The provisions Insolvency and Bankruptcy Code, 2016 specifically provides for treatment for all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund. Further, in the present scenario there is much debate on the admissibility of the claim of EPFO under Sections 7Q and 14B for which different opinions and judgments have been delivered by the Hon’ble Benches and Apex Court of India. The author tried to understand the legal position of admissibility of Interest, Penalties, and Damages claimed by the EPFO in this article.
The distribution of the proceeds from the sale of the liquidation assets shall be distributed in the order of priority as per Section 53 of IBC, 2016. However, the Section 36 (4) of IBC, 2016 excludes from Liquidation Estate all the sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund.
The Apex Court i.e. Supreme Court has categorically held that Section 53(1) of the IBC shall not apply to PF, Gratuity and Pension dues, which are to be treated outside the liquidation process and liquidation estate assets under the IBC since Section 36(4) of the IBC has given outright protection to the workmen’s dues under the provident fund, the pension fund and the gratuity fund, which are not to be treated as liquidation estate assets and the liquidator shall have no claim over such dues.
In Jet Aircraft Maintenance Engineers Welfare Association vs. Ashish Chhawchharia Resolution Professional of Jet Airways, the hon’ble NCLAT harmoniously construed Section 36 and Section 18 of the Code to conclude that EPF dues do not fall under the scope of the term ‘assets’ even during the CIRP and, therefore, the IRP cannot alienate or transfer such assets. The NCLAT observed.
“…the said funds i.e., provident fund, pension fund and gratuity fund maintained by the corporate debtor, have to be utilized fully for payment of provident fund, pension fund and gratuity fund of the workmen and employees and thus, these assets cannot be included in the information memorandum as the assets of the corporate debtor, while inviting the resolution plan”
Further, the Hon’ble NCLAT in Tourism Finance Corporation of India Ltd. vs Rainbow Papers Ltd. has explicitly held that since no provisions of the Code and the EPF Act are in conflict, the application of Section 238 of the Code does not arise. The Apex court concurred with the reasoning set out by NCLAT and refrained from interfering with the judgment, ultimately dismissing the appeal.
Therefore, as the provisions of IBC do not override the EPF Act it becomes pertinent to note the relevance of Section 17B of the EPF Act. Section 17B of the EPF Act creates an obligation on the transferee to pay the contribution and other sums due from the employer whenever an establishment is transferred. Therefore, by operation of Section 17B of the EPF Act, the successful resolution applicant is made liable to pay the provident fund that the corporate debtor owes to its employees.
At this juncture, we can conclude that concludes that the dues of PF are not Assets of the Corporate Debtor, it is only held in trust and the beneficial owners are employees, hence the same cannot be included in the Liquidation Estate formed by the liquidator under Section 36.
It is further notable that the PF dues are to be treated as Secured as the Charge is created by operation of law as provided in Section 100 of the Transfer of Properties Act. So, the dues of PF should be given priority and be paid in full irrespective of the waterfall provided in section 53 of IBC.
Generally, the PF department prefers to submit its claim in 3 parts: One Dues of PF under Section 7A, Second interest on delayed payment under Section 7Q, and Third Penal Damages under Section 14B of EPF & MP Act,1952. Indeed, the dues under Section 7A and Section 7Q (Interest) will go to the account of the workman or employee, but the damages collected by the EPFO are only a penal provision and nothing will go to the workman and employees from the sum of damages. So harmonious reading of Section 11(2) of EPFMA and 36(4)(a)(iii) confirms that the Damages are not the dues to Workman or Employees and can be treated as Government Dues and should be categorized as Unsecured Operational Debt and be payable according to Section 53 of the IBC.
Further Section 14B Provided that the Central Board may reduce or waive the damages levied under this section in relation to an establishment which is a sick industrial company and in respect of which a scheme for rehabilitation has been sanctioned by the Board for Industrial and Financial Reconstruction established under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985, subject to such terms and conditions as may be specified in the Scheme.
However, after enforcement of IBC, the provisions of Board for Industrial and Financial Reconstruction and Sick Industrial Companies (Special Provisions) Act, 1985 were repealed and earlier statutory regime for rehabilitation is now substituted by Insolvency Regime as contained in IBC. Thus, when the Insolvency Resolution Process has been initiated against a Corporate Debtor and the Resolution plan has been approved under IBC, the power of the Central Board to reduce or waive the damages can be exercised about the damages imposed under Section 14B. Paragraph 32 of the 1952 Scheme as extracted above also contemplates a recommendation by Board for Industrial and Financial Reconstruction, 1985 Act being not in force and substituted by the Insolvency Regime there can be now no recommendation for waiver of the damages under Section 14B of the Board for Industrial and Financial Reconstruction. The power of recommendation as contemplated in paragraph 32B scheme can very well be exercised by the NCLT. Hence, SRA may make an application under Section 14B 2nd proviso for waiver of the damages under Section 14B.
Conclusion:
It can be concluded that the PF dues are to be paid in priority, but the treatment of dues under Section 14 B is conflicting as several judgments have different views and explanations and IRP/RP/Liquidator should admit EPFO dues in full including dues under 7A, 7Q, and 14B, and specify the same in the List of Creditors so the Prospective Resolution Applicant makes full provision of EPF dues and use the benefits of waiver of damages by making an application to Central Board.
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