The National Company Law Appellate Tribunal, Chennai (“NCLAT”) has in its judgment dated September 9, 2022 in the matter of B. Parameshwara v. Assistant PF Commissioner, Employees’ Provident Fund Organization, Bommasandra II and Others [Company Appeal (AT) (Ins) No. 231 of 2021] held that attachment of the bank account of the corporate debtor by the Employees’ Provident Fund Organization (“EPFO”) cannot continue during the Corporate Insolvency Resolution Process (“CIRP”) of the corporate debtor by virtue of subsistence of Moratorium imposed in respect of the corporate debtor in terms of Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Facts

The Hon’ble National Company Law Tribunal, Chennai (“NCLT”) initiated the CIRP of Easun Reyrolle Limited (“Corporate Debtor”) by way of a common order dated May 5, 2020 passed in IBA/1045/2019 and IBA/1169/2019. Thereafter, the appointment of B. Parameshwara (“Appellant/Resolution Professional”) was confirmed during the course of the first meeting of the Committee of Creditors of the Corporate Debtor as the Resolution Professional.

Pursuant thereto, upon reviewing the accounts of the Corporate Debtor, the Appellant came across the orders of attachment dated June 4, 2018, July 20, 2018 and August 23, 2019 (“Attachment Orders”) issued by the EPFO Authorities for attaching the Bank Account of the Corporate Debtor maintained with the State Bank of India, Mookandapalli Branch (“SBI”), followed by the show cause notices dated July 13, 2018, August 30, 2018 and October 1, 2018 (“Notices”) addressed to the SBI for non-compliance of the aforesaid Attachment Orders. Thereafter, SBI replied to such Notices, thereby inter alia stating that the Appellant has ownership over all the assets of the Corporate Debtor till the conclusion of the CIRP and therefore SBI is bound to allow operations/ withdrawals, if any, done by the Appellant in the bank account.

Thereafter, the Assistant PF Commissioner, EPFO, Regional Office, Bengaluru (Koramangala) (“Respondent No. 2”) addressed an e-mail dated September 9, 2020 for a sum of INR 9,60,729/- (Rupees Nine Lakhs Sixty Thousand Seven Hundred and Twenty-Nine Only) for the period of default.

In view of the above, the Appellant preferred an application bearing number IA/1273/2020 before the NCLT. However, the NCLT disposed of the aforesaid application by order dated April 20, 2021 (“Impugned Order”) with a direction to the Appellant herein to make adequate provisions in relation to the amount stated in the Attachment Orders as due towards PF dues and upon being satisfied, the EPFO authorities could remove the Attachment Orders of the bank accounts of the Corporate Debtor.

Aggrieved by the Impugned Order passed by the NCLT, the Appellant preferred an appeal before the NCLAT.

Issues

• Whether an Attachment Orders on bank account of the Corporate Debtor imposed before the initiation of CIRP can continue during Moratorium under Section 14 of the IBC.
• Whether the Resolution Professional is duty bound to make adequate provisions for Provident Fund (“PF”) even though the Corporate Debtor did not have separate PF Account.
• Whether the adjudicating authority can direct Resolution Professional to make provisions for PF without receiving claims for the same by the concerned authority.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the NCLT has passed the Impugned Order by overstepping its jurisdiction. It was further submitted that it is a settled law that the NCLT should have removed EPFO attachments on the bank account of the Corporate Debtor once the Moratorium commenced.

The Appellant relied upon the decision of NCLAT in the matter of Mr. Savan Godiwala, Liquidator of Lanco Infratech Limited v. Mr. Apalla Siva Kumar [Company Appeal (AT) (Insolvency) No. 1229 of 2019] (“Lanco Infratech”). In the Lanco Infratech case, the NCLAT held that where no fund is created in the company for the payment of gratuity prior to the commencement of its CIRP, the liquidator should not be directed to make payment of gratuity to the workmen. Hence, the Appellant contended that where no specific fund towards PF is created in the company prior to the commencement of its CIRP, the outstanding dues cannot be put in the liquidation estate.

Contentions raised by the respondent:

The respondent submitted that there is no illegality in the Impugned Order. The respondent further submitted that the attachment of the bank accounts of the Corporate Debtor is prior to initiation of CIRP and therefore not covered under Moratorium.

In view of the above-mentioned contentions, the respondent submitted that the present Appeal should be dismissed.

Observations of the NCLAT

For deciding the issue as to whether an attachment order on bank account of the Corporate Debtor imposed before the initiation of CIRP can continue during Moratorium under Section 14 of the IBC, NCLAT observed that the Corporate Debtor did not have a separate Employees’ PF in terms of Section 16A of the Employees Provident Fund and Miscellaneous Provisions Act, 1952.

Further the NCLAT observed that the Lanco Infratech decision of the NCLAT is based on similar facts as that of the present case and makes it clear that where no fund is created by a company, the liquidator should not have been directed to make provision of payment of gratuity to the workmen.

NCLAT further analysed Section 14 of the IBC, which deals with Moratorium and observed that from perusal of Section 14(1)(a) of the IBC, it can be inferred that there shall be complete embargo to continue any proceeding against the corporate debtor by any authority till the CIRP is completed and Moratorium is lifted. Hence, it was observed that attachment of bank account of the Corporate Debtor by EPFO cannot be continued when Moratorium is declared under the IBC and proceedings are required to be kept in abeyance till lifting of moratorium. However, the NCLAT clarified that EPFO can continue/ initiate proceedings against the Corporate Debtor after lifting of Moratorium and completion of the CIRP.

NCLAT further observed that Section 238 of the IBC is a “non-obstante clause” by virtue of which, in the event of any inconsistency between the provisions of the IBC and any other law for the time being in force, the provisions of the IBC shall prevail.

Further, NCLAT observed that as Section 36(4)(iii) of the IBC provides that all sums due to any workman or employee from the PF, the pension fund and the gratuity fund shall not be included in the liquidation estate assets and shall not be used for recovery in liquidation. However, NCLAT also observed that in cases where there no PF created in the Corporate Debtor prior to commencement of CIRP, the aforesaid provision shall not be applicable.

Further, for deciding the issue whether the Resolution Professional is duty bound to make adequate provisions for PF even though the Corporate Debtor did not have separate PF Account, the NCLAT relied upon the Lanco Infratech judgment and held that the direction to the Resolution Professional of the Corporate Debtor to make adequate payments towards demand of the respondents is not correct.

Hence, based on the above-mentioned observations, the NCLAT arrived at the observation that the Resolution Professional is not duty bound to make adequate provisions for PF when the Corporate Debtor did not have separate PF Account.

On the issue whether the adjudicating authority can direct Resolution Professional to make provisions for PF without receiving claims for the same by the concerned authority, the NCLAT relied upon relevant provisions from the Insolvency and Bankruptcy Board of India (Resolution Process for Corporate Persons) Regulations, 2016 and observed that it is necessary that any person having a claim over the Corporate Debtor has to prefer claim as stipulated in the aforesaid regulation.

Decision of the NCLAT

The NCLAT held that the NCLT erred in giving direction as contained in the Impugned Order and therefore allowed the Appeal and set aside the Impugned Order. However, NCLAT granted liberty to the respondents to initiate/ continue proceedings against the Corporate Debtor after completion of the CIRP and lifting of the Moratorium in accordance with law.

VA View:

Since the commencement of the IBC, there have been numerous instances of claims pertaining to PF and/or gratuity, wherein no such fund had been created in the Corporate Debtor prior to commencement of the CIRP. Also, in many instances, the claims pertaining to PF and/or gratuity are not filed within the stipulated time period. Nonetheless, the government authorities contend that as per Section 36(4)(iii) of the IBC, all sums due to any workman or employee from the PF, the pension fund and the gratuity fund shall not be included in the liquidation estate assets nor be used for recovery in liquidation.

Often, the government authorities even give effect to attachment of the assets of the corporate debtor, thereby stalling the entire insolvency and bankruptcy process of the corporate debtor. This pronouncement shall go a long way in providing the much-needed clarity on this legal issue.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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