Section 53 of the Insolvency and Bankruptcy Code, 2016 ("IBC") provides for the order of priority in which the proceeds from the sale of liquidation assets is to be distributed. The Section includes workmen due and the amounts payable to the Central and State government. Section 36(4) of the IBC lists out the assets which are not to be included as part of the liquidation assets and this includes the amounts payable to workmen or employees from provident fund, pension fund and the gratuity fund. Thus, it is relevant to consider if the amount due by way of provident fund, pension fund and the gratuity fund will be included as part of the priority of distribution of liquidation assets as set out in Section 53 of the IBC or will the same be payable in priority to the distribution waterfall as set out under Section 53 of the IBC. This article seeks to examine the judicial interpretation of Section 36 (4) read with Section 53 of the IBC with respect to the priority of payment of the provident fund dues payable to the workmen.
The National Company Law Tribunal (NCLT) bench of Mumbai and New Delhi and the National Company Law Appellate Tribunal (NCLAT), in their orders during the last three years, have held that the amounts due and payable to any workmen or employee from the provident fund, pension fund and gratuity fund are the assets of the workmen/employees and hence shall not be included in the liquidation estate to be distributed pursuant to the order of priority as set out in Section 53 of the IBC. It may also be observed that dues payable to the workmen includes both the employee and employer contribution to the funds and hence it has been held by the NCLT/ NCLAT that the entire arrears towards the provident fund should be liquidated before paying off the other creditors of the company under liquidation. Thus, the employer contribution to provident fund, pension fund and gratuity fund shall be considered as allocated for payment to the respective funds irrespective of whether such amounts have been released or not.
In 2016, the Joint Parliamentary Committee, in its report had stated, "provident fund, pension fund and the gratuity fund provide the social safety net to the workmen and employees and hence need to be secured in the event of liquidation of a company or bankruptcy of partnership firm." The Committee recommended that all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund should not be included in the liquidation estate assets and estate of the bankrupt.
Analysis of Applicable Case Laws
We have analysed some of the applicable case laws in this regard:
- Precision Fasteners Limited v Employees' Provident Fund Organisation (M.A.No.576 & 752/2018) in C.P.(IB)1339 (MB/2017)
- The point for consideration in this case was whether or not Provident Fund, Pension Fund due and payable to the workers or employees of the corporate debtor will become part of liquidation estate in the light of section 36 of the IBC
- In this case, the Hon'ble National Company Law Tribunal, Mumbai Bench, in its order dated 12 September 2018, observed that dues of provident fund, pension fund and gratuity fund have to be deemed as an asset of the workmen or employees irrespective of whether they have been maintained in a separate account or not by the company under liquidation. It further observed that by including all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund under the Section 36(4)(a) (assets owned by a third party which are in possession of the corporate debtor), an overarching interest and title has been created in favour of the workmen in respect of the provident fund, etc. The judgement further elaborated that The Employees' Provident Funds and Miscellaneous Provisions Act, 1952 ("EPF Act") is a social welfare legislation to protect against the weaker section of the society as enshrined in the directive principles of the Constitution of India. Hence, it can be ascertained that sums due from the provident fund, pension fund and gratuity fund are different from the general term of workmen dues as provided in Section 53 of IBC. Thus the workmen/ employees are free to realise their provident fund, pension fund and gratuity fund dues without being included in the order of priority for distribution of liquidation assets as set out in Section 53 of the IBC. The judgement held that the right of all other creditors over the assets of the company is a property right whereas workmen dues are interwoven with right to life because these amounts are the savings made by the workmen out of their hard earned money for life after retirement and linking such sums on par with the debts of the creditors is nothing but diluting the most valuable and inalienable right of a person.
- It has also been held that since IBC excludes the dues with respect to provident fund, pension fund and gratuity fund from the liquidation estate, the provisions of the IBC shall not apply for realisation of such dues.
- Alchemist Asset Reconstruction Company Ltd. v Moser Baer India,
(IB-378(PB)/2017), order dated 19-3-2019 by Principal Bench, New
The authority held that the overriding effect of section 238 of the IBC over any other law for the time being in force will not have any bearing over the amounts due and payable to the workmen/ employee by way of provident fund, pension fund and gratuity fund (deemed assets of the employees) because those amounts are specifically excluded from liquidation estate under section 36(4)(a), by reason of which, Section 53 of the IBC shall not be applicable to those amounts.
- State Bank of India v Moser Baer Karamchari Union and Ors (AT)
(Insolvency) No.396 of 2019 decided on 19-08-2019 by the National
Company Law Appellate Tribunal, New Delhi The point for
consideration in this appeal was whether or not Provident Fund,
Pension Fund and Gratuity Fund come within the meaning of assets of
the Corporate Debtor for distribution under Section 53 of
The appellate authority upheld the decision of the Deli bench and ruled that the question of distribution of the provident fund or the pension fund or the gratuity fund in order of priority and within such period as prescribed under Section 53(1) does not arise as all sums due to any workman or employees from the provident fund, the pension fund and the gratuity fund, do not form part of the liquidation estate/liquidation assets of the 'Corporate Debtor' as provided in Section 36 of IBC.
However, a contradictory view has been taken in the case of The Regional Provident Fund Commissioner – I vs. Karpagam Spinners Private Limited. In this case, it was pleaded by the Regional Provident Fund Commissioner that the categorisation by the Resolution Professional of the dues under the EPF Act under Section 53 (1) (f) as "other remaining debts and dues is incorrect and that the EPF Dues shall be a first charge on the assets of the establishment and shall have priority against all other dues including the waterfall of liquidation payments as set out in Section 53 of the IBC. However, it was held that, pursuant to 238 of the IBC, the IBC will over ride anything inconsistent with the IBC including the EPF Act and that the workmen dues as payable under the EPF Act will not be considered in priority to priority of payment under Section 53 of the IBC. It is however to be noted that in this case, no reference was made to Section 36 of the IBC.
Thus, the dues of Provident Fund, Pension Fund and Gratuity Fund may be considered to be excluded from the waterfall of priority of payment as set out in Section 53 of the IBC. Such determination by the courts will help protect earnings of the workmen/ employee, thereby securing the fundamental right to life of the workmen/ employees.