Priority of dues is always a contentions subject as we know that the provisions related to priority is incorporated in the number of statutes. This problem gets more complicated when in a federal structure the power of legislation rests with both State and Central Legislature. Likeness for the phenomenon of priority is such that even in some municipality statutes you may find a provision of priority for municipal dues. In that kind of scenario, while adjudicating on the question of priority, we need to keep in mind the intention of the legislature and the purpose for which the concerned Act was enacted while adjudicating on the question of priority. For that purpose, we have to keep in mind the following factors:
1. Nature of dues – Collective or
2. Objective of the Act – Revenue or Social or Investment or
3. Purpose for which Priority Clause was incorporated in the Act
4. Time period of Priority-It is provided for a limited time period or without any
5. End effect in case of non-recovery of dues – Collective or
While we are discussing the priority of dues under IBC then we have to keep in mind the prime objective of the IBC-2016. The prime objective is time – bound resolution of corporate persons and in case, resolution is not forthcoming then automatically moving for liquidation except in the case of individual insolvency. We are aware that in case, any corporate entity is unable to pay the liabilities on time then creditors are provided with the option to move an application for resolution before the adjudicating authority. We know that there may be many reasons when a corporate entity is unable to pay the time bound liabilities, for example: –
1. Problem of liquidity – in this case, asset of the entity is more than the liabilities but the entity may be facing the problem of liquidity due to that entity is unable to pay the time bound liabilities. Nature of assets of the entity is of such a nature that assets cannot be sold separately to maintain the entity as a going concern or continuity of operations. In that case, an entity may not be in position to discharge the liabilities immediately but the entity may go for resolution as case of the entity is not fit for Here the following situations may arise: –
First Situation: – Any creditor may extend the financial help to owners/promotors considering that assets of the entity are more than liabilities or entity may be transferred as going concern to some other party. Previous owners will be paid by the buyers or resolution applicant the remaining balance out of the sale price after deducting the liabilities form of the assets of the entity.
Second situation: – Assets of the entity are less than the liabilities of the entity. In that case, creditors may come forward to take a hair cut in their dues to maintain the entity as a going concern. As soon as assets will match with the liabilities, either the previous owner may come forward to run the entity or entity may be transferred to new management as going concern at the stage of resolution.
2. In case, both the above said solutions are not coming forward and assets of the entity is not sufficient to meet the liabilities and no prospective buyer has come forward within the given time period to buy the entity then entity will automatically go for liquidation except in the case of individual insolvency.
At this point, we have to keep in mind that liabilities of corporate debtor will be divided in the following parts: –
1. Dues which need to be kept out in full out of the asset of corporate debtor or undisputed dues or dues that does not require any adjudication or third party assets kept with the corporate debtor in (Undisputed Dues)
For example: – Any assets on lease or rent with the corporate debtor or PF & Gratuity dues of workers which he was supposed to pay as per statutory requirement (whether deducted or not from the salary of the workers is not a matter of concern). These dues are need to be marked separately out of the asset of the corporate debtor as per Section 18 of the Code.
2. Cost of the resolution
3. Debt of financial creditors which include both secured and unsecured creditors.
4. Debt of operation creditors.
5. Debt of the Government or Crown dues
6. Debt of any decree holder.
Resolution is the stage where adjudicating authority with appointment of any natural professional such as Resolution Professional will try to sort out the dispute between the creditors and debtor by keeping the entity as going concern. We have to keep in mind that at the stage of resolution the prime motto is to preserve the value of assets of the entity and maintain the entity as a going concern. For that purpose, adjudicating authority is rested with the extraordinary power to impose a moratorium under section 14 of IBC – 2016 right from the date entity was admitted for resolution. The purpose of the moratorium is to prevent any adverse action against the entity and keep the entity as a going concern. It is stage that if lease of any equipment is with the entity then lessor is not even allowed to take back the leased equipment during the agreed period of the lease provided that Resolution Professional will get in to the shoes of corporate debtor and he is duty bound to make payment of lease rent to lessor as if it was paid by the Corporate Debtor. in case, lessor is allowed to take back the equipment then Resolution Professional will not be in position to maintain the entity as the going concern.
At this stage, the resolution professional will call claims from all the parties who has liabilities against the entity and he will segregate the claims as per Section 18 of the Code in two parts: –
1. Undisputed liabilities: – This is not the asset belonging to the corporate debtor but only kept with the corporate debtor either in the capacity as a trustee or for any third party use. These dues need to be paid to be in full without any adjudication. For example, as per Section 18 of the Code these dues are: –
1. Third party asset kept in trust with Corporate Debtors such as PF & Gratuity Dues of the workers with the statutory liability on the corporate debtor to pay in the PF or Gratuity Fund.
2. Any third party equipment kept with the corporate debtor on lease.
3. Asset of any Indian or foreign subsidiary of corporate debtor
4. Any other asset as notified by CG.
2. Disputed liabilities: — This includes dues of financial creditors, operational creditors and decree holders.
The purpose of this classification of assets of the corporate debtor under Section 18 of the Code is that any resolution applicant who is going to make bid for purchasing the assets of the corporate debtor will get a clear idea that what is going to get in case, he is taking over the entity as the going concern.
We can understand the importance of the classification under Section 18 of the Code through an illustration: –
Illustration
Suppose a corporate debtor has an asset of Rs.100 Crores in his possession or in balance sheet on the date corporate debtor was admitted for resolution. Out of the total asset in the possession of the corporate debtor, Rs. 2 Crore is the PF dues of the workers, which the corporate debtor was supposed to pay but he has not paid till the date he was admitted for resolution. Rs. 1 Crore is the Gratuity which was due to workers, which the corporate debtor was supposed to deposit in the Gratuity Fund but he has not deposited yet. Rs. 1 crore is value due of any equipment which is on lease to Corporate Debtor by any lessor for use for time being but not actually belonging to the corporate debtor.
Now, it is the duty of RP to call claims of all parties and carry out proper classification/segregation of asset in the possession of the corporate debtor. For example, in the above illustration asset in possession of the corporate debtor will be Rs. 100 crores but actually asset belonging to corporate debtor is only Rs.96 crores. In this illustration asset belonging to workers kept with the corporate debtor in trust only is Rs. 3 Crores (which include Rs. 2 Crores PF dues and Rs. 1 Crore Gratuity dues) and Rs. 1 Crore is the value of the equipment belonging to the third party which is kept with the corporate debtor for third party use only. So, in nutshell, we can say that this asset of Rs. 4 Crores is not the asset belonging to corporate debtor but it is kept only with the corporate debtor. Now, Resolution Professional can classify the asset in the possession of the corporate debtor as under: –
| Total Asset with the Corporate Debtor | Third Party Asset | Asset Belonging to Corporate Debtor |
| 100 Cr. | 04 Cr. | 96 Cr. |
This classification is of paramount importance for any resolution applicant who is going to make bid for entity as going concern so that he may know the exact value of asset in against the liabilities of the corporate debtor. For example, in the above said illustration the resolution applicant should know that he is going to get asset of Rs.96 Crore against the total liabilities of Corporate Debtor.
At this stage, the question may arise that whether a Resolution Professional has to return/part the third party assets at the stage of resolution itself. The answer is “NO”. In case, Resolution Professional is paying/releasing third party asset immediately at this stage then Resolution Professional cannot maintain the entity as going concern and it will defeat the purpose of Moratorium. It will create the operational difficulties for the entity and it will create the problem of liquidity to maintain the entity as a going concern. We know that resolution is the time bound exercise and in case, valuable time is lost in the payment of third party dues then it will lead to liquidation of any due to paucity of time even if entity is not worthy of liquidation otherwise.
At this stage, resolution applicants will submit bids against the asset of Rs.96 Crores keeping in mind the total liabilities of the corporate debtor. These bids will be presented before creditors by the Resolution Professional. Here, two situations may arise: –
In the first situation, the Resolution Plan will be presented before the Adjudicating Authority for approval. After approval of Resolution plan, the entity will be transferred as going concern to successful resolution applicant as per conditions of the Resolution Plan. At this stage, Resolution Professional and Resolution Applicant will be responsible for payment /release of third party dues or successful resolution applicant may take a stand that he will pay the third party due on taking over the entity as going concern. Successful Resolution Applicant will be responsible for payment of due of the creditors as per resolution plan.
In case of a second situation, the entity will go for liquidation then Liquidator is duty bound to release /pay the third party dues and mark the remaining Rs. 96 Crore as the liquidation estate of corporate debtor.
We have seen that in the past 07 years that number of disputes are going on between PF/Labour authorities and Creditors/Resolution Applicants/RP for reasons being that Insolvency and Bankruptcy Board of India(IBBI) has not issued any regulation under section 18 of the IBC-2016 for proper classification of the asset of the corporate debtor. There may be reason that officials are not clear on this subject and they are not having clarity between Workman dues and PF dues or any other reason best known to them. This is the major bone of contention in many disputes. Most of the resolution professional are coming from the profession relating the accounting and they see the dues of poor workers from the angle of debtor and creditor without understanding the legal concept of third party asset.
As per Code, appointment and removal of RPs by the adjudicating authority is on the recommendation of Committee of Creditors(COC) therefore all RPs are under pressure of COC to get better pay, facilities and commission etc. In most of the cases, they are not carrying out the proper classification of the dues as per Section 18 of the Code stating the reason that IBBI has not issued any such regulation. They are not carrying out the proper segregation of the asset in the possession of the corporate debtor as the third party asset and asset belonging to the corporate debtor. They take the shed that they will pay against the claims strictly as per priority paid down under section-53 of the code. They are classifying the dues of workers as Government due or dues belonging to Operational Creditors. They are unable to understand that section 53 is only providing for distribution of assets belonging to the corporate debtor as per waterfall mechanism provided in section-53 of code but they are insisting on the inclusion of the PF and Gratuity dues of the poor workers to carry out the distribution among the creditors under Section 53 of the Code.
Section 53 of the Code is not providing any mechanism for distribution of any asset among the creditors which is not belonging to the corporate debtor. Suppose, as stated above in the above illustration, PF dues of Rs. 2 Crores of the workers is an asset belonging to workers lies in the hands of corporate debtor as a trustee with the responsibility to deposit in either with the statutory trust (EPFO OF CBT) or in trust created with corporate debtor with the permission or under supervision of statutory trust.
In case, any secured creditor is not relinquishing his right to enforce the security right and no asset available with the corporate debtor then at first, third party asset which has already entered in to the secured asset or asset in the possession of the corporate debtor will be taken out first. Then the remaining asset will be handed over to the secured creditor to enforce the secured interest under SARFAESI Act-2002. In that case, the interest of the Workmen will be represented by the Liquidator. Secured Creditor will realize the sale proceed and pay the Workmen’s due under Section 13 of the SARFAESI Act-2002 to the Liquidator and secured creditor will be liable to pay the proportional cost of the liquidation to the liquidator under Section 52 of the Code.
Few Misconceptions about Workers Assets
Now I will discuss a few misconceptions regarding PF and Gratuity dues and regulator has not issued any clarity on the subject:
1) Continuance of assessment proceeding against Corporate Debtor during moratorium: – In very recent order in the matter of REGIONAL PROVIDENT FUND COMMISSIONER Vs EXCEL GLASS LIMITED IA(IBC)/127/KOB/2023 IN IBA/258/CB/2019 Cochin Bench of Hon’ble NCLT has passed a stricture against PF authorities that they have violated moratorium by continuing the assessment proceeding for levy of damages against corporate debtor during the moratorium period. Hon’ble NCLT has given the liberty to liquidator to approach IBBI to seek permission to file prosecution against PF In my personal opinion, this is not the correct legal interpretation by Hon’ble NCLT regarding the moratorium. Purpose of the moratorium under Section 14 is very limited that is to keep the asset under the possession of the corporate debtor intact during the period of resolution and carry out resolution of entity as going concern. For that purpose, any coercive or executive proceeding against the corporate debtor is barred by moratorium U/s. 14 of the Code. Procedure for assessment of dues under EPF&MP Act-1952 is incorporated in Section 7A to assess the dues payable under Section 6 and Section 14 of the EPF&MP Act-1952. Proceeding U/s. 7A of the EPF&MP Act-1952 is not an executive court proceeding but only a proceeding similar to any civil court, which pass a decree under section 7A of the EPF&MP Act-1952. The purpose of the assessment proceeding is to decide the quantum of dues payable by the corporate debtor and only and only PF authorities are competent to decide the same. In case, dues are not paid by the employer i.e corporate debtor within the statutory time period then a certificate will be issued by authorized officer to the recovery officer U/s. 8B of the EPF&MP Act-1952 to recover the dues by taking the coercive action against the corporate debtor. Merely passing of an assessment order and issuing a recovery certificate is not at all an executive proceeding. Assessment of dues is merely a process for quantification of dues which is in fact more helpful in the resolution proceeding. Any action under section 8B to 8G to recover the dues by the Recovery Officer can be termed as coercive action not the action of assessment of dues under section 7A of the Act.
Hon’ble Apex Court and Hon’ble High Courts in number of judgments held that assessment proceeding against corporate debtor is not barred by the moratorium. I had a similar kind of problem while adjudicating a dispute between a contractor and principal employer during the assessment proceeding u/s 7A of EPF&MP Act-1952 for assessment of PF dues payable by contractor for employees engaged with the principal employer. During the assessment proceeding, the principal employer has taken a stand that any dispute between contractor and principle employer is to be resolved by any arbitrator appointed with the consent of both contractor and principal employer and PF authorities has no jurisdiction in the matter. I have not accepted the contention of the principal employer for the reason that PF authorities have the full jurisdiction to decide the quantum of dues payable by the employer for the employees. I have clarified that only and only PF authorities have the competency to decide the quantum of the PF dues and arbitrator is only competent to decide proportion of the total dues to be distributed between contractor and principle employer in terms of the agreement between them for payment. Similar in this case, RP is not the authority to quantify the PF dues and that authority as a civil court lies with PF authorities only. In case, assessment proceedings are not allowed during the moratorium period then PF authorities will not be in position to submit a claim of PF dues on behalf of workers.
Therefore, assessment proceeding during the moratorium is not only necessary to complete the statutory requirement but it is even more helpful for timely completion of resolution proceeding.
2.Excluded Dues v/s Priority Dues: –
In most cases, RPs are not able to understand the difference between priority dues & excluded dues. They simply take a stand that any distribution will be carried out as per section 53 of the Code. We need to understand the difference between exclusion and priority. PF dues take the shape of asset belonging to workers as and when get due for payment as per statutory timelines whether or not deducted from the salary of workers and it get into the asset of corporate debtor with liability on the corporate debtor to pay either in statutory trust or trust maintained with corporate debtor under the permission and guidance of statutory trust. For example, in the above illustration, the asset in possession of the Corporate Debtor is Rs.100 crores but Rs. 2 Crore is the PF dues of workers. This was an asset belonging to poor workers and get into the asset of CORPORATE DEBTOR as third party dues. Corporate Debtor was not having any ownership right over this asset. It was the duty of the Corporate Debtor to pay it to statutory trust. Practically to be seen, the asset of Corporate Debtor for transfer as going concern during the resolution or for distribution during the liquidation is not Rs. 100 Crores but it is only Rs. 98 crores. Some RPs give contention that in case, no assessment is carried out by PF authorities then they are unable to pay the PF dues. In this regard, we have to keep in mind that assessment of PF dues by PF authorities is nothing but quantification of PF dues. On the day, these dues get due for payment then get in the property/asset of Corporate Debtor and Corporate Debtor is liable to pay these dues on priority before casing out any transfer or sell of asset, let it be by himself or by any third party such as RP or liquidator and trust. In the nutshell, we can say that excluded dues need to be taken out of the asset of corporate debtor under Section 36 of the Code and priority dues need to be paid as per priority under Section 53 of the Code as per waterfall mechanism provided in the Code. PF dues and Gratuity due of the workers is the excluded dues while workmen’s dues and dues of creditors will be treated as priority dues. Priority dues has charge over the asset of the corporate debtor while the excluded dues are not part of the asset of the corporate debtor so need to be excluded in full.
3. Maintenance/Creation OF Fund: –
Some RPs try to avoid payment of PF or Gratuity dues on the reasoning that the employer has not created or maintained a separate fund for these dues. We have to keep in mind that the employer has not been given any authority to create a fund but the Fund for PF & Gratuity dues is the creation of respective statutes. In some cases, the employer has been given limited authority to create a trust by seeking exemption from the Income Tax Authorities on the recommendation of statutory trust with due approval of appropriate govt. In the context of EPF&MP Act-1952 that is called as Exemption.
In one case, professional was able to obtain on order from Hon’ble NCLAT Chennai that employer has not maintained separate PF Fund under section 16A of the EPF & MP act -1952 so PF dues will not get priority in payment. As per my limited knowledge and in my humble opinion, section 16A of EP & MP Act-1952 not yet enforced but it is unfortunate that professional has obtained order under a section which is not yet enforced. It is unfortunate that this type of stand was taken with misrepresentation of the fact that creation of trust and creation of Fund is an entirely different concept. Even if issue of creation of fund is taken into literal sense then also this is matter of concern only at the time of consideration of workmen’s dues under section 53 of the Code but not having relevance at the time of payment of excluded dues such as PF and Gratuity dues under Section 36 of the Code.
In case, we are taking this as a reference then we can negate legislative provisions U/s 36(4) of Code by taking shed of section 16A EPF & MP Act 1952 which is not even brought into of enforcement.
4. Priority in payment- Contribution/Interest/Damage:-
In very recent order Kochi Bench of Hon’ble NCLT has ruled that only contribution payable under EPF&MP Act-1952 enjoy the benefit of exclusion under section 36(4). In this regard, we need to keep in mind that PF dues actually collected, invested and returned back to individual employees. The Legislature has created a statutory trust for that purpose named as CBT. CBT is not having any independent source of funds and the employer is duty bound to pay PF dues in the individual PF accounts of employees through challan. In case, the employer is making a delay in payment of statutory dues then he is liable to pay 12% simple interest under section 7Q of the EPF & MP Act 1952. In turn, CBT is paying monthly compound interest to employees. Dues under section 7Q of EPF & MP Act-1952 is compensatory in nature therefore no appeal provision is provided in the statute. Board is not having any independent source of income and in case, these dues are not recovered on time then the board will not be in position to meet its commitment. It is clear that interest U/S 7Q of Act is part of contribution itself.
Hon’ble Apex Court while adjudicating on the priority provision in section 11 of EPF & MP Act 1952 in the matter of Maharashtra State Co-operative Bank Limited v/s APFC in CIVIL APPEAL NO.6893 OF 2009 (Arising out of S.L.P. (C) No.15243 of 2007) in 2009 has held that PF dues has priority over the dues of secured creditors. Here, we have to keep in mind that in section 11 of EPF & MP Act 1952, the legislature has used the word “dues” not the word “contribution” as such. This matter again went back to Hon’ble Apex Court for reconsideration in 2013 in matter of Maharashtra State Co-operative Bank Limited v/s Kannad Sahakari Sakhar Karkhana Limited and Others in 2013 and Hon’ble Apex Court again clarified that not only contribution but PF dues u/s 7Q(interest) and 14B(Damage) of the EPF & MP Act- 1952 also has priority over the dues of secured creditors.
As discussed above, PF dues u/s 7A and 7Q are part and parcel of each other. As for as, dues under 14B of Act in concerned, these dues attain finality after an assessment/levy order passed by adjudicating authority u/s 14B of Act and employer has failed to exercise the remedy of appeal. After that, in case, entity is a sick unit and a scheme of rehabilitation is sanctioned by the Board for Industrial and Financial Reconstruction(BIFR) then CBT is competent to grant waiver of damage on the damages levied by the adjudicating authority on the recommendation of BIFR. Now, BIFR is not existing so in new Social Security Code – 2020 this power of recommendation is vested in Hon’ble NCLT. In case, any entity is transferred as a going concern at the state of resolution that is one kind of revival or rehabilitation of sick entity then Hon’ble NCLT is only competent to recommend to CBT for waiver of damages. We have to keep in mind that jurisdiction of Hon’ble NCLT in this matter is only limited up to make recommendation only and that is only in the case of successful resolution but not in the case of liquidation.
We have seen in the last few years that Hon’ble NCLT is trying to act as an adjudicating authority under EPF & MP Act-1952 and deciding that whether only contribution is payable on priority U/s 36/(4) of the Code and damage is not payable like that. Once, legislature has used the word “dues” then we being adjudicating authority is not allowed to read between the lines, we being the adjudicating authority is not allowed to create the law but we are given the limited authority to adjudicate on the law. We are not allowed to create any artificial line of priority on the ground of contribution, damage and interest when the legislature has used the plain wording “dues”.
In my humble opinion and limited knowledge, it is not the jurisdiction of Hon’ble Company Court to decide that whether combination only payable on priority or interest and damage are also payable till the time the legislature has used the wording “PF DUES” in its wisdom. we have to keep in mind that RP/Creditors are having option to file appeal against the order passed by PF Authorities and in addition to that RP/Creditors are having option to file application for waiver of damages before CBT with recommendation of Hon’ble NCLT.
5. Workmen’s dues V/s PF dues: –
At first, we have to keep in mind that till the date entity was working any payment due to poor workers let it be salary, PF dues and Gratuity are an asset belonging to workers and employer has no right over these dues as it was already earned by them so this is coming under the category of excluded dues lying in possessing of Corporate Debtor and liquidator is duty bound to release these dues on priority before marking the asset of Corporate Debtor for liquidation.
Many professionals are putting up contention that dues belonging to last 2 years before the date of liquidation are part of workman’s dues and same is payable under section 53 of the Code on priority. They further taking stand with company court that in case employer has not maintained any provident found account U/s 16A EPF & MP Act-1952 then even workman’s dues is not payable pari-passu with secured creditors. In one case, professional was even has been successful in obtaining the order from Hon’ble NCLAT by taking shed of section 16A of EPF & MP ACT 1952 despite the fact that this section was not even enforced. We have to keep in mind that in Gratuity Act-1952 and EPF & MP Act -1952, the word “employee” is used instead of the word” workmen.” The word “Employee” has broader meaning as it includes both workmen and supervisors. PF dues under section 36(4) is the asset belonging to workers, which is already earned by them while workmen’s dues under section 53 is nothing but one kind of compensation to workers as worker are deemed to be retrenched on the date of liquidation therefore they are provided benefits equivalent to 02 years’ (24 months) service in the form of compensation. We know that workman’s dues are defined in section 325(3) of the Companies Act-2013 and workman’s dues are ranked pari-passu with secured creditors as per section 326(1) of Companies Act-2013. It means workmen are given the status of secured creditor and the legislature has not stopped even at that point but the legislature vide proviso to section 326 (1) of companies clarified that even though workmen dues in full are ranked pari-passu with dues of secured creditor but workmen dues payable for two years’ period prior to date of liquidation will be paid in priority over the dues of all creditors even on secured creditors. That means, workmen are treated not only as secured creditor but as priority secured creditors even for workmen’s dues.
In the nutshell, we can say that PF and Gratuity dues are asset belonging to poor workers therefore these dues will be paid on priority as excluded dues under section 36(4) of the Code. Workmen’s dues equivalent to two years of service prior to the date of liquidation will be paid on priority over the dues of secured creditors and remaining workmen’s dues will be paid as pari-passu with secured creditors.
6. Liquidation of Corporate Debtor Not Workers: –
PF dues are the asset belonging to poor workers therefore these dues are not part of the liquidation estate. For example, in the above said illustration asset in possession of CORPORATE DEBTOR may be Rs.100 crores but actually it contains PF dues of 2 Crores so the actual asset belonging to CORPORATE DEBTOR is only Rs.98 Crore. In case we are including the full asset of Rs.100 crores in the liquidation estate and carrying out distribution u/s 53 of code then it will to not only be liquidation of CORPORATE DEBTOR but it will also be liquidation of PF dues of poor workers as if liquidation of individual worker is taking place. We have to keep in mind that we are carrying out liquidation of the corporate entity not the liquidation of any asset already earned and belonging to workers.
7. Nature of Dues: –
While adjudicating the dispute on the priority, we have to keep in mind the nature of dues whether it is individual or collective. We can understand this with the help of one example. For example, dues of the Income Tax Department or any other Government Department recovered in liquidation. We all know that in case, dues of the Income Tax Department are recovered then these dues will be deposited in a Consolidated Fund of India. In case, these dues are not recovered then end effect will not fall on any individual tax payer but it will be distributed among all tax payers so its end effect will be almost negligible on each individual whereas PF dues are deducted and collected from salary of individual worker and deposited in to account of individual worker. Ownership over PF dues lies with the individual worker and at the end of day this is paid back to the individual worker. EPFO or CBT is not the owner but only a trustee for these dues. In case, these dues are not paid on priority then it is going to affect the individual worker. The same is the case with Gratuity dues but that is not applicable for other dues like dues of State Government, Central Government or dues of any local authority. We have to keep in mind that EPFO is a machinery created by Central Government but EPFO is run by CBT which is not a Government body.
Road Map Ahead
We have to keep in mind that in mind that in the Code time limit is fixed for resolution of dispute but in case, RP/Creditors are engaged in un-necessary dispute with PF /Gratuity/Labour authorities then it will consume the valuable time which could have been used for resolution. It may lead to liquidation of a corporate person which was fit for resolution as well as erosion of the asset of the corporate person. We faced the problem in an earlier system of liquidation through company court that it was a very time consuming process. In some cases, it used to take 20 years to liquidate the company. In order to counter this problem, we brought the Code. In case, we engaged again in this problem due to non-clarity on the subject and dispute between RPs/ liquidators / and PF/ Gratuity/Labour authorities then it will lead to same situation which we have faced earlier.
Steps May Be Taken
1. IBBI being a regulator of the sector needs to take active steps in this matter and need to clarify the process of the resolution and liquidation with the help of illustrations. IBBI needs to simplify the process flow to avoid any kind of confusion on the
2. IBBI needs to issue clear regulation U/s 18 of Code for proper classification or segregation of the asset in the possession of the corporate debtor. IBBI has not even Issued any form for claimant of third party dues or third party asset in the possession of the corporate debtor. This is leading to loss, complication and harassment of successful Resolution Applicants due to non-clarification on the In this regard, clear direction need to be issued to RPs/liquidator similar to already provided in Section 178 of Income Tax Act 1961 where it is mandated that liquidator on taking over the entity for liquidation will intimate the jurisdictional Income Tax Authority and call for dues of the Income Tax Department. In the similar fashion, IBBI may issue clear direction to all RPs/ liquidators that they will call the claims of third party dues such as PF/Gratuity/Labour Authorities and mark these dues separately for information of Resolution Applicants as provided in section 18 of the Code so that proper classification or segregation of the asset in the possession of the corporate debtor may be carried out.
3. We knew that through the Code we move to creditor lead resolution/ liquidation. In case any committee is being constituted for any reform in this sector by IBBI then generally representatives of creditors and financial regulators are being included in the committee. we know that PF, Gratuity and ESIC dues have a big stake at the time of liquidation /resolution specially in service sector establishments where the number of employees are so So, it is suggested that representatives of the workers such as State Labour departments, EPFO and ESIC need to be included in any committee in future for any reform in the Code so that interest of the workers can be represented as workers are the veins on any industry and we cannot run the industry without protection of worker’s interest. We need to understand that these dues and these bodies belong to poor workers but not to the Government so we need to see them in different prospective from the pour Government Department like the dues of Central Government, State Government or Dues of any local authority.
4. We know that creditors are on the driving seat in the Code. Even RPs/ Liquidators are appointed on their it is the duty of liquidators/RPs to represent the interest of workers during resolution / liquidation. In earlier system of liquidation, official liquidator used to a Government employee so he used to work without any pressure of creditors but now RPs/Liquidators are private persons being appointed on the recommendation of creditors. In that circumstances, we have to keep in mind that workers are not part of COC. RPs/ liquidators are unnecessary engaging in legal disputes with PF/Gratuity/Labour authorities citing the reason that IBBI has not issued clear regulation under section 18 of Code which is harmonious with section 36 of the Code. They sometimes act as if they are not independent person but acting as an agent of the creditors and playing in the hands of creditors. This is leading to the situation of “might is right” and adversely affecting rights of poor workers. Hence, IBBI need to issued clear direction for calling claims for excluded dues or third party dues and classification of asset in possession of corporate debtor under section 18 of Code as well as payment on priority as soon as entity is admitted for liquidation so that excluded dues can be paid in priority as used to be in earlier Companies Act 2013 with responsibility on liquidator for payment within 30 days.
5. IBBI needs to include officials of EPFO, ESIC and State Labour authorities in deliberation in this We know that this is a new law and it is at the stage of evolution. We all know any law related to liquidation is so comprehensive that it requires understanding of revenue, corporate, banking, financials and labours laws. I think IBBI does not have so much expertise on the subject. In case, any changes in Code are carried with through deliberation among major stakeholders then it will fulfill the purpose for which this law was enacted otherwise it will create the situation in the favour of creditors as if “Might is right.” We know that workers are not included in COC that means that their dues will be paid in full without any kind of deliberation and only creditors need to take a call on their dues whether they will take a haircut or not that was why only financial creditors are included in the COC. It is joint responsibility of IBBI, adjudicating authority, adjudicating authorities under the respective Acts and RP/Liquidator to protect the interest of workers in the liquidation.
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