2011 (11) TMI 533 - SC - Companies Law

EPF Act Prevails Over Companies Act: Priority for Provident Fund Dues Upheld

Employees Provident Fund Commissioner Versus Official Liquidator of Esskay Pharmaceuticals Ltd.

The court held that the priority given to dues payable under the Employees' Provident Funds and Miscellaneous Provisions Act prevails over the priority ... Winding up - whether priority given to the dues payable by an employer under Section 11 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 is subject to Section 529A of the Companies Act, 1956 in terms of which the workmen's dues and debts due to secured creditors are required to be paid in priority to all other debts – Held that:- Section 11 was renumbered as Section 11(1) and a new sub-section was added as Section 11(2) and it was declared that any amount due from an employer in respect of the employees' contribution shall be deemed to be the first charge on the assets of the establishment and shall be paid in priority to all other debts. By inserting proviso in Section 529(1), Parliament ensured protection of the interest of the workmen in winding up proceedings. The object of this amendment is to place the legitimate dues of workers at par with those of secured creditors. Effect of the amendment made in the Companies Act in 1985 is only to expand the scope of the dues of workmen and place them at par with the debts due to secured creditors and there is no reason to interpret this amendment as giving priority to the debts due to secured creditor over the dues of provident fund payable by an employer. Priority given to the dues payable by an employer under Section 11 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 is not subject to Section 529A of the Companies Act, 1956 in terms of which the workmen's dues and debts due to secured creditors are required to be paid in priority to all other debts Issues Involved:1. Whether the priority given to the dues payable by an employer under Section 11 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) is subject to Section 529A of the Companies Act, 1956.Issue-wise Detailed Analysis:1. Priority of Dues under EPF Act vs. Companies Act:The primary issue in these appeals is whether the priority given to the dues payable by an employer under Section 11 of the EPF Act is subject to Section 529A of the Companies Act, which prioritizes workmen's dues and debts due to secured creditors over all other debts.Facts:Messrs Esskay Pharmaceuticals Limited, a company registered under the Companies Act, failed to pay dues under the EPF Act from March 1998 to May 1999 and June 1999 to August 2001. The competent authority determined the liability to be Rs. 14,96,751/-. Despite partial payment and demand notices, the remaining amount was not paid. The Gujarat High Court ordered the winding up of the company, appointing an Official Liquidator. The appellant's application to the Official Liquidator for payment under the EPF Act was dismissed by the Company Judge and the Division Bench of the High Court.Legal Provisions:- Section 11 of the EPF Act: Declares that any amount due from an employer towards employees' contributions is the first charge on the assets of the establishment and is payable in priority to all other debts.- Section 529A of the Companies Act: Gives priority to workmen's dues and debts due to secured creditors over all other debts in the winding up of a company.Arguments:- Appellant's Argument: Cited the judgment in Maharashtra State Co-operative Bank Ltd. v. Assistant Provident Fund Commissioner, arguing that Section 11(2) of the EPF Act, being a special legislation, should prevail over Section 529A of the Companies Act due to its non obstante clause.- Respondent's Argument: Argued that the non obstante clause in Section 529A(1) of the Companies Act, being a subsequent legislation, should prevail over Section 11(2) of the EPF Act.Court's Analysis:- Statutory Provisions: The court analyzed the relevant statutory provisions of both the EPF Act and the Companies Act, emphasizing the non obstante clauses in both.- Interpretation of Non Obstante Clauses: The court noted that both the EPF Act and the Companies Act contain non obstante clauses. However, the purpose and policy underlying the two Acts must be considered.- Priority of EPF Dues: The court emphasized that Section 11(2) of the EPF Act declares the amount due from an employer as the first charge on the assets of the establishment, payable in priority to all other debts, including those of secured creditors.- Purpose of Amendments: The court observed that the amendments in the Companies Act aimed to protect workmen's dues by placing them at par with secured creditors but did not intend to override the first charge created by the EPF Act.Conclusion:The court concluded that the priority given to the dues payable under the EPF Act prevails over the priority given under Section 529A of the Companies Act. The dues payable by the employer under the EPF Act are to be treated as the first charge on the assets of the establishment and are payable in priority to all other debts, including those of secured creditors.Judgment:The appeals were allowed, setting aside the impugned judgment and the order of the learned Company Judge. The applications filed by the appellant were allowed, directing the Official Liquidator to deposit the dues of provident fund payable by the employer within three months. The parties were left to bear their own costs.