Payment of EPF Dues is a Prerequisite to the Validity of a Resolution Plan – By Chidambaram Ramesh

Payment of EPF Dues is a Prerequisite to the Validity of a Resolution Plan

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

The question of what happens if the NCLT-approved Resolution Plan does not include provisions for the payment of EPF due in its entirety has been answered by the NCLAT. In the case of Sikander Singh Jamuwal versus Vinay Talwar and Others,[1] the NCLAT has ruled that no sections of the EPF Act contradict with any of the I & B Code’s provisions and if the Resolution Plan fails to provide for paying the entire EPF dues, the Resolution Applicant is also liable to pay the EPF arrears. The Appellate Tribunal held that what is required is not the ‘commercial wisdom’ of the Committee of Creditors, but rather ‘compliance of the law.’

In a recent order, the National Company Law Appellate Tribunal, New Delhi has ruled that what is paramount is not the ‘commercial wisdom,’ but rather the ‘compliance of the law,” when it comes to non-payment of the EPF arrears by the Corporate Debtor. The brief facts of the case are as follows.

            Sikander Singh Jamuwal, the Appellant was an employee of M/s Applied Electromagnetic Private Limited, the Corporate Debtor. The grievance of the Appellant was that the ‘Resolution Plan’ approved by the Adjudicating Authority does not provide for the payment of the Provident Fund dues in their entirety and hence it is discriminatory insofar as it relates to the employees and also violative of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Records revealed that the Assistant Provident Fund Commissioner, Employees’ Provident Fund Organisation had determined a sum of Rs.1,35,06,391/- as the dues payable by the Corporate Debtor for the period up to March 2018, whereas the Resolution Plan provisioned for payment of Rs.78,00,000/- only towards the EPF arrears. Surprisingly, the EPF authorities have not questioned the validity of the Resolution Plan.  The Resolution Plan was approved by the NCLT on 2^nd April 2019.  It was contended by the Resolution Professional that the payments approved by the Committee of Creditors are a commercial decision of the CoC and the Appellant-worker has no locus standi to challenge the commercial decision of the CoC. To buttress his argument, he quoted the decisions of the Supreme Court in the case of K.Shashidhar vs Indian Overseas Bank [2] and CoC of Essar Steel India Limited vs. Satish Kumar Gupta and others.[3]

            Considering the arguments of both sides, the NCLAT cited the mandate of Section 30(2)(e) of the Insolvency & Bankruptcy Code, 2016 which unequivocally stipulate that the Resolution Plan should not contravene any of the provisions of the law for the time being in force. The NCLAT made a further reference to Section 17-B of the EPF & MP Act, 1952 which speaks that the liability on the employer would not cease because of the transfer of the company, but would continue to exist and would be fastened upon the transferee, though limited to the value of the assets obtained by the transferee by such transfer. Section 17-B of the EPF & MP Act, 1952 reads,

            Liability in case of transfer of establishment. – Where an employer, in relation to an establishment, transfers that establishment in whole or in part, by sale, gift, lease or licence or in any other manner whatsoever, the employer and the person to whom the establishment is so transferred shall jointly and severally be liable to pay the contribution and other sums due from the employer under any provision of this Act or the Scheme or [the Pension]Scheme or the Insurance Scheme, as the case may be, in respect of the period up to the date of such transfer: Provided that the liability of the transferee shall be limited to the value of the assets obtained by him by such transfer.

Citing the foregoing provision, the NCLAT concluded that the Resolution Applicant is also obliged to pay the contribution and any monies due from the Corporate Debtor under any provision of the EPF Act for the period up to the date of the Company’s transfer. This further requires that the explicit provisions contained in the EPF Act needs to be complied with in the Resolution Plan and duty has been cast on the Resolution Professional/NCLT/NCLAT to ensure this aspect of law. Additionally, the NCLAT cited its prior decision in Tourism Finance Corporation of India Ltd. vs. Rainbow Papers Ltd. In that case, it was decided that because the Provident Fund dues are not included in the Corporate Debtor’s Liquidation Estate, Section 238 of the I & B Code does not apply; additionally, directions were issued to the Successful Resolution Applicant to pay the entire Provident Fund arrears (including interest) following the EPF Act. It is worth noting that the NCLAT’s ruling was eventually affirmed by the Supreme Court.[4]

Thus, for a Resolution Plan to be legitimate, it must account for EPF arrears and ensure complete compliance with the EPF & MP Act, 1952. The Resolution Professional and the Adjudicating Authority share the statutory responsibility for ensuring this legal mandate.

Reference:

[1] Company Appeal (AT)(Ins) No.483 of 2019; Case Citation: (2022) iblaw.in 221 NCLAT

[2] [Civil Appeal No.10673 of 2018]

[3] [Civil Appeal No.8766-67 of 2019]

[4] (2020) ibclaw.in 145 SC, decided on 20-05-2020 (Supreme Court).