The National Company Law Appellate Tribunal, Principal Bench (“NCLAT”) in its judgement dated November 2, 2022 (“Judgement”), in the matter of Assam Tea Employees Provident Fund Organization v. Mr. Madhur Agarwal and Another [Company Appeal (AT) (Insolvency) No. 262 of 2022] held that provident fund (“PF”) dues are not the assets of the corporate debtor and they have to be paid in full.

Facts

HAIL Tea Limited (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) by an order dated January 21, 2020, passed by the National Company Law Tribunal, Kolkata Bench (“Adjudicating Authority”).

In pursuance of the public announcement, the Assam Tea Employees Provident Fund Organization (“Appellant”) submitted its claim in Form B (Proof of claim by operational creditors except workmen and employees) under Regulation 16 of the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulation, 2017 for an amount of INR 2,10,13,797.92/- (“Claim”), on account of default on part of the Corporate Debtor to deposit its PF contribution, administrative cost, interest for delay of the PF dues deposit, interest for delay of deposit linked insurance dues accruable from March 28, 2019 till September 26, 2019.

The Resolution Professional of the Corporate Debtor, Mr. Madhur Agarwal (“Resolution Professional”) admitted the entire Claim of the Appellant. The resolution plan was submitted by the successful resolution applicant of the Corporate Debtor (“Resolution Plan”) which earmarked INR 1,07,21,592/- against the Appellant’s Claim. The said Resolution Plan was approved by the Adjudicating Authority by an order dated January 3, 2022 (“Impugned Order”). However, the Resolution Professional only made a part payment of INR 64,30,222/- to the said Appellant.

Aggrieved by the Impugned Order, the Appellant filed an appeal before the NCLAT (“Appeal”).

Issue

Whether PF dues of the Corporate Debtor are to be paid in full.

Arguments

Contentions raised by the Appellant:

The Appellant contended that PF dues of the Corporate Debtor were entitled to be paid in full. The Appellant submitted that the Resolution Professional had admitted its Claim, and therefore, the Corporate Debtor was under the obligation to discharge the said Claim, in full. Moreover, non-payment of the PF dues in full, is in violation of Section 30(2)(e) (Resolution plan to not contravene any other laws) of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

The Appellant also referred to Section 11(2) (Priority of payment of contributions over other debts) of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) and submitted that PF dues are not dues of any other operational creditor of the Corporate Debtor and are required to be paid in full.

Contentions raised by the Corporate Debtor and the Resolution Professional (“Respondents”):

The Respondents opposed the Appeal filed by the Appellant on the ground that the limitation for filing an Appeal under Section 61 (Appeals and Appellate authority) of the IBC is only 30 days and that in the instant case, the Appellant has filed the Appeal after a delay of 25 days. Thus, the Appeal being barred by limitation, ought to be rejected.

The Respondents also submitted that the approval of the Resolution Plan is within the commercial wisdom of the committee of creditors. Moreover, the Resolution Professional contended that the Appellant was an operational creditor and haircut was given to all financial creditors and operational creditors.

Observations of the NCLAT

The NCLAT observed that the Appellant’s Claim admitted by the Resolution Professional was not disputed between the Appellant and the Respondents.

The NCLAT placed reliance on its recent judgment in Regional Provident Fund Commissioner v. Ashish Chhawchharia, Resolution Professional for Jet Airways (India) Limited and Another [Company Appeal (AT) Ins. No. 987/2022] (“Jet Airways Case”) wherein the appellant had challenged the resolution plan on the ground that Section 11 of the EPF Act requires priority over all other dues and Section 36(4)(a)(iii) (Liquidation estate) of the IBC excludes PF dues from the liquidation estate of the corporate debtor.

In that regard, the NCLAT had, while relying on the judgment of the Hon’ble Supreme Court (“SC”) in the case of Maharashtra State Cooperative Bank Limited v. Assistant Provident Fund Commissioner and Others [(2009) 10 SCC 123] held that priority for payment of debt under Section 11 of the EPF Act had to be made in the way specifically provided under Section 53(1) (Distribution of assets) of the IBC and PF dues are not subject to it. In the Jet Airways Case, the NCLAT also clarified that the corporate debtor’s non-payment of PF dues, in full, would result in breach of Section 30(2)(e) of the IBC.

With regard to the contention of the Respondents that the Appeal was barred by time, the NCLAT observed that the Appeal was fully covered by the judgement of the SC in Re: Cognizance of Extension of Limitation [Suo Moto Writ Petition No. 03/2022], wherein the SC extended the period of limitation for all appeals to additional 90 days. Therefore, the objection of the Respondents was not accepted by the NCLAT.

The NCLAT also observed that the Resolution Professional’s contention that the Appellant was an operational creditor and both operational creditors and financial creditors had taken haircuts, could not be accepted.

Decision of the NCLAT

The NCLAT opined that its decision in the Jet Airways Case would be squarely applicable to the instant case and held that PF dues are not assets of the Corporate Debtor and they have to be paid in full.

Therefore, the NCLAT directed the successful resolution applicant of the Corporate Debtor to discharge the payment of PF dues amounting to INR 2,10,13,798/-, in full.

VA View:

The dictum of law in the Jet Airways Case is explicit that the priority for payment of debt under Section 11 of the EPF Act has to be looked into alongside the mechanism which is specifically provided under Section 53(1) of the IBC, thereby making it clear that PF dues are not subject to distribution under Section 53(1) of the IBC.

Sections 30, 36(4)(a)(iii) and 53(1) of the IBC, read in conjunction with Section 11(2) of the EPF Act, echo the priority of PF dues in relation to a company undergoing CIRP.

The NCLAT has correctly observed that PF dues are not the assets of the corporate debtor and they have to be paid in full. While it may be a well settled position of law that the commercial wisdom of the committee of creditors cannot be interfered with, compliance with the law is a must.

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

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