2018 (5) TMI 2173 - HC - Indian Laws

EPF dues claim rejected after 10-year delay as distribution already completed among workers and creditors

IN RE-M/s KAMLA SYNTEX LTD.

The Delhi HC addressed a claim for EPF dues under the Employees Provident Fund Miscellaneous Provisions Act, 1952, involving priority of statutory dues ... Seeking a direction in favour of the applicant for payment of dues under the Employees Provident Fund & Miscellaneous Provisions Act, 1952 - priority of dues against the statutory as well non-statutory secured and non-secured debts including on assets subject to mortgage or pledge - HELD THAT:- In the present case, as already noted by this court, the OL invited claims on 23.01.2004. Thereafter the claims were processed and payments were released in favour of those whose claims were accepted by order dated 27.09.2005. Reference may be had to the said order dated 27.09.2005. The said order noted that there are 770 workmen who have lodged their claims before the OL. Total of these claims add up to Rs.5.04 crores. The court accepted that the claims of the worker would to the tune of Rs.3.40 crores. There were claims of three secured creditors, namely, Canara Bank, HFC and Essenda Finanze Pvt. Ltd. which were for Rs.374 lacs, Rs.120 lacs and Rs.4 lacs. Noting that the OL has Rs.3.86 crores, the court ordered distribution of the fund to the secured creditors and workers on pari passu basis in terms of Sections 529 and 529A of the Act. In the rejoinder that was filed by the applicant to the reply of the OL, the applicant has attached a copy of a communication dated 18.06.2004 which was allegedly sent to the OL. Unfortunately this document has been filed alongwith the rejoinder and the OL has not been able to respond to the same. There is also nothing to show that this document was served on the OL. It is further stated in the letter that the dues are likely to the tune of Rs.50 lacs, which are pending and are not deposited by the respondent company. As already noted, this letter was not in response to claims invited by the OL. Even if such a letter had been received by the OL, it cannot be a substitute for the statutory procedure which exist for inviting claims from the creditors of the respondent company. A liquidator has to give notice inviting creditors, who have not proved their debts. As per Rule 151, the affidavit proving a debt shall contain or refer to a statement of account and shall be in Form 66. The applicant is only entitled to the amount that is now left with the OL, namely, a sum of Rs. 5,76,162/- or about. The applicant cannot be permitted to disturb the position/steps which have been taken by this court way back in 2005. The applicant has merrily taken five years to file its first application attempting to prove its dues. Thereafter, the applicant had withdrawn the said application and has now filed the present application in 2015. In view of the settled legal position, the applicant would be entitled to only the amount now remaining with the OL. Application allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether dues under the Employees Provident Fund & Miscellaneous Provisions Act, 1952 (EPF & MP Act) constitute a first charge on the assets of an employer and have priority over other debts (statutory, secured and unsecured) in a winding-up proceeding. 2. Whether a provident fund claim not proved before the date fixed for proving creditors' claims or before declaration/distribution of dividends by the Official Liquidator can (a) disturb past distributions/dividends already declared and paid, or (b) entitle the claimant to any portion of undistributed assets then remaining with the Official Liquidator. 3. Whether informal or non-statutory communications to the Official Liquidator (not in prescribed form or not served pursuant to the statutory claim procedure) can substitute for proof of debt under the Companies (Court) Rules and entitle the creditor to participate in distributions. 4. Whether delay and withdrawal of earlier applications by the provident fund authority affect its entitlement and the relief which can be granted. ISSUE-WISE DETAILED ANALYSIS Issue 1: Priority of EPF dues as first charge on employer's assets Legal framework: Section 11(1) and (2) of the EPF & MP Act create priority for amounts due from the employer and deem any such amount a first charge on the assets of the establishment, payable in priority to all other debts; related statutory provisions (Sections 7A, 7Q, 14B, 15(2)) determine components of the dues (contributions, interest, damages, accumulations). Precedent Treatment: The Supreme Court authority interpreting Section 11(2) holds that the priority is unqualified and operates against statutory and non-statutory, secured and unsecured debts, including mortgages and pledges; interest and damages payable under relevant provisions are included within 'any amount due from the employer'. Interpretation and reasoning: The Court adopts the plain and purposive meaning of Section 11(2). The deeming and non obstante language and the object of protecting workers' provident fund rights justify a broad construction that includes contributions, interest and damages as first charge items. Excluding such components would frustrate legislative intent and allow circumvention by creditors. Ratio vs. Obiter: Ratio - Section 11(2) creates a statutory first charge over employer assets for amounts due under the Act, overriding other claims; inclusion of interest and damages is integral to that ratio. Conclusions: EPF dues (including relevant interest/damages) have priority over other creditors in winding up and form a first charge on the establishment's assets. Issue 2: Effect of failure to prove claim within time; inability to disturb prior distributions; entitlement to undistributed funds Legal framework: Section 474 of the Companies Act empowers the Court to fix times within which creditors must prove debts or be excluded from benefits of distributions made before proof; Rule 178 of the Companies (Court) Rules provides that a creditor who has not proved his debt before declaration of dividend is entitled to any money then in the hands of the liquidator available for distribution but cannot disturb prior distributions. Precedent Treatment: A series of High Court decisions and English authorities (In re General Rolling Stock Co. and subsequent domestic applications) consistently hold that late-proofing creditors are not wholly excluded - they may prove until final distribution/dissolution but cannot reopen or disturb dividends already declared or paid; the only penalty for delay (absent court exercise of exclusion) is forfeiture of participation in earlier distributions. Interpretation and reasoning: Applying Section 474 and Rule 178, the Court reasons that the statutory scheme aims at expeditious realization and pari passu distribution; allowing post-distribution claimants to unsettle completed distributions would defeat that scheme. Therefore late claims entitle the creditor only to undistributed balances then in the liquidator's hands. Ratio vs. Obiter: Ratio - failure to prove within time, while not necessarily barring admissibility of the claim before final distribution, disentitles the claimant to disturb distributions already made; late-proofing permits participation only in undistributed assets. Conclusions: A provident fund claim not proved within the fixed period cannot disturb prior dividends; the claimant is limited to any monies remaining with the Official Liquidator available for distribution at the time of determination. Issue 3: Validity of non-statutory communications as proof of debt Legal framework: Rule 151 of the Companies (Court) Rules prescribes contents and form (Form No.66) of an affidavit proving a debt; the Official Liquidator must invite and receive claims according to the statutory procedure; Rule 9 (inherent powers) cannot be used to circumvent express statutory mechanisms for proving claims. Precedent Treatment: Recent High Court authority emphasizes that where a specific procedure exists for proving claims before the Official Liquidator, invoking inherent powers is inappropriate; claimants are required to follow the statutory procedure and file prescribed affidavits. Interpretation and reasoning: The Court treats an informal communication (letter) to the Official Liquidator, filed only in a rejoinder and not shown to have been served or to comply with Rule 151/Form 66, as insufficient to substitute the statutory proof. Acceptance of such informal communications would undermine the statutory regime for notice, verification and pari passu distribution. Ratio vs. Obiter: Ratio - informal communications not compliant with Rule 151/Form 66 and not served as part of the statutory claim procedure cannot be treated as proof of debt for distribution purposes. Conclusions: The applicant's alleged letter cannot supply the place of a formal proof of debt; the Official Liquidator was not bound to accept it and the claimant must follow the statutory proof process to participate beyond undistributed funds. Issue 4: Effect of delay, withdrawal of prior proceedings and scope of relief Legal framework: Combined effect of EPF priority and Companies Act provisions; court's equitable supervision of winding-up distributions; requirement that claims be timely pursued before the Official Liquidator. Precedent Treatment: Authorities confirm that creditors who delay may still prove until final distribution but take the risk of being limited to remaining assets; procedural non-compliance and delay justify restricting relief to undistributed funds. Interpretation and reasoning: The Court notes the claimant's substantial delay in approaching the Official Liquidator, withdrawal of an earlier application, and failure to comply with the Court's direction to produce supporting lists/documents. Given settled law, the Court holds that the claimant's remedy is confined to amounts then remaining in the hands of the Official Liquidator; it cannot reopen or upset distributions finalized in 2005. Ratio vs. Obiter: Ratio - procedural delay and failure to follow the statutory claim process permit the Court to limit relief to the balance available with the Official Liquidator without disturbing prior distributions. Conclusions: The provident fund authority, having delayed and not followed the statutory proof procedure, is entitled only to the undistributed balance in the Official Liquidator's hands; it cannot set aside earlier distributions already declared and paid. Final Disposition (operative conclusion synthesized across issues) EPF dues are a statutory first charge and enjoy priority; however, where the claimant failed to prove its claim in the prescribed manner and within the process fixed for proving creditors' claims and after prior distributions were lawfully declared and paid, the claimant cannot disturb those distributions and is limited to the funds remaining with the Official Liquidator at the time of the application.