Between the Lines | NCLAT: There is no conflict between Section 17B of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and the Insolvency and Bankruptcy Code, 2016 April 22, 2022
Published in: Between The Lines
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The National Company Law Appellate Tribunal (“NCLAT”) has in its judgement dated March 11, 2022 (“Judgement”), in the matter of Sikander Singh Jamuwal v. Vinay Talwar Resolution Professional and Others [Company Appeal (AT) (Ins)No. 483 of 2019] held that there was no conflict between Section 17B (Liability in case of transfer of establishment) of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (“EPF Act”) and the Insolvency and Bankruptcy Code, 2016 (“IBC”), owing to which Section 238 of the IBC (Provisions of the IBC to override other laws) would not come into force. Hence, the payment or non-payment of provident fund (“PF”) dues is not a matter of commercial wisdom, and necessary compliance of law is a must.
In the instant case, the appeal had been filed before the NCLAT under Section 61 (Appeals and Appellate Authority) of the IBC against the impugned order dated April 2, 2019 (“Impugned Order”) passed by the National Company Law Tribunal, New Delhi (“NCLT”). The appellant was an ex-employee of M/s Applied Electromagnetics Private Limited (“Respondent No. 3”/“Corporate Debtor”) who worked as a supervisor (“Appellant”) and he had total outstanding dues of INR 12,49,702/-.
The Appellant complained that the employees and workmen are the backbone of the Corporate Debtor in corporate insolvency resolution process (“CIRP”), who stood by it, by not resigning even when their rightful dues and salaries were not being paid / irregularly paid, much prior to the CIRP. Further, the Appellant complained that the resolution plan (“Plan”) had not considered the full PF dues which amounted to INR 1,35,06,391/- full dues minus the amount of INR 78,00,000/- considered in the Plan (“PF Dues”) of the employees, which Respondent No. 3 in CIRP was supposed to remit to the PF Authority under the EPF Act for the default period from October 1, 2012 to March 31, 2018, as assessed, and communicated by the Assistant Provident Fund Commissioner Noida, by its order dated March 19, 2019 (“APFC Order”).
Pursuant to the issue of demand notice to Respondent No. 3 by one of its employees and on the subsequent filing of his petition, the NCLT by its order dated October 26, 2017, initiated the CIRP of Respondent No. 3 under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the IBC. Mr. Naveen Kumar Jain was appointed as the Interim Resolution Professional (“IRP”) by the NCLT who took charge on November 18, 2017. Subsequently, Mr. Vinay Talwar, the Resolution Professional (“RP”/ “Respondent No. 1”) was confirmed by the NCLT on January 29, 2018. The liabilities of the Corporate Debtor as verified by the RP, amounted to INR 68.50 crores.
S.M. Milkose Limited, the resolution applicant (“Respondent No. 2”), had provided an amount of INR 12.99 crores towards settlement of all past dues and liabilities of the Corporate Debtor which included an amount of INR 9 crores towards secured financial creditors and INR 50 lakhs towards unsecured financial creditors. The employees and workmen were being given an amount of INR 1.03 crores against the claim of INR 8.17 crores. The Impugned Order stated that the Respondent No. 2 would infuse INR 5 crores as working capital requirement of the Corporate Debtor out of the sale proceeds of the assets of the Corporate Debtor. The Respondent No. 2, who was also one of the financial creditors of the Corporate Debtor, submitted the Plan. The Plan, after revisions, was submitted by the Respondent No. 2 to the RP, and was subsequently approved in the 9th meeting of the committee of creditors (“CoC”) of the Corporate Debtor held on July 21, 2018. The Government of India by an order under Section 7A (Determination of moneys due from employers) of the EPF Act, has determined an amount of INR 1,35,06,391/- as the dues from the Corporate Debtor for the period up to March, 2018, against which only INR 78 lakhs had been provisioned for in the Plan submitted by the Respondent No. 2. The NCLT had approved the Plan by Impugned Order in terms of the approval of the CoC and had observed that “While we are not endorsing any specified waivers or extinguishing of claims, the Resolution Applicant shall be entitled to all such waivers as are legally permissible under law”.
Respondent No. 1, Respondent No. 2 and Respondent No. 3 are collectively referred to as “Respondents”. In view of the above, the Appellant in the instant case prayed for setting aside the Impugned Order.
Contentions raised by the Appellant:
The Appellant submitted that there was a misconduct on the part of the Respondent No. 1 in calculating the PF amount. The Appellant alleged that there was a disparity in releasing the percentage of payment between the dues of financial creditors and the rightful dues of employees and workmen. Calling the plan discriminatory and non-payment of PF Dues a violation of the provisions of the EPF Act, it was also alleged by the Appellant that initiation of CIRP had been filed first by the employees and workmen under Section 9 of the IBC, and their interest was not taken care of in the Plan. The Plan provided for unequal treatment to the employees and is violative of the principles enshrined under Article 14 of the Constitution of India. The Appellant submitted that apart from the fact that the Plan was discriminatory insofar as it relates to the employees, the financial creditors had been paid much more (21.6%) than the operational creditors (12.67%).
Further, the Appellant complained that it had not been paid the gratuity amount as required under the Payment of Gratuity Act, 1972. The Appellant highlighted the large gap between the percentage of payment released to the financial creditor and the workmen. The Appellant challenged the basis on which Respondent No. 2, being engaged in a totally unrelated business in dairy industry, was eligible to take over a highly technical and specialized field working on projects of national importance requiring expertise in the related field. Further, it was alleged that the director of the Respondent No. 2 is a related party and is covered by Section 29A (Persons not eligible to be resolution applicant) of the IBC, thereby being disqualified for being considered as a resolution applicant.
Contentions raised by the Respondent:
The Respondent No. 1 submitted that there was no infirmity in the Impugned Order. It was submitted that against the verified claims of the workmen / employees of INR 8.17 crores, the RP had proposed an amount of INR 1.03 crores. It was argued that the appeal itself was not maintainable in view of the Hon’ble Supreme Court’s judgment in case of Swiss Ribbon Private Limited and Another v. Union of India and Others [2019 4SCC 17]. It was also submitted that it is the ultimate decision of the CoC to decide what to pay and how much to pay to each class or sub-class of creditors. The Respondent No. 1 contended that the payments approved by the CoC were the commercial decision of the CoC and the Appellant had no locus standi to challenge the commercial decision of the CoC.
Moreover, the Respondent No. 2 and the Respondent No. 3 contended that:
Observations of the NCLAT
The NCLAT observed that the Plan failed to consider the payment of PF Dues as computed in the APFC Order. The Plan was approved by the NCLT on April 2, 2019. The amount so computed is INR 1,35,06,391/-; whereas the provisions had been made for INR 78 lacs only. The NCLAT observed that financial creditors were being paid 21.6% whereas operational creditors were being paid 12.67%. The NCLAT clarified that by Section 30(2)(e) of the IBC, the Plan itself did not contravene any of the provisions of the law for the time being in force, however, the NCLAT further observed that the RP/NCLT had to look at the compliance of the provisions of law. As per the provisions of the EPF Act, the Respondent No. 2 was also liable to pay the contribution and other sums due from the employer under any provisions of the EPF Act as the case may be in respect of the period up to the date of such transfer.
The NCLAT observed that the explicit provisions of the EPF Act need to be complied with. When read with Section 17B of the EPF Act, it is amply clear that the Respondent No. 2 was required to pay the contribution and other sums due from the employer as per the provisions of the EPF Act. The NCLAT laid down that it was the duty of the RP/NCLT/NCLAT to see that the law is being complied with, and it is not a question of the commercial wisdom of the CoC. The NCLAT clarified that it was not looking into the aspect of parity for payment of financial creditors and operational creditors, as that came under the ambit of commercial wisdom of the CoC.
Decision of the NCLAT
The NCLAT relying on the judgement by the NCLAT in Tourism Finance Corporation of India Limited v. Rainbow Papers Limited and Others [2019 SCC Online NCLAT 910] laid down that since no provisions of the EPF Act is in conflict with any of the provisions of the IBC, the applicability of even Section 238 of the IBC did not arise. The PF Dues were not the assets of the Corporate Debtor as amply made clear by the provisions of Section 36(4)(a)(iii) of the IBC, which could be used for recovery in liquidation. The NCLAT directed the Respondent No. 2 to release full PF Dues in terms of the provisions of the EPF Act, immediately by releasing the balance amount of the PF Dues, thereby modifying the Impugned Order.
The NCLAT in this Judgement has dealt with the interplay between the EPF Act and the IBC. The NCLAT has by this Judgement explained the scope of the commercial wisdom of the CoC. The instant Judgement has provided clarity on whether the entire PF dues need to be paid or not under a resolution plan. As rightly pointed out by the NCLAT, the PF dues cannot be utilized as assets to be used for recovery in liquidation. Through this Judgement, the NCLAT has provided much needed relief to the employees and workmen of a company undergoing CIRP, securing their right to receive PF and gratuity dues, so that the CIRP in its aftermath does not endanger the interests of the employees and workmen.
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