NCLAT upheld the priority of provident fund claims in corporate insolvency, thereby securing employee rights.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench led by Justice Rakesh Kumar Jain (Judicial Member) and Mr. Indevar Pandey (Technical Member) reviewed an appeal and observed that the provident fund claims, including statutory dues under the Employees' Provident Funds and Miscellaneous Provisions Act, are excluded from the liquidation estate under Section 36(4)(a)(iii) of the Insolvency and Bankruptcy Code, and must be prioritized for payment from the Corporate Debtor's available funds, irrespective of the existence of dedicated accounts for these dues. This ruling underscores the statutory obligation to pay such claims directly to employees and upholds the principle of equitable treatment among creditors.
The appeal filed under Section 61(1) of the Insolvency and Bankruptcy Code, 2016, questioned the National Company Law Tribunal (NCLT) order directing the Resolution Professional (RP) of Bombay Rayon Fashions Ltd. to set aside provident fund contributions from the Corporate Debtor's bank accounts. This directive was issued following attachment orders by the Employees' Provident Fund Organization (EPFO) prior to the initiation of the Corporate Insolvency Resolution Process (CIRP) on June 7, 2022. The EPFO had attached 17 bank accounts, hindering the RP's ability to manage the Corporate Debtor’s operations and fulfill CIRP costs, while the EPFO maintained their right to recover statutory dues.
The NCLT acknowledged the moratorium established under Section 14 of the IBC, which typically bars attachments, yet held that provident fund dues fell outside the liquidation estate as per Section 36(4)(a)(iii) of the Code. Consequently, it directed that amount be set aside to meet these obligations prior to the release of the accounts. The Liquidator, who replaced the RP, contended that the NCLT’s decision favoured the EPFOs at the expense of equitable distribution among creditors as outlined in Section 53 of the Code. The Liquidator argued that the accounts in question were not specifically designated for provident funds and insisted that statutory dues should be handled under Section 53. Meanwhile, the EPFOs asserted the validity of their attachments, maintaining that the claims were valid due to their pre-existing nature, which rendered them exempt from the liquidation estate.
The Liquidator further criticized the NCLT's reliance on previous judgments, claiming that the order obstructed the liquidation process by restricting access to necessary funds for timely completion of liquidation as required by the Liquidation Process Regulations. The EPFOs defended the NCLT's ruling, arguing that it upheld their statutory obligations to pay provident fund dues, which are excluded from the liquidation estate and cannot be used for recovery during liquidation proceedings.
In assessing the legal implications, the Tribunal referenced the Supreme Court ruling in Sunil Kumar Jain & Ors. v. Sundaresh Bhatt & Ors., which established that provident fund, gratuity, and pension dues are excluded from liquidation estate assets and are not subject to Section 53(1) of the IBC. The Supreme Court emphasized that such dues are to be paid directly to the concerned employees and not to be utilized in the liquidation process. Additionally, the Tribunal reiterated that all claims, including damages and interest under the EPF Act, fall within Section 36(4)(a)(iii) and are not part of the liquidation estate.
Ultimately, the Appellate Tribunal held that the provident fund claims of employees were to be prioritized and paid from the Corporate Debtor's available funds, irrespective of whether dedicated accounts existed for these dues. It directed the removal of the attachment on the bank accounts and mandated the Liquidator to ensure the payment of provident fund dues before proceeding with the liquidation process. The appeal was dismissed with this ruling, affirming the importance of adhering to statutory obligations while balancing the interests of creditors in the insolvency framework.
Ms. Shivani Rawat, Jojongandha Ray, and Tine Abraham Advocates represented the Appellant.
Mr. Hitesh Sachar, Ms. Anju Jain, and Rabi Karmokar, Advocates appeared for Respondent No. 1 and Respondent No. 2.
Mr. Amrendra Kumar, Ms. Sanidhya Kumar, Advocates appeared for Respondent No. 4.
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