2001 (10) TMI 1046 - HC - Companies Law

Court rules provident fund dues are not suspendable under Section 22(1) of Act, holding company not liable.

Industrial Development Corpn. Orissa Ltd. Versus Regional Provident Fund Commissioner

The court held that provident fund dues of an employee cannot be suspended under Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, ... Suspension of legal proceedings, contracts etc. Issues Involved:1. Whether the provident fund dues of a sick industrial unit stand abated under Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985.2. Whether the holding company can be construed as a defaulter for the provident fund dues of a subsidiary company under Section 8F(3)(x) of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.Issue-wise Detailed Analysis:1. Abatement of Provident Fund Dues under Section 22 of the SIC Act:The petitioners argued that the proceedings for recovery of provident fund dues should be suspended under Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, as ABS Spinning Mills Ltd. was declared a sick unit by the BIFR. Section 22(1) of the SIC Act suspends legal proceedings against a sick industrial company during the pendency of an inquiry or scheme before the BIFR or an appeal under Section 25.The court noted that the Employees' Provident Funds Scheme mandates the employer to deduct the employees' contribution from their wages and deposit it along with the employer's contribution to the fund. The court emphasized that provident fund dues are part of the legitimate wages of employees, which cannot be indefinitely deferred under Section 22(1) of the SIC Act. The court relied on various judgments, including the Bombay High Court's decision in Ralliwolf Ltd. v. Regional Provident Fund Commissioner and the Supreme Court's decision in Corromandal Pharmaceuticals Ltd., which held that statutory dues like provident fund contributions are not covered by the suspension of proceedings under Section 22 of the SIC Act.Therefore, the court concluded that the provident fund dues of an employee and the recovery actions taken by the Provident Fund Commissioner cannot be suspended under Section 22(1) of the SIC Act.2. Liability of Holding Company for Subsidiary's Provident Fund Dues:The petitioners contended that IDC Ltd., the holding company, should not be held liable for the provident fund dues of its subsidiary, ABS Spinning Mills Ltd., as they are separate legal entities with independent liabilities. The petitioners argued that the provident fund authorities cannot proceed against the holding company without notice and that such actions violate the principles of natural justice.The court examined the relevant provisions of the Companies Act and the Employees' Provident Funds and Miscellaneous Provisions Act. It noted that a subsidiary company is an independent legal entity with its own assets and liabilities. The court held that the liability of a subsidiary company cannot be imposed on the holding company under the Companies Act or the Employees' Provident Funds Act, except as specifically provided by law.The court further analyzed Section 8F of the Employees' Provident Funds Act, which deals with the mode of recovery of dues. The court concluded that IDC Ltd., as the holding company, does not fall within the definition of an 'employer' under Section 2(e) of the Act and cannot be held liable for the provident fund dues of its subsidiary. The court quashed the notices issued by the Recovery Officer and the Regional Provident Fund Commissioner declaring IDC Ltd. as a deemed defaulter and directing it to withhold amounts from the pending bills of ABS Spinning Mills Ltd.Conclusion:The court allowed the writ petition in part, quashing the notices issued against IDC Ltd. but upheld the recovery proceedings against ABS Spinning Mills Ltd. The provident fund authorities were directed to proceed in accordance with law against the subsidiary company. The court clarified that the liability of the holding company, if any, in the event of the winding up of the subsidiary, would be determined in accordance with law at the appropriate time.