PROVIDENT FUND DUES UNDER IBC LIQUIDATION

In a recent ruling, Supreme Court of India dismissed an appeal filed by Employees Provident Fund Organization (EPFO) against an approved Insolvency Resolution plan which was duly affirmed by NCLAT, Delhi bench. In Employees Provident Fund Organisation Versus Rachna Jhunjhunwala & Anr. - 2026 (8) TMI 108 - SC Order, the resolution plan provided for payment of PF dues even though it does not provide for uncrystallized claims of interest and damages regarding which proceedings were not initiated by the CIRP commencement date. Therefore, court held that there was no blatant violation of the statutory mandate of IBC.

Thus, in a scenario where Provident Fund dues were excluded from liquidation estate, but claims for interest and damages under EPF Act were uncrystallized and no proceedings in respect thereof had been initiated before commencement of CIRP such claims constituted contingent liabilities. Further, where Committee of creditors did not provide for such contingent liabilities in resolution plan, its decision could not be faulted as resolution plan provided for actual provident Fund dues, resulting in no violation of statutory mandate of IBC.

Statutory Provisions

This case involves interpretation of Sections 30 and 36 of IBC, 2016 and sections 7Q and 14B of Employees' Provident Fund and Miscellaneous Provisions Act, 1952.

Accordingly, while section 30 provides for manner of submission of resolution plan, section 36 provides for liquidation estate. The liquidator shall form an estate of the assets which will be called the liquidation estate in relation to the corporate debtor. The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.

Further, the following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation:-

(a) assets owned by a third party which are in possession of the corporate debtor, including-

1. assets held in trust for any third party;
2. bailment contracts;
3. all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund;
4. other contractual arrangements which do not stipulate transfer of title but only use of the assets; and
5. such other assets as may be notified by the Central Government in consultation with any financial sector regulator.

Moreover, section 7Q of Employees' Provident Funds & Miscellaneous Provisions Act, 1952, provide that the employer shall be liable to pay simple interest at the rate of twelve percent per annum or at such higher rate as may be specified in the scheme on any amount due from him under this Act from the date on which the amount has become so due till the date of its actual payment. Higher rate of interest specified in the scheme shall not exceed the lending rate of interest charged by any scheduled bank.

Section 14B of Employees' Provident Funds & Miscellaneous Provisions Act, 1952 deals with power to recover damages by authorized officer from employer by way of penalty not exceeding the amount of arrears. 'Damages' here is a penalty for default or failure in performance of duty imposed under the Act as well as a compensation for the loss sustained by the employees. Damage under Section 14-B is intended to compensate the loss to the beneficiaries of the Scheme.

Facts and Ruling

In the instant case, the corporate debtor was admitted for CIRP on 1-5-2023 and pursuant to the public announcement, the appellant-EPF authority submitted a claim of about Rs. 22.50 lakhs comprising PF dues and statutory accruals under the 1952 Act, broken up as: about Rs. 0.73 lakhs towards PF dues under Section 7A, about Rs. 9.33 lakhs towards interest under Section 7Q, and about Rs. 12.441akhs towards damages under Section 14 B. The Committee of Creditors, with 100% voting share, approved a resolution plan proposing payment of about Rs. 0.73 lakhs towards PF dues of the corporate debtor as against the total claim, and the plan was placed before the Adjudicating Authority for approval. The Adjudicating Authority approved the resolution plan, which provided for payment of PF dues but did not provide for the claimed interest under section 7Q and damages under Section 14-B. Being aggrieved, the appellant filed an appeal before the NCLAT who observed that proceedings relating to interest and damages under the 1952 Act were initiated on 10-5-2023, whereas CIRP had commenced on 1-5-2023; therefore, those claims were neither crystallized nor could they be adjudicated owing to the moratorium, and protection under Section 36(4)(a)(iii) of the IBC was not available to such claims. The NCLAT declined to interfere and affirmed approval of the plan and the EPFO approached the Apex Court.

Apex Court observed that a successful resolution applicant cannot suddenly be faced with undecided claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. [Relied upon: Committee of Creditors of Essar Steel India Limited Through Authorised Signatory Versus Satish Kumar Gupta & Others - 2019 (11) TMI 731 - Supreme Court].

Further, it was observed and held that though PF dues are excluded from the liquidation estate under Section 36(4)(iii) of the Insolvency and Bankruptcy Code, 2016, liability of CD towards interest and damages payable under Section 7Q and 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, if not determined and finalized before CIRP commencement, would fall in the category of a contingent liability. To assuage the concern of all stakeholders, the COC, in its commercial wisdom, may provide for a lump sum amount to meet contingent liabilities arising from uncrystallized claims. However, if the COC, in its commercial wisdom, has not provided for such contingent liabilities in the resolution plan, its decision cannot be faulted because the underlying object of CIRP is to adhere to fixed timelines. If the prospective resolution applicant is kept guessing as to what he would have to pay to take over and run the business of the Corporate Debtor, it may not enter the fray thereby defeating the underlying object of IBC. Besides, approval of a resolution plan duly approved by the COC can be declined by the Adjudicating Authority on limited grounds, inter alia, that it does not fulfill the mandate of Section 30(2) of IBC, 2016.

The Supreme Court thus, concluded that there was no justification to interfere with the impugned order and dismissed the appeal filed by EPFO.