Debtor has ownership rights as recorded in the balance sheet of the Corporate Debtor. Moreover, it is expressly clarified that the term ‘assets’ does not include those assets owned by a third party in possession of the corporate debt. A combined reading of the Explanation to Section 18 and Section 36(4)(a)(iii) of the I & B Code makes it clear that the Liquidator cannot take possession of the properties of the Corporate Debtor to the extent of the third-party rights included in it. In another way, the Provident Fund contributions – particularly the workers’ share deducted from their wages – can be treated as ‘assets owned by a third party (workers) in possession of the corporate debtor held under trust.’ This aspect of the law is further strengthened by clause (3) of Paragraph 32 of the Employees’ Provident Funds Scheme, 1952, which reads, “Any sum deducted by an employer or a contractor from the wages of an employee under this Scheme shall be deemed to have been entrusted to him for the purpose of paying the contribution in respect of which it was deducted. Thus, it is a deemed entrustment, and any default on the part of the Corporate Debtor to make the payments to the EPF authorities in time tantamount to ‘criminal breach of trust within the meaning of Section 405 of the IPC. In such cases, the legal proceedings can be instituted or continued against the employers of the companies concerned. In Bhupender Singh vs Unitech Limited, the Supreme Court held 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 in accordance with law against the erstwhile management.
Even though the law is clear enough to be fairly enforced to safeguard the social security interest of the workers, and the orders of the Adjudicating Authorities and the Appellate Authority have thrown sufficient light on the issues raised by some of the stakeholders, it is unfortunate that an erroneous interpretation of the provisions of Section 36(4)(a)(iii) has been made in a few cases to the effect that only where the Corporate Debtor has kept aloof a separate Fund towards the Provident, Pension and Gratuity Fund, the exclusion clause is applicable. Such interpretation, first of all, defies common wisdom. When the Corporate Debtor cannot pay his debts – the major reason for the insolvency, how could he be expected to keep in reserve the funds to be paid to the Provident Fund authorities? Why should he keep such funds in violation of the provisions in the EPF & MP Act, 1952 only to attract penal damages and interest? No answer. The seemingly conflicting judgements have given rise to further confusion on the treatment of the Provident fund dues. The Insolvency and Bankruptcy Board of India, the regulatory authority of the Insolvency professionals, should intervene in the matter to ensure that the provisions contained in Section 36(4)(a)(iii) of the I & B Code are carefully followed by the Insolvency Professionals in letter and spirit.
 Written in his personal capacity.
 IA No.31/2021 in MA/868/2019 Along with IA/370/2020 in MA/868/2019 IN CP/567(IB)/CB/2018 Along with MA/868/2019 IN CP/567(IB)/CB/2018 | 08-04-2021