Unravelling the Complexity: Conundrum of Treatment of Employees Provident Fund and Apex Court’s Pathbreaking Decision
The Apex Court has shed light on the intriguing legal enigma involving the treatment of Employees’ Provident Fund, Pension Fund, and Gratuity Fund (‘EPF’) under the Insolvency and Bankruptcy Code, 2016 (‘Code’), in a landmark case, State Bank of India v. Moser Baer Karamchari Union. The enigma stems from the Code’s overlapping sections, the Employees’ Provident Funds and Miscellaneous Provisions Act of 1952 (‘EPF Act’), and the Companies Act, 2013. The authors, armed with their legal expertise, have skilfully unravelled the intricacies of this issue, providing a clear and definitive path forward.
Overview of Apex Court Decision
The Supreme Court pointed out that any change to the waterfall mechanism, which determines the priority of debt payments, might upset the balance and interests of secured creditors, operational creditors, and even the government. It emphasised the significance of harmonising Indian insolvency practices with international norms. Following the costs of the bankruptcy resolution procedure and liquidation, the Court determined that secured creditors had the greatest priority, with a fixed time of dues for workers. The Court determined that the workmen’s unpaid dues were appropriately safeguarded in line with the Code’s goals and the mandated waterfall mechanism under Section 53 of the Code. It was highlighted that secured creditors were accepting significant cutbacks, while workers were being reimbursed fairly and equitably. The Supreme Court affirmed the legal view that provident funds, gratuity funds, and pension funds are not part of the liquidation estate and, as such, are not subject to the specified waterfall process under Section 53. This ruling by the Supreme Court brings much-needed clarity to the exclusion of provident fund, gratuity fund, and pension fund dues from the liquidation estate. However, it is important to note that the workers’ dues still hold significance, even though they do not receive priority under the prescribed waterfall mechanism. The ruling ensures the protection of employees’ rights and aligns with the objectives of the Code.
Unravelling the Essence of Section 36 through Purposeful Interpretation
Section 36 (4)(a)(iii) of the Code acts like a protective shield for the provident fund, pension fund, and gratuity fund of employees, keeping them outside the purview of the liquidation estate of a company facing insolvency. This exclusion means that these funds are not subject to the priority order i.e., the waterfall mechanism defined in Section 53 of the Code, which determines how claims are settled against the company’s assets. However, when it comes to claims related to the Employees’ Provident Fund (‘EPF’), there is often a disagreement between the liquidator or the successful resolution applicant and the employees. The disagreement arises because the term “workmen’s dues” mentioned in Section 53 (b) (ii) of the code does not explicitly cover EPF claims. In the case of Precision Fasteners v Employees Provident Fund Organization, the NCLT Mumbai Bench interpreted the term “workmen’s dues” by examining its historical context and comparing it to the previous legal framework of the Companies Act, 1956. The court referred to Section 529 of the 1956 Act, which outlined various components such as wages, salaries, approved holidays, and sums owed to workers from funds like provident fund, pension fund, and gratuity. These components were considered part of the broader definition of “workmen’s dues.”
The term “workmen’s dues” as defined by the Companies Act of 1956, which covered components such as wages, salaries, allowed holidays, and funds such as provident fund, pension fund, and gratuity, was kept in Sections 326 and 327 of the Companies Act of 2013. However, the legislature purposefully excluded EPF dues from the assets of a firm in liquidation under the Insolvency Code (Section 36(4)(a)(iii)). This move not only increased workers’ protection but also enhanced their rights, particularly regarding EPF contributions. As a result, employees can collect their EPF contributions on their own without being subject to the waterfall mechanism as described in Section 53 of the Code. This view specifically accords with the purpose and intent of the EPF Act, which intends to protect employees’ rights as a social welfare legislation as highlighted in the case of the Employees Provident Fund Commissioner. O.L. of Esskay Pharmaceuticals Ltd. by the Apex Court.
Harmonious Coexistence of the Code and EPF Act
One of the main reasons advanced by the liquidator or successful resolution applicant is that Section 238 of the Code supersedes the provisions of the EPF Act. However, in the case of Tourism Finance Corporation of India Ltd. vs Rainbow Papers Ltd., the Hon’ble NCLAT found that there is no contradiction between the provisions of the Code and the EPF Act, leaving Section 238 inapplicable. The Supreme Court affirmed the NCLAT’s rationale and refused to intervene in the judgement, rejecting the appeal. This shows that the requirements of the IBC do not supplant the provisions of the EPF Act, emphasising the importance of Section 17B of the Act. When an establishment is transferred, Section 17B of the Act requires the transferee to pay the employer’s payments and any outstanding dues. As a result of Section 17B’s operation, the successful resolution applicant is liable for paying the corporate debtor’s workers’ provident fund dues. This section emphasises the resolution applicant’s accountability to satisfy the EPF commitments and guarantees that the aim of the EPF Act is fulfilled.
Striking a Chord: Ensuring Consistency Between Section 36 and Section 18 of the Code
The Code provides creditors with two alternatives for collecting debts from corporate debtors: the Corporate Insolvency Resolution Process (‘CIRP’) or liquidation. Notably, Section 18(f) of the Code authorises the Insolvency Resolution Professional (‘IRP’) to take possession and custody of the corporate debtor’s assets. The explanation to Section 18 does, however, allow exceptions to what comprises the corporate debtor’s assets, including assets owned by other parties. This category includes EPF dues, which are employee assets held by the corporate debtor.
The judiciary has unanimously backed the position that EPF dues are assets of employees owned by the corporate debtor and, as such, are excluded from the liquidation estate under Section 36 of the Code. Applying this logic to the CIRP and Section 18 of the Code, it is clear that the IRP is not authorised to manage EPF dues owing to workers, even during the CIRP. The NCLAT interpreted Section 36 and Section 18 of the Code harmoniously in the case of Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia Resolution Professional of Jet Airways to determine that EPF dues do not fall within the scope of the term “assets” even during the CIRP. Consequently, the IRP is prohibited from alienating or transferring such assets. The NCLAT observed that funds such as the corporate debtor’s provident fund, pension fund, and gratuity fund must be fully utilised for payment to employees and thus cannot be included as assets of the corporate debtor in the information memorandum when inviting a resolution plan. This highlights the Code’s proactive approach to protecting EPF dues, ensuring that employees’ rights are safeguarded throughout the insolvency process.
In conclusion, the judiciary’s consistent and harmonious interpretation of the Insolvency and Bankruptcy Code and the Employees’ Provident Funds and Miscellaneous Provisions Act has reinforced the social welfare aspect of the EPF Act and protected the rights of employees regarding EPF dues. The Supreme Court’s ruling in the State Bank of India v. Moser Baer Karamchari Union case has provided much-needed clarity by affirming that provident fund, gratuity fund, and pension fund are not part of the liquidation estate and therefore do not fall under the prescribed waterfall mechanism. This ensures that these funds are adequately safeguarded for the benefit of workers. Additionally, the court’s interpretation of Sections 36 and 18 of the Code has highlighted the inability of the Insolvency Resolution Professional to deal with EPF dues during both the liquidation and Corporate Insolvency Resolution Process. Overall, the judiciary’s stance upholds the objectives of the EPF Act and reinforces the importance of protecting employees’ rights in insolvency proceedings.
This article is written by Mr Aayush Akar & Mr Aditya Gautam, students of National Law University Odisha.