Is the Resolution Plan under the Insolvency Code binding on the EPF authorities?
– By Chidambaram Ramesh, [Author of The Law of Employees’ Provident Funds – A Case-law Perspective]
In a landmark judgement, the Supreme Court held that all dues, including the statutory ones, due to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period before the date on which the Adjudicating Authority grants its approval under Section 31(1) of the I & B Code could be continued. This article examines whether statutory contributions payable under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, are similarly subject to the legal embargo.
In Ghanashyam Mishra and Sons (P) Ltd. vs Edelweiss Asset Reconstruction Company Ltd. (2021) ibclaw.in 54 SC, the Supreme Court addressed the issue of whether the statutory creditors are bound by a resolution plan, once it is approved by the Adjudicating Authority under sub-section (1) of Section 31 of the Insolvency & Bankruptcy Code, 2016. The Supreme Court held that once a resolution plan is duly approved by the Adjudicating Authority, the claims as provided in the resolution plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. The Supreme Court further held that all claims which are not part of the resolution plan stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim which is not part of the resolution plan.
Legal Requirements of the Resolution Plan
A resolution applicant who intends to take over the operations of the Corporate Debtor as a going concern submits a resolution plan following Section 30 (2) (b) of the I & B Code and Regulations 31 and 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. According to Rule 36(1) of the Regulations, the Resolution Professional is required to submit the Information Memorandum to each member of the Committee of Creditors. The said Information Memorandum shall contain the details of all material litigation and an ongoing investigation or proceeding initiated by Government and statutory authorities, as per the mandate of Rule 36(2)(h) of the aforesaid Regulations.
Subsequently, a resolution applicant may submit a resolution plan to the resolution professional in terms of Section 30(1) of the I & B Code prepared based on the information memorandum. Section 30(2) stipulated that the resolution professional shall examine each resolution plan received by him to confirm that each resolution plan,
(a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the repayment of other debts of the corporate debtor;
(b) provides for the repayment of the debs of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53;
(c) provides for the management of the affairs of the corporate debtor after approval of the resolution plan;
(d) the implementation and supervision of the resolution plan;
(e) does not contravene any of the provisions of the law for the time being in force;
(f) conforms to such other requirements as may be specified by the Board.
An explanation was added to sub-section (2) of Section 30 that “for the purposes of clause (e), if any approval of shareholders is required under the Companies Act, 2013 (18 of 2013) or any other law for the time being in force for the implementation of actions under the resolution plan, such approval shall be deemed to have been given and it shall not be a contravention of that Act or law.”
In fact, the Resolution Professional is required to certify in Form H (Compliance Certificate) that the Resolution Plan is not in contravention of any of the provisions of law for the time being in force.
Appeal Provision if the Resolution Plan is approved in contravention of the law
Sub-Clause (3) of Section 61 provides that an appeal against an order approving a resolution plan under section 31 may be filed inter alia on the ground that the approved resolution plan is in contravention of the provisions of any law for the time being in force. Interpreting this provision, the Supreme Court observed the limited judicial review available to Adjudicating Authority lies within the four corners of Section 30(2) of the Code, which would essentially be to examine inter alia that the resolution plan does not contravene any of the provisions of law for the time being in force.
Meaning of the phrase “Laws for the time being in force”
The meaning and scope of the phrase “rules for the time being in force” was discussed by the Supreme Court in the case of Management of Municipal Corporation of Delhi vs Prem Chand Gupta. The Supreme Court held that the phrase occurring in Regulation 4(1) of the Delhi Municipal Corporation Service Regulations, 1959 means ‘the rules in force from time to time” and not the rules in force only at the first point of time in the year when the service regulations were promulgated. The Madras High Court also held that the scope and ambit of the phrase cannot be circumscribed and frozen only to the point of time of the enactment. If such was the intention of the Parliament, it would have employed a different phraseology, namely, “laws at present in force,” instead of the phraseology “laws for the time being in force.” The phrase “laws for the time being in force” would necessarily mean laws in force from time to time and not laws in force only at a fixed point of time. The expression “for the time being” denotes time indefinite and refers to an indefinite state of facts which will arise in future and which may vary from time to time,” the Madras High Court observed.
Government of India’s Clarification
In an illustration of Section 30(2)(e) of the I & B Code 2016, which directs resolution professionals to ensure that any such resolution plan “does not contravene any provision of the law in force at the time,” the Ministry of Corporate Affairs wrote to stakeholders: “…the resolution plan must not contemplate 100 per cent foreign investment in a corporate debtor if the FDI policy/relevant foreign exchange laws permit only up to 75 per cent foreign investment.” The requirement of Section 30(2)(e) of the code is to ensure that the resolution plan considered and approved by the committee of creditors and the adjudicating authority is compliant with the provisions of the applicable laws, and therefore, is legally implementable, it added.
Non-Payment of the EPF dues is a violation of law
Now, the entire argument boils down to the question of a resolution plan’s legal validity in the case of ignoring to pay the Provident Fund arrears and monthly contributions payable under the EPF & MP Act, 1952.
In the case of Committee of Creditors of Essar Steel India Ltd. Vs. Satish Kumar Gupta & Ors.  ibclaw.in 07 SC the Supreme Court made it plain that labourers cannot be denied their legal rights while considering the feasibility of a resolution plan. The underlying idea is that the workmen’s welfare dues must be paid in full, even if such benefits have not been deposited after deduction by the former Corporate Debtor. As an example, the Supreme Court cited the case of compliance under the Electricity Act. Take the case of a resolution plan which does not provide for payment of electricity dues. It is certainly open to the Committee of Creditors to suggest a modification to the prospective resolution applicant to the effect that such dues ought to be paid in full so that the carrying on of the business of the corporate debtor does not become impossible for want of a most basic and essential element for the carrying on of such business, namely, electricity.
In a similar vein, the failure to make Provident Fund contributions also constitutes a breach of the code’s legislative mandate under Section 30(2)(e). The non-payment of the statutory contributions under the EPF & MP Act, 1952 and the Schemes framed thereunder is a contravention of Section 6, 6-A and 6-C of the aforesaid Act. Moreover, an offence relating to default in payment of contribution by the employer is a cognizable offence under Sec.14 AB of the aforementioned Act. Likewise, the non-payment of the workers’ share of the Provident Fund contributions, after deduction from their wages, is a criminal offence under Section 405 of IPC, punishable under Section 406 of IPC. In the case of IDBI Bank vs EPC Construction Limited, the NCLT, Mumbai directed that the pre-CIRP outstanding dues of the employees (including the Provident Fund contributions), if any, would be covered in the Resolution Plan and the same will be revealed as and when the Resolution Plan is considered by the Adjudicating Authority. The dues of the employees during the CIRP would be covered in the CIRP cost and the same will be dealt with under the Resolution Plan in compliance with the labour laws.
EPFO is not a stakeholder under the CIRP
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. 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 under sub-clause (a) (iii) to Section 36(4) of the I & B Code. 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.
Non-Compliance of Labour Laws vitiate the Resolution Plan
The use of the non-obstinate provision entrenched in Section 238 of the I & B Code to supersede welfare legislation like the EPF Act is unjustified because the welfare legislations and the Code operate in independent realms. Even yet, an overriding power should not be used to deprive workers of their fundamental rights.
Giving a compliance certificate under Section 30(2) of the I & B Code although the Resolution Plan does not provide for compliance with the provisions of the EPF & MP Act, as well as misrepresenting the facts in the Information Memorandum concerning the pending recovery proceedings against the Corporate Debtor, may get the resolution professional into trouble. In rare instances, the Disciplinary Committee of the Insolvency and Bankruptcy Board of India has terminated the registration and barred the Insolvency Professional from reapplying for 10 years based on substantiated accusations of filing a fake Compliance Report.
To summarize, a resolution plan that does not allow for the payment of Provident Fund dues does not conform with the statutory requirement set out in Section 30(2)(e) of the I & B Code, and so is void.
 With effect from 6-6-2018 by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018
 Regulation 39(4) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016
 AIR 2000 SC 454