2022 (3) TMI 601 - AT - Insolvency and Bankruptcy

Dismissed appeal for settlement, ex-employee claims dues & discrimination. Scrutiny on Resolution Plan disparities.

The appeal was dismissed as withdrawn for some appellants who reached a settlement. The remaining appellant, an ex-employee, claimed outstanding dues and ... Approval of resolution plan - compliance of resolution plan with other statutory obligations - prohibition on using provident fund sums for the liquidation estate - liability of transferee for provident fund dues on transfer of establishment - limited judicial review of the commercial wisdom of the Committee of Creditors - non-application of overriding provision where no conflict existsCompliance of resolution plan with other statutory obligations - approval of resolution plan - The Resolution Plan approved by the Adjudicating Authority failed to provide for full provident fund dues as determined by the Assistant Provident Fund Commissioner and therefore did not fully comply with statutory obligations. - HELD THAT: - The Tribunal examined Section 30(2)(e) and Section 31(1) of the Code which require that a resolution plan must not contravene any law for the time being in force and must provide for effective implementation. The Assistant Provident Fund Commissioner had computed provident fund dues for the corporate debtor up to March 2018 which exceeded the amount provisioned in the approved plan. The Tribunal held that compliance with the PF Act is a matter of law and not a matter of commercial wisdom of the Committee of Creditors; accordingly the Adjudicating Authority must ensure that the resolution plan does not contravene statutory provisions. In view of Section 17B of the PF Act and the statutory duty to pay contributions, the Tribunal directed the Successful Resolution Applicant to pay the balance of the provident fund dues as determined by the EPF authority, thus modifying the impugned order approving the resolution plan to that limited extent (paras 13(a), 13(c), 13(f)). [Paras 13]The Resolution Applicant is directed to pay the balance provident fund dues as computed by the Assistant Provident Fund Commissioner; the impugned approval is modified to that extent.Prohibition on using provident fund sums for the liquidation estate - non-application of overriding provision where no conflict exists - Sums due to employees from provident fund and gratuity are not assets of the corporate debtor and the overriding effect of the Code (Section 238) does not displace obligations under the EPF Act where there is no conflict. - HELD THAT: - Relying on the Code's carve-out in Section 36(4)(a)(iii) that provident fund and gratuity sums are not liquidation estate assets, and on the PF Act (including Section 17B), the Tribunal concluded that there is no inconsistency between the IBC and the PF Act which would attract the overriding provision. Consequently, the Resolution Applicant remains liable to discharge provident fund dues in accordance with the PF Act. The Tribunal cited earlier precedents applying the same principle and affirmed that statutory liabilities in respect of PF cannot be ignored while approving a resolution plan (paras 13(d), 13(e)). [Paras 13]The PF and gratuity dues are not assets of the corporate debtor; statutory obligations under the PF Act continue to apply and must be complied with.Limited judicial review of the commercial wisdom of the Committee of Creditors - The commercial decision of the Committee of Creditors regarding distribution between classes of creditors is generally non-justiciable, subject to limited judicial review to ensure compliance with statutory parameters and that the interests of stakeholders are considered. - HELD THAT: - The Tribunal reiterated that the Committee of Creditors exercises commercial wisdom in selecting and approving a resolution plan and that adjudicating authorities cannot ordinarily interfere with that business decision. However, judicial review is available to ensure that the Committee has taken into account statutory requirements under the Code (such as maximising value, keeping the corporate debtor as a going concern, and protection of stakeholders) and that the approved plan does not contravene any law. In the present case the Tribunal did not substitute the CoC's commercial decision on relative percentages of payment, except insofar as the plan failed to meet statutory obligations under the PF Act (para 13(c)). [Paras 13]While the CoC's commercial wisdom is generally not amenable to interference, limited judicial review is permissible to ensure statutory compliance; the Tribunal modified the plan only to secure compliance with PF law and did not otherwise upset the CoC's commercial decision.Final Conclusion: The appeal is partially allowed by modifying the impugned approval of the resolution plan to direct the Successful Resolution Applicant to pay the balance provident fund dues as determined by the Assistant Provident Fund Commissioner; otherwise the CoC's commercial decision is left undisturbed. Pending applications are disposed of and there is no order as to costs. Issues Involved:1. Withdrawal of appeal by some appellants.2. Non-payment of outstanding dues and discriminatory treatment of employees.3. Approval and content of the Resolution Plan.4. Disparity in payment between financial and operational creditors.5. Eligibility of the Resolution Applicant.6. Compliance with statutory provisions regarding Provident Fund dues.7. Commercial wisdom of the Committee of Creditors (CoC).8. Judicial review of the Resolution Plan.Detailed Analysis:1. Withdrawal of Appeal by Some Appellants:The present appeal was initially filed by five appellants under Section 61 of the Insolvency and Bankruptcy Code, 2016. However, on October 19, 2020, the counsel for the appellants stated that appellants No. 1, 3, 4, and 5 had reached a settlement with the respondents and withdrew their appeal. Consequently, the appeal was dismissed as withdrawn for these appellants, and the appeal continued solely for appellant No. 2.2. Non-payment of Outstanding Dues and Discriminatory Treatment of Employees:The appellant, an ex-employee of Respondent No. 3, claimed outstanding dues of Rs. 12,49,702. The appellant argued that the Resolution Plan did not consider the full Provident Fund dues and was discriminatory towards employees. The appellant highlighted that financial creditors received 21.6% of their claims, while operational creditors, including employees, received only 12.67%. Additionally, the appellant contended that the gratuity amount was not paid as required under the Payment of Gratuity Act, 1952.3. Approval and Content of the Resolution Plan:The Corporate Debtor (CD) was undergoing Corporate Insolvency Resolution Process (CIRP) initiated on October 26, 2017. The Resolution Plan proposed by the Resolution Applicant included a total amount of Rs. 12.99 crore towards settlement of past dues and liabilities, with Rs. 9 crore allocated to secured financial creditors and Rs. 50 lakh to unsecured financial creditors. Employees and workmen were allocated Rs. 1.03 crore against their claim of Rs. 8.17 crore. The plan also included Rs. 5 crore for the working capital requirement of the company.4. Disparity in Payment Between Financial and Operational Creditors:The appellant argued that the Resolution Plan was discriminatory as it provided a higher percentage of payment to financial creditors (21.6%) compared to operational creditors (12.67%). The appellant alleged that this disparity violated the principles of fairness and equity enshrined under Article 14 of the Constitution of India.5. Eligibility of the Resolution Applicant:The Resolution Applicant, engaged in the dairy industry, was also a financial creditor of the CD. The appellant questioned the eligibility of the Resolution Applicant, arguing that the applicant lacked expertise in the technical and specialized field of the CD. The appellant also alleged that the Resolution Applicant was a related party and disqualified under Section 29A of the Code.6. Compliance with Statutory Provisions Regarding Provident Fund Dues:The appellant highlighted that the Resolution Plan did not fully account for the Provident Fund dues as determined by the Assistant Provident Fund Commissioner. The plan provisioned Rs. 78 lakh against the assessed dues of Rs. 1,35,06,391. The Tribunal observed that the Resolution Plan failed to comply with the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952, which mandates full payment of Provident Fund dues.7. Commercial Wisdom of the Committee of Creditors (CoC):The respondents argued that the payments approved by the CoC were a commercial decision and non-justiciable. They cited the Supreme Court's judgment in K. Shashidhar vs. Indian Overseas Bank, which emphasized that the commercial wisdom of the CoC is non-justiciable. The Tribunal acknowledged that the aspect of parity in payment between financial and operational creditors falls under the commercial wisdom of the CoC.8. Judicial Review of the Resolution Plan:The Tribunal noted that while the Adjudicating Authority cannot interfere with the commercial decisions of the CoC, it can review whether the Resolution Plan complies with the provisions of the law. The Tribunal referred to Section 30(2)(e) of the Code, which requires the Resolution Plan to comply with all applicable laws. The Tribunal directed the Resolution Applicant to release the full Provident Fund dues in compliance with the Employees Provident Funds and Miscellaneous Provisions Act, 1952.Conclusion:The Tribunal partially allowed the appeal, directing the Resolution Applicant to release the balance Provident Fund amount of Rs. 57,06,391 (Rs. 1,35,06,391 - Rs. 78,00,000) in compliance with the statutory provisions. The impugned order dated April 2, 2019, was modified to this extent. The appeal was disposed of with these observations and directions, with no order as to costs.