IBC

Provident fund, Pension fund and Gratuity to have priority over waterfall u/s.53 of IBC

NCLT, Mumbai in the matter of Precision Fasteners Ltd vs. Employees Provident Fund Organisation, Thane, Vapi and Vashi
Decision dated 12 Sept. 2018
M.A. 576 & 752 of 2018 in C.P. (IB) 1339 (MB) of 2017

Hon’ble NCLT holds that workmen’s due under the provident fund, pension fund and gratuity fund, even though remained unpaid for several years prior to liquidation commencement date of Corporate Debtor, shall not form part of liquidation estate. And hence such PF etc. dues to have priority over waterfall mechanism u/s.53 of the Insolvency and Bankruptcy Code 2016.

Facts:

Corporate Debtor failed to pay dues under EPF Act for 15 years to EPFO. And EPFO despite it proceeding against Corporate Debtor, could not realise the dues owing one or the other legal implications. However, EPFO could attach the assets of the Corporate Debtor. And that attachment is now challenged under IBC by the Liquidator.

Liquidator filed M.A. u/s. 60(5) of Insolvency and Bankruptcy Code, 2016 (‘IBC’) against EPFO seeking reliefs for declaring attachment of movable and immovable properties (‘Properties’) of the Corporate Debtor’s units at Kalwa, Silvassa and Mahad by EPFO as null and void, so as to enable the liquidator to dispose of the properties under IBC.

Properties of the Corporate Debtor were attached by EPFO for not depositing PF dues of workers/employees since long. Dues of workers/employees were determined u/s.7A of EPF Act.

Liquidator, while acting as Resolution Professional, had intimated EPF (APFC and Recovery officer) about his appointment under IBC and had requested for release of Properties.

EPFO filed its claim before the Liquidator of approx. Rs. 16.06 crores and refused to release the attachment of Properties stating that there is no provision to vacate attachment without receipt of the dues due to it.

The contention of the Liquidator before Hon’ble NCLT:
1. He requires Properties to form Liquidation Estate
2. Dues of EPF does not fall within the meaning of ’secured debt’ under IBC and hence cannot be considered as secured creditor on par with other secured creditors.
3. Properties attached by EPFO have been charged / mortgaged to various creditors (secured creditors) prior to attachment by EPFO. And hence attachment by EPFO cannot lie against the secured creditors. Thus, attachment by EPFO impairs the right of secured creditors.
4. Liquidator u/s.35(b) and (d) is required to take into his custody and control all the assets of the Corporate Debtor and take necessary measures to protect and preserve them.
5. U/s.36 Liquidator is entitled to include encumbered assets in the liquidation estate and hence EPFO be directed to release the attachment over Properties.
6. Section 36(4)(a)(iii) of IBC, dues of PF, Pension fund and gratuity fund fo any workmen or employees already credited to those accounts cannot be included in liquidation estate. But the funds that remained as arrears to be deposited with EPFO, is not required to be considered by the Liquidator and hence attachment over Properties by EPFO for arrears of dues of PF shall be released.
7. IBC overrides other laws including EPF Act 1952 per section 238 of the Code. Also IBC enacted later than EPF Act and hence shall override EPF Act 1952. And hence Liquidator in exercise of power conferred u/s.35 and u/s.36 of IBC can comprise the Properties already attached by EPF in liquidation estate.
8. Liquidator relied upon following judgements:
* Ananta Mills Ltd vs. City Dy. Collector (1972 Comp Cas 476), to say that attachment over an asset is only to prevent alienation of the asset but by mere such attachment of the assets, that creditor will not be conferred with any interest in the said asset. In view of this scenario, the attachment over the secured assets upon which already interest has been created in favour of some other creditors will not alter or nullify the rights of the secured creditors and therefore the attachments shall be declared illegal.
* Leo Edibles & Fats Ltd vs. Tax Recovery Officer & Ors. (WP no. 8560 of 2018, order dated 26.07.2018 passed by Hon’ble High Court of Hyderabad) to say that evenif attachments constitute an encumbrance on the property, still it will not have the effect of taking it out of the purview of section 36(3)(b) of IBC.
* Innoventive Industries Ltd vs. ICICI Bank and Ors. (2017 SCC OnLIne SC 1025) to say that one of the important objectives of the Code is to bring Insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process.
* To say that the Code has overriding effect over other enactments – relied upon (i) Raman Ispat Pvt Ltd vs Executive Engineer, Paschimanchal Vidyut Vitran Nigam Ltd & District Collector, Muzaffarpur Nagar, U.P. & Tahisildar, Office of Tahsildar Sadar, Muzaffarnagar, U.P. [Comp. Application. No. 88/ALD/2018 in C.P. (IB) 23/ALD/2017] and (ii) Surendra Kumar Joshi vs. REI Agro Limited and Mr. Anil Goel, Liquidator vs. Deputy Director, Directorate Enforcement, Delhi [CA (IB) No.453/KB/2018 in CP (IB) No.73/KB/2017] – but states that those cases not being related to PF issue, they are not applicable to present case.

The contention of the EPFO before Hon’ble NCLT:
1. EPFO is a statutory body established under EPF Act 1952
2. EPF Act is a social legislation with an endeavour to protect the weaker sections of the society i.e. workers employed in Factory and other establishments.

From the Judgement, it is not clear whether EPFO contended that dues of workmen, being their savings – which along with the contribution of employer i.e. the Corporate Debtor was not paid and hence there is unjust enrichment to the Corporate Debtor and which will be used to pay off other secured creditors.

Hon’ble NCLT framed the issue for the determination as under:
Whether or not the PF, Pension Fund due and payable to workers or employees of the Corporate Debtor will become part of Liquidation Estate in the light of section 36 of IBC?

Corporate Debtor failed to pay dues under EPF Act for 15 years to EPFO. And EPFO despite it proceeding against Corporate Debtor, could not realise the dues owing one or the other legal implications. However, EPFO could attach the assets of the Corporate Debtor. And that attachment is now challenged under IBC by the Liquidator.

Hon’ble NCLT analysed Section 36(4) of the IBC. It noted that legislature has enumerated five types of assets under clauses a, b, c, d and e of sub-section (4) of section 36 which shall not form part of liquidation estate to avoid ambiguity.
And under clause (a) of Sec.36(4), there are further five kinds of assets owned by a third party but in the possession of the Corporate Debtor. To know implications of these clauses and understand commonality in bringing in these clauses under one head of assets possessed by Corporate Debtor without title over it, Hon’ble NCLT analysed it as under:
1. Sec.36(4)(a)(i) – any asset lying in trust with the corporate debtor for the benefit of the third party, that asset shall be excluded from the liquidation estate.
2. Sec.36(4)(a)(ii) – in bailment contracts, if goods have been in possession of corporate debtor for a specific purpose, corporate debtor being bailee not having title over such asset, that asset shall not be included in liquidation estate.
3. Sec.36(4)(a)(iii) – sums due to any workmen or employees from the provident fund, pension fund and the gratuity fund shall not be included in the liquidation estate.
4. Sec.36(4)(a)(iv) – contractual arrangements or transferring title to Corporate Debtor except for use of the assets will not form part of liquidation estate.
5. Sec.36(4)(a)(v) – any assets notified but the Central Government in consultation with financial sector regulator, shall not be included in the liquidation estate.

Sec.36(4)(a) of IBC is an inclusive definition of assets which are in possession of Corporate Debtor without title over it and which shall not form part of liquidation estate. Since it is inclusive, its meaning cannot be restricted – as held in Oswal Fats and Oils Ltd vs. Additional Commissioner (administration), Bareilly Division, Bareilly and Others [MANU/SC/0216/2010 – para 25].
While Sec.36(4)(a)(i), (ii) and (iv) of IBC deals with the assets in possession of the Corporate Debtor without any title over such assets, Sec.36(4)(a)(iii) and (v) of IBC, need not be seen as to whether title is vested with the Corporate Debtor or not, it is by operation of law that says when provident fund is payable to the workmen or employees, such payment dues have to be deemed as an asset of worker or employees, it makes no difference whether it has been maintained in a separate account or not. In view of this deeming fiction, the workmen/employees need not prove that whether any sum (interest) has been explicitly vested with them or not. So is the case when an asset of the Corporate Debtor is notified by the Central Government in consultation with any financial sector regulator. By including sub-clauses (iii) and (v) along with sub-clauses (i), (ii) and (iv) of clause (a) of sub-section (4), an overreaching interest and title has been created in favour of the workmen in respect to provident fund, etc. and in favour of Government in respect of the asset notified treating these two assets under sub-clauses (iii) and (v) as not included in the liquidation estate.[para 25]

Hon’ble NCLT noted historical background of the legislation of interplay between Sec.529A of the Companies Act 1956 and Section 11 of EPF Act as held in Employees Provident Fund Commissioner vs. O.L. of Esskay Pharmaceuticals Ltd. (2011) 10 SCC 727, wherein it was held that Section 11(2) of EPF Act will have the first charge on the assets of the establishment (here in case of Corporate Debtor) and will become payable in priority to all other debts. In particular paras 15, 16 and 17 of the said judgement was relied upon. Further Hon’ble NCLT considered that from the said Judgement it is clear that EPF Act is a social legislation and in furtherance of the directive principles of State.

Further, Hon’ble NCLT considered Section 529 of Companies Act 1956 and noted that similar provision is retained u/Ss.326 and 327 of the Companies Act 2013. It concludes that by excluding asset of PF etc. dues of workmen/employees from liquidation estate, the rights of workmen/employees are further strengthened as it is left open to the workmen or the PF authority to realise their PF/Pension/Gratuity dues without standing in line of waterfall mechanism.
In view of above, Hon’ble NCLT held that if we go by the provisions of law and the judge made law, it is evident that duty is conferred upon the liquidator and the Tribunal to ensure that PF dues are excluded from liquidation estate so as to enable the workmen realise their savings, as well as the matching contribution, comes from the employer giving priority even above the costs of liquidator because the liquidator is also entitled to realise the costs from the liquidation estate only, whereas the workmen for PF dues need not remain in line to realise their PF dues from the liquidation estate. This right in fact emanated from the fundamental right of Right to life. [Para 29]

Further, Hon’ble NCLT referred to Bandhua Mukti Morcha vs. Union of India (1984 AIR 802), where Hon’ble Justice Bhagwati hold the right to live with dignity under Article 21 derives its right from the Directive Principles of State Policy, particularly from Article 39(e) and (f) and Articles 41 and 42 of the Constitution of India.

Then Hon’ble NCLT expressed the view that right of workmen to savings during working life for later part of life must not be diluted as it is right to life. And hence dues of workmen by way of PF dues are treated under IBC as assets lying with Corporate Debtor and not to be treated as par with other creditors. [Para 30]

When PF contribution from the workmen is deducted from the wages by the Corporate Debtor, it has to be deemed that matching contribution has been allocated by the Corporate Debtor. It makes no difference whether it has been released from the Corporate Debtor or not. Once deduction has been made from the wages of the workmen, it is to be deemed as the asset of the workmen and not as an asset of the Corporate Debtor or the company as the case may be. Hence argument of liquidator that per section 36(4)(a)(iii) of IBC only PF amount already released and lying with EPFO needs to be considered. [Para 31]

Hon’ble NCLT referred to the overriding effect of EPF Act per sections 8 and 11 thereof whereby dues of PF, Pension and Gratuity fund has to be paid in priority to all other debts in the distribution of the property to the insolvent or the assets of the company being wound up, as the case may be. [para 32]. And since the dues of PF, Pension and Gratuity are not forming part of the liquidation estate per section 36(4)(a)(iii) of IBC, the provisions of IBC will not be applicable for realisation of such dues from the assets of the Corporate Debtor. The intriguing aspect lying in thus scenario is that though it is a due payable by the Corporate Debtor, as to PF, Pension, Gratuity Fund dues are considered, the Code has treated it as an asset of the workmen lying with the Corporate Debtor. [para 33].

And hence the overriding effect of Section 238 will not have any bearing over assets of the Corporate Debtor because that asset is not considered as part of the liquidation estate. Further, there is no inconsistency between IBC and PF Act as section 36(4)(a)(iii) excludes PF dues lying with the Corporate Debtor from the liquidation estate and section 53 is not applicable to dues not forming part of liquidation estate. [para 34]

And the PF Act is having overriding effect over and is later in time of Presidency Insolvency Act, Provincial Insolvency Act and the Companies Act 1956. Further, in view of section 36(4)(a)(iii) of IBC, the dues under PF Act are assets of workmen/employees with the Corporate Debtor and hence IBC does not come in the way. [para 35]

It does not matter whether assets are secured or not for realisation of PF dues from the Corporate Debtor because charge created over the assets of the Corporate Debtor by operation of law (EPF Act) will have first charge over any asset of the Corporate Debtor notwithstanding whether it is secured or unsecured. And hence argument of Liquidator that since the charges is created over the assets of CD in favour of other creditors, EPFO is not at par with secured creditors, is rejected. The charge in relation to PF dues will be the first charge in priority to all other debts, including Liquidation cost because the PF dues have been excluded from the liquidation estate. [para 36]

And workmen dues has been assigned u/s.53(1)(b)(i) of IBC the same meaning as under section 326 of the Companies Act 2013 will not have any bearing over section 36(4)(a)(iii) of IBC. The term used in section 53(1)(b)(i) of IBC shall not be construed as PF dues become part of the distribution of assets pari passu basis along with secured creditors, as distribution u/s. 53 will be of assets comprised u/s.36 of IBC i.e. liquidation estate. [para 37]

In the facts of the case, it is held that by virtue of EPF Act and section 36(4)(a)(i) of IBC, the charge will remain in force against the assets of the Corporate Debtor until it has been paid off by Liquidator before making payment to any entity fall under waterfall mechanism devised u/s.53 of the Code. [para 38]

And since caveat is included in sec.36(3) that the same is subject to sec.36(4) of IBC and hence ratio decided in Leo Edibles & Fats Ltd vs. Tax recovery Officer & Ors. By Hon’ble High Court of Hyderabad will not have the effect of removing the charge over assets under PF Act. [para 39]

Since dues under PF Act is not forming part of liquidation estate per section 36 of IBC itself, ratio of Innoventive Industries Ltd vs. ICICI Bank Ltd is not applicable. [para 40]

It makes no difference whether attachments have been made prior to or subsequent to the admission of Company Petition under IBC, the statutory first charge having remained in force against the Corporate Debtor. [para 41]

Accordingly, liquidator was directed to pay the PF dues to EPFO from the liquidation estate before distributing the same to the claimants, as the liquidator has to sale the assets of the Corporate Debtor and pay off the PF dues in priority to all other claims.[para 42]

Comments:

In my view, considering that under section 53(1)(b)workmen’s due for the period of twenty-four months preceding the liquidation commencement date ranks equally with debts due to a secured creditor if such creditor relinquishes security u/s.52 and hence the liquidator is required to distribute the same equally – the conclusion of Hon’ble NCLT in para 37 is not totally correct. What the liquidator is required to do, in such a situation, as in the present case, is to sale liquidation estate, pay off dues of workmen under PF Act for a period prior to twenty-four months preceding the liquidation commencement date. And thereafter, whatever remains shall be paid as per section 53 of the IBC. This is so, as PF dues form part of workmen’s due under section 326 of Companies Act 2013 and hence also under section 53 of the IBC (in view of explanation (ii) to section 53 of IBC).

Standard