Introduction
An employee during the course of his employment is entitled to a number of social security benefits according to various statutes governing the operation of labour law in India. Two of these statutes are the Employee Provident Funds and Miscellaneous Provisions Act, 1952 [hereinafter “PF Act”] and Payment of Gratuity Act, 1972 [hereinafter “Gratuity Act”], these acts make an employee entitled to PF and Gratuity for the period of employment. However, under a Corporate Insolvency Resolution Process [hereinafter “CIRP”] the non-payment of these dues by the employer grants the employees a status of operational creditors thereby making the dues as operational dues. The manner in which these dues are to be treated and the quantum of such dues is in debate owing to the judgements rendered by the Ld. NCLAT and the Supreme Court. This article thus aims at offering a twofold perspective on the treatment of such dues in the event of a CIRP.
Analysis of the current judicial standpoint on the issue
The existing jurisprudence on the issue at hand can be analyzed from two perspectives (a). dues relating to PF and Gratuity being statutory dues of the first charge and (b). the effect of conjoint reading of Section 36 and Section 53 of IBC.
1. dues relating to PF and Gratuity being statutory dues of the first charge
Section 11(1) of the EPF Act lays down that dues relating to PF are to be paid in priority to other debts, furthermore, Section 11(2) contemplates that the amount due shall be deemed to have first charge over the assets of the corporate debtor (employer). Thus, in effect, Section 11 of the EPF Act makes dues statutory dues of the first charge. As per a ruling of the Supreme Court in Sunil Kumar Jain v Sundaresh Bhatt (2022), 7 SCC 540 the rationale behind charge on assets is the very nature of these legislations, as they are enacted keeping in mind the Directive Principles of State Policy to provide for social security to the employees.
Furthermore, as per Supreme Court in Talchar Municipality v Talcher Regulated Market Committee (2004) 6 SCC 178 the EPF Act and the Gratuity Act have special provisions regarding payment of social security dues owed under the acts, thereby they take precedence over all other laws catering to such dues. Furthermore, it is an established principle of interpretation that a special enactment cannot be held to be overridden by a later general enactment simply because the latter opens up with a non-obstante clause. There should be a clear inconsistency between the two before giving an overriding effect to the non-obstante clause.
Though, EPF Act and Gratuity Act are special enactments. The Ld. NCLAT has in Tourism Finance Corporation of India Limited v Rainbow Papers Limited Company Appeal (AT) (Insolvency) No 354 of 2019 ruled that no provisions of these two special Acts governing the dues are in conflict with provisions of the IBC, viz. the general enactment, thereby exempting them from the overriding effect of the IBC. Hence, the provisions of these special acts apply to the payment of dues under question in the event an undergoing the CIRP. Thus, since the non-obstante clause contained in IBC (Section 238) does not render the provisions of the EPF Act and Gratuity Act nugatory, these dues are to be paid in full as per the provisions of the EPF Act and Gratuity Act.
2. the effect of conjoint reading of Section 36 and Section 53 of IBC
It is argued that IBC superimposes upon any Resolution Plan passed by a Committee of Creditors an obligation to check that payment of debts of operational creditors must not be less than what would have been due to them in the event of the liquidation under Section 53 of IBC. However, in the event of liquidation under IBC as per Section 36(4)(iii) dues relating to provident fund and gratuity are explicitly taken out of the liquidation estate, wherein the employees/workmen are paid such dues in full. As per Supreme Court in __ these dues are kept outside the liquidation estate for the reason that these dues were never a part of the assets of the corporate debtor, thus, in the event of liquidation owing to the effect of Section 36(4)(iii) of IBC these dues are to be paid in full.
Therefore, since Section 53 of IBC contemplates that dues owed to operational creditors cannot be less than what would have been due to them in liquidation and as in the event of liquidation these dues are paid in full, the effect of a conjoint reading of Section 53 and Section 36(4)(iii) cements the conclusion that these dues are to be paid in full in event of a CIRP.
The alternative side of the issue
As argued above while passing a resolution plan the Committee of Creditors is under an obligation to check that the payment made to the operational creditors must be in accordance with the waterfall mechanism as per Section 53 of IBC. However, the distribution of assets in the event of liquidation does not include provident funds and gratuity, these have been explicitly taken out of the liquidation estate. However, in a CIRP, provident fund and gratuity dues, by statutory action have not been kept outside the ambit of the Resolution Plan.
Furthermore, the designation of the Provident Fund and Gratuity dues of an employee as a statutory due of first charge as it creates a security interest in the property of the Corporate Debtor, thereby making the State a secured operational creditor. In the event that such a security has not been realized prior to the commencement of the CIRP proceedings, it would entitle the State to be situated pari passu with other secured creditors to receive proceeds as per Section 53(1) of the IBC.
It is therefore, by virtue of being a secured operational creditor, the maximum claim that a workman may mandatorily be entitled to in the event of CIRP would be at par with
the proportional repayment being made to the secured creditors under Section 53(1) and not to the full payment of the dues pending thereof.
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