Navigating Interest and Damages in Provident Funds: Various Judicial Perspective
Rishita Sinha
4th Year, BBA LL.B., National Law University Odisha
What are Provident Funds ?
The Insolvency and Bankruptcy Code of 2016 has facilitated insolvency and restructuring processes in the country, fostering efficiency and providing a structured framework for handling insolvency resolutions. Within this framework, due consideration is given to the rights of employees and creditors, who are prioritized over other stakeholders. Section 53 of the code establishes a mechanism known as the waterfall mechanism, outlining the preferred sequence for distributing a corporate debtor’s assets. However, a lingering question pertains to whether the provident fund, along with any associated interest and damages resulting from defaults, falls within the purview of this section and the waterfall mechanism.
Now there are three different things when it comes to EPFO components. First of all, there is employers’ contribution that is simply deduced from their wages and salaries, they are not part of liquidation assets of the corporate debtor. They are simply kept in possession of the CS as a trustee but in actuality they belong to the workmen or employer. It is for this reason they cannot be used in/as liquidation assess a rule clearly laid out in 36(4)(a)(iii).
Then further in this area is the employer contribution which is the amount given by the employer to the respective account of workers / employers. Lastly and most importantly there is interest and penalties which is the amount comparable to EPF department due to delay in submitting the sum which is payable by the employer to employees. This is the result of that delays and the penal charge levied by EPFO for the delay. But now the question is who is the amount remitted to? Is it given to employees or EPFO, is it under statutory dues or workmen dues and in that line of question does it come under Section 53 waterfall mechanism for assets distribution during liquidation of a corporate debtor?
Section 53 of IBC and Provident Fund.
The law set by court is very clear on the matter of provident fund of employees and its involvement in liquidation assets of a corporate debtor, under section 36(4)(a)(iii) that such things will not be part of the liquidation assets of the corporate debtor used for recovery of the corporate debt. A perusal of the section clarifies that it states that any amount due to the workmen or employee from pension, provident, or gratuity fund will not form a part of the liquidation estate of the corporate debtor and will not be used for distribution of the same to other stakeholders.
The court precedents say that employee shall have first charge on the securities of the corporate debtor before the Section 53 of IBC even comes into play. NCLAT in Tourism Finance Corporation of India Ltd. v. Rainbow Papers Ltd. & Ors (2019) ibclaw.in 463 NCLAT clearly directed the resolution applicant to release full provident fund including interest thereof in terms of PF act to the EPFO. And again, in Jet Aircraft Maintenance Engineers Welfare Association Vs. Ashish Chhawchharia RP of Jet Airways (2022) ibclaw.in 861 NCLAT, that all – workmen are entitled for payment of their full unpaid provident dues till the insolvency commencement date and that non-payment of full provident fund amount to the workmen and employees till the insolvency commencement date amounts to non-compliance of provisions of Section 30(2)(e) of the Code. In another case of Moser Baer Karamchari Union vs Union of India(2023) ibclaw.in 59 SC before the supreme court, the bench held that such distinguishment is not arbitrary or violation of Article 21 of the constitution.
Understanding 14 B and 7 Q
Section 14 of EPF act 1952, talks about the power to recover damages, it says that when an employer makes any default in contribution to the Provident Fund, then the central provident fund commissioner or any officer authorized by central government. By a reading of this section, we can infer that the power to recover damages lies with the government therefore it shall come under the purview of statutory dues. / Government.
Secondly if we take a look at Section 7Q it concerns itself with Interest that shall be payable by the em0loter at. The rate of 12% from the day of due amount to its actual payment if there is a default in payment of provident fund by the employer.
Waterfall Mechanism and 14b and 7Q of PF Act.
While the court and statute are in harmony related to the matter of provident fund, the same cannot be said for involvement of 7Q and 14B of PF act in Section 53. NCLT of different places have held different views related to it.
NCLT Bengaluru in case of Shri Addanki Haresh Vs Recovery Officer (2023) ibclaw.in 385 NCLT , EPFO held that damages and interest do have preferential rank in waterfall mechanism under Section 53 as they are government dues , and shall be in priority under Section 53 of IBC 2016.
But on the contrary, in the case of B/S limited vs Employees Provident Fund Organization, of NCLT Hyderabad, court held that damages and interest do not have any preferential rank in waterfall mechanism because according to the court they are not a result of employee’s contribution in any way, however they come under the category of unsecured debt .
Onto a third opinion , the Court in M/s Metkore Alloys & Industries Ltd vs EPFO. Gave two different set of recourses , Accordingly 7Q shall be paid to employee outside Section 53 while 14B shall be paid accordingly .To reach this conclusion the court has relied on the Supreme Court’s decision in Organo Chemical industries & Another vs. Union of India 1979. According to this judgement employees shall only get the damages in form of interest levied on their delayed payment however the damages covered under 14B shall be given to ‘Fund” constituted under Section 5 of IBC 2016.
To continue the saga of confusion, another judgement from NCLT Bangalore in Employee’s Provident Fund Organization v. SDU Travels (P) Ltd., 2024 held that the interest and damages do not get priority like provident fund under section 36, rather they shall be treated as government dues, as they will not be paid to the workmen or employees.
In the Central Board of trustees vs Shri Kumar Ranjan (2023) ibclaw.in 401 NCLAT,
NCLAT refused to make any distinction that entire provident fund shall be paid by resolution applicant without excluding any payment towards interest and damages, when asked the question on how such claims shall be treated
Now the question arises that what shall be the outcome of all these contradictory views, shall interest and damage be discharged according to section 36(4)(a)(iii), and be given priority of first charge or shall them be given place under unsecured debt that by fault comes under section 53 in the (iv) clause or shall it be treated as government dues in accordance with section 53(v) of IBC 2016.
Conclusion and Way Forward
It is well established through a thorough analysis of judgments that there is a disparity in views of National Company Law Tribunal branches regarding the position and place of interest and damages paid on delayed payment of provident fund to the employees. The question imposes an important challenge because based upon this decision, it will come under the ambit of waterfall mechanism and be paid according to the preferential list; however, if it is not to be covered under Section 53, then it will have first charge over the corporate debtor’s financial assets and will be paid on priority basis according to Section 36(4)(a)(iii).
It is also important to determine a certain answer to this question because such uncertainties and disparities may lead to a violation of Section 30(2) of IBC 2016 and may pose a problem for the liquidator. In light of this, a clear and unambiguous section shall be brought into amendment which can tell where interest and damages shall be put in the order of payment during liquidation, and what is the extent of the word “all dues” which is used in Section 36(4)(a)(iii) related to provident fund.
