Employee Funds Excluded from Liquidation Estate: NCLT Decision

The NCLT held that provident fund, pension fund, and gratuity fund dues are not part of the liquidation estate under the I&B Code. The State Bank of India's appeal was dismissed, affirming that these funds are not to be included in asset distribution under Section 53.

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Issues Involved:
1. Whether the provident fund, pension fund, and gratuity fund come within the meaning of assets of the 'Corporate Debtor' for distribution under Section 53 of the 'I&B Code'.

Issue-wise Detailed Analysis:

1. Initiation of Corporate Insolvency Resolution Process (CIRP):
The CIRP was initiated against the 'Corporate Debtor' on 14th November, 2017, under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code). Subsequently, on 20th September, 2018, the Adjudicating Authority (NCLT) ordered the liquidation of the Corporate Debtor, discharging the workmen under Section 33(7) of the I&B Code.

2. Liquidator's Denial of Preferential Payment:
The Liquidator, via email dated 5th December, 2018, denied preferential payment of the gratuity fund, provident fund, and pension fund, including them under the waterfall mechanism of Section 53 of the I&B Code.

3. Application by Moser Baer Karamchari Union:
In January 2019, the 'Moser Baer Karamchari Union' filed CA No. 19(PB)/2019, seeking directions for the Liquidator to exclude the amounts due towards 'Provident Fund', 'Pension Fund', and 'Gratuity Trust Fund' from the waterfall mechanism and to pay these dues as they do not constitute part of the liquidation estate.

4. Adjudicating Authority's Order:
The NCLT, by order dated 19th March, 2019, allowed CA No. 19(PB)/2019, holding that 'Provident Fund Dues', 'Pension Fund Dues', and 'Gratuity Fund Dues' cannot be part of Section 53 of the I&B Code. This order was challenged by the 'State Bank of India', a 'Secured Creditor'.

5. Appellant's Argument:
The 'State Bank of India' argued that under Section 53 of the I&B Code, the dues of employees, including the contribution to the 'Provident Fund', should be distributed as part of the assets of the 'Corporate Debtor'. They relied on the Explanation below Section 53 and Section 326 of the Companies Act, 2013, which includes sums due to workmen from various funds as 'workmen’s dues'.

6. Resolution Professional's Argument:
The Resolution Professional argued that Section 36(3) of the I&B Code, which defines the liquidation estate, specifically excludes sums due to workmen or employees from the provident fund, pension fund, and gratuity fund. Therefore, these funds should not be part of the liquidation estate and should not be distributed under Section 53.

7. Legal Provisions Discussed:
The judgment delved into Section 36 of the I&B Code, which outlines the formation of the liquidation estate and explicitly excludes sums due to workmen from certain funds. Section 53, which deals with the distribution of assets, was also examined, emphasizing that the proceeds from the sale of liquidation assets must be distributed in a specific order of priority.

8. Conclusion:
The Tribunal concluded that since sums due to workmen from the provident fund, pension fund, and gratuity fund are excluded from the liquidation estate under Section 36(4)(a)(iii) of the I&B Code, they cannot be included in the distribution of assets under Section 53. Therefore, the provident fund, pension fund, and gratuity fund do not form part of the liquidation estate of the 'Corporate Debtor'.

9. Final Judgment:
The appeal by the 'State Bank of India' was dismissed, upholding the NCLT's order that the provident fund, pension fund, and gratuity fund are not part of the liquidation estate for the purpose of distribution under Section 53 of the I&B Code. No costs were awarded.

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