2022 (11) TMI 332 - AT - Insolvency and Bankruptcy

Employee Dues in Insolvency: Tribunal Rules on Provident Fund & Gratuity

The Tribunal held that workmen and employees are entitled to receive full provident fund and gratuity amounts up to the insolvency commencement date. The ... Judicial review of Committee of Creditors' commercial wisdom - approval of resolution plan under Section 31(1) read with Section 30(2) - exclusion of provident fund, gratuity and pension from liquidation estate under Section 36(4)(a)(iii) - minimum liquidation value for operational creditors under Section 30(2)(b) and waterfall under Section 53(1) - treatment of insolvency resolution process costs and CIRP costs - compliance of resolution plan with labour laws (Section 30(2)(e) and Sections 25F/25FF of ID Act) - validity of contingent/conditional resolution plans (Ebix Singapore principle) - priority/charge of statutory dues (state tax/GST/EPFO) vis-a -vis IBCJudicial review of Committee of Creditors' commercial wisdom - approval of resolution plan under Section 31(1) read with Section 30(2) - Scope and limits of judicial review available to the Adjudicating Authority and the Appellate Tribunal in relation to a resolution plan approved by the CoC with requisite majority. - HELD THAT: - The Tribunal reaffirmed that the commercial wisdom of the Committee of Creditors is sacrosanct and not subject to judicial reappraisal except on the limited statutory grounds set out in Section 30(2) read with Section 31(1). The Adjudicating Authority/Appellate Tribunal may examine whether the approved plan meets the requirements of Section 30(2) (including that it does not contravene any law) and whether the Plan makes provision for effective implementation; it cannot substitute its view for the commercial decision of the CoC. Where a plan fails the mandatory tests under Section 30(2) the Adjudicating Authority may reject or remit the plan, but mere disagreement with CoC's commercial decision is not a ground for interference. [Paras 37, 38, 39, 40, 41]Judicial review is limited to the compliance checks prescribed by Section 30(2) and Section 31(1); the commercial wisdom of the CoC is not open to re-appraisal beyond those checks.Exclusion of provident fund, gratuity and pension from liquidation estate under Section 36(4)(a)(iii) - minimum liquidation value for operational creditors under Section 30(2)(b) and waterfall under Section 53(1) - Entitlement of workmen and employees to receive provident fund and gratuity in full (and the relationship of such entitlement with the waterfall/minimum liquidation value under Section 30(2)(b) and Section 53(1)). - HELD THAT: - The Tribunal held that sums due to any workman or employee from provident fund and gratuity fund are excluded from the liquidation estate under Section 36(4)(a)(iii) and, insofar as such funds (if maintained) exist, must be applied to satisfy those dues outside the waterfall in liquidation. Applying Supreme Court and three member Tribunal precedents, the Court directed that workmen and employees are entitled to the unpaid portion of provident fund and gratuity due up to the insolvency commencement date (20.06.2019), after credit for amounts already paid under the Resolution Plan. The Tribunal distinguished CIRP costs (wages during CIRP) and held only those employees who actually worked while the RP ran the corporate debtor as a going concern are entitled to wages as CIRP costs. Where no fund was maintained by the corporate debtor (or contributions were not deposited), the statutory obligation remains and the Successful Resolution Applicant must discharge unpaid statutory dues to comply with Section 30(2)(e). [Paras 63, 66, 69, 71, 72]Workmen and employees are entitled to full provident fund and gratuity dues up to the insolvency commencement date (20.06.2019); these sums are outside the liquidation estate and Successful Resolution Applicant must pay unpaid amounts after adjusting sums already received under the Plan.Minimum liquidation value for operational creditors under Section 30(2)(b) and waterfall under Section 53(1) - compliance of resolution plan with Section 30(2)(b) - Whether the Resolution Plan complied with the minimum liquidation value requirement of Section 30(2)(b) for the workmen and employees and whether the allocation in the Plan was deficient. - HELD THAT: - Form H submitted by the RP estimated the minimum liquidation value payable to workmen and employees at Rs.113 crores. The Plan allocated only Rs.52 crores but contained an undertaking that if liquidation value was not 'NIL' the liquidation value would be paid and given priority. The Tribunal held that the undertaking binds the Successful Resolution Applicant and directed payment of the minimum liquidation value (as estimated in Form H) to the workmen - thereby remedying the Plan's insufficient nominal allocation. The Tribunal observed that absent such undertaking a Rs.52 crore allocation would have violated Section 30(2)(b). [Paras 85, 86, 87, 88, 128]Successful Resolution Applicant is directed to pay the minimum liquidation value to workmen and employees (Rs.113 crores as recorded in Form H), the Plan otherwise being modified to that extent to comply with Section 30(2)(b).Treatment of insolvency resolution process costs and CIRP costs - CIRP costs and 'no work no pay' principle - Whether wages and other dues accruing to employees during the CIRP (post ICD) form part of CIRP costs and are payable in full. - HELD THAT: - Applying Supreme Court authority, the Tribunal held that wages/salaries during CIRP can be CIRP costs only if the RP managed the corporate debtor as a going concern and the employees actually worked during the CIRP; where the corporate debtor was not a going concern and employees did not work (other than 50 retained for asset protection), their post ICD wages are not CIRP costs. The RP's treatment (excluding post ICD wages except for retained APT members) was upheld. [Paras 98, 99, 100, 101]Only wages of employees who actually worked while the RP ran the corporate debtor as a going concern qualify as CIRP costs; the post ICD wages claimed en masse were not CIRP costs and were correctly excluded except for APT members.Compliance of resolution plan with labour laws (Section 30(2)(e) and Sections 25F/25FF of ID Act) - demerger/transfer of workforce and Section 25FF proviso - Legality of the Plan's demerger of the workforce into AGSL and whether such demerger amounted to retrenchment attracting retrenchment compensation under Section 25F/25FF of the Industrial Disputes Act and thus violated Section 30(2)(e). - HELD THAT: - The Tribunal examined the demerger scheme in the Plan and the proviso to Section 25FF. It held that the Plan's demerger fell within the proviso to Section 25FF because the scheme contemplated continuity of service for demerged employees (no interruption), offers of re employment or transfer on terms not less favourable, and the Plan provided safeguards and an employee trust equity mechanism. The Tribunal found no infringement of Section 25F/25FF or of Section 30(2)(e) in respect of the demerger; however, statutory dues (PF/gratuity) accrued up to ICD must still be paid to avoid contravention of Section 30(2)(e). [Paras 90, 91, 93, 95, 96]The demerger into AGSL does not, on the facts, amount to unlawful retrenchment and does not by itself violate Section 30(2)(e); nevertheless, unpaid statutory dues up to ICD must be discharged by the Successful Resolution Applicant to ensure compliance with Section 30(2)(e).Validity of contingent/conditional resolution plans (Ebix Singapore principle) - Whether the condition precedents/contingencies in the Plan rendered it a contingent/conditional plan that should have been rejected under the Ebix Singapore principle. - HELD THAT: - The Tribunal applied Ebix Singapore and concluded that the Plan's conditions were business requisite condition precedents (statutory and regulatory approvals necessary for restarting aviation operations) and not impermissible unilateral withdrawal clauses or unenforceable contingencies. The Plan's condition precedents were not a ground for rejection where they relate to necessary statutory approvals and the Resolution Applicant had satisfied relevant conditions to the Monitoring Committee's and Adjudicating Authority's satisfaction. [Paras 108, 109]The Plan's condition precedents did not render it impermissibly contingent; the Ebix Singapore principle did not require rejection of the Plan on that ground.Priority/charge of statutory dues (state tax/GST/EPFO) vis-a -vis IBC - status of statutory authorities as secured creditors - Whether certain statutory claimants (Regional PF Commissioner; Department of State Tax) were secured creditors entitled to priority or special charge under state laws that override IBC entitlements. - HELD THAT: - The Tribunal held that provident fund dues (EPFO) admitted by the RP must be paid in full (and directed the Successful Resolution Applicant to pay the admitted PF claim of the Regional PF Commissioner). With respect to State Tax (Maharashtra GST) the Tribunal noted the State Act's first charge provision but observed the statutory carve out for the IBC; accordingly the Department of State Tax's claim was treated as an operational creditor claim (its admitted claim being reflected in the list) and, where liquidation value is nil, no greater entitlement arose under the Plan. The Tribunal relied on Supreme Court precedents holding IBC's scheme overrides inconsistent State provisions. [Paras 117, 121, 122, 123, 124]Regional PF Commissioner's admitted PF claim to be paid in full by the Successful Resolution Applicant; State tax claim under Maharashtra GST did not acquire a priority charge that could override IBC distribution where the IBC provides otherwise.Distribution to secured creditors under Section 53(1)(b) - debt owed vs. value of security - Whether secured creditors' entitlement under Section 53(1)(b) must be computed by reference to the value of their security interest rather than the full admitted debt. - HELD THAT: - The Tribunal rejected the submission that distribution should be limited to the value of security interest; the plain language of Section 53(1)(b)(ii) refers to 'debts owed to a secured creditor' and the admitted debt in CIRP is the relevant measure. While academic reports suggested considering security value, no statutory amendment to that effect exists; accordingly, distribution is to be considered per the admitted debt and the commercial allocations made by the CoC subject to statutory minima. [Paras 102, 103, 104, 105, 106]Secured creditors' claims for distribution are to be considered with reference to the debts admitted in CIRP; distribution calculated by reference to security value alone is not mandated by Section 53(1)(b).Final Conclusion: The Tribunal upheld the Adjudicating Authority's approval of the Jalan Fritesch Consortium resolution plan subject to directed remedial payments: the Successful Resolution Applicant must pay the minimum liquidation value to workmen (as recorded in Form H) and discharge unpaid provident fund and gratuity dues up to the insolvency commencement date (20.06.2019) after adjusting amounts already paid under the Plan; other challenges (including to the Plan's commercial allocations, contingency clauses and State tax treatment) were dismissed insofar as they fall within the CoC's commercial wisdom or are governed by the IBC framework. Issues Involved:1. Entitlement of workmen and employees to provident fund, gratuity, and other retirement benefits.2. Compliance of the Resolution Plan with Section 30(2)(b) of the Insolvency and Bankruptcy Code (IBC).3. Compliance of the Resolution Plan with Section 30(2)(e) of the IBC concerning Industrial Disputes Act provisions.4. Validity of the demerger of employees to Airjet Ground Services Limited (AGSL).5. Entitlement of workmen and employees to dues during the Corporate Insolvency Resolution Process (CIRP).6. Calculation of payment to secured financial creditors under Section 53(1)(b) of the IBC.7. Contingency and conditionality of the Resolution Plan.8. Fairness and equity of the allocation to Operational Creditors.9. Claims of the Regional Provident Fund Commissioner.10. Claims of the Department of State Tax.Detailed Analysis:1. Entitlement of workmen and employees to provident fund, gratuity, and other retirement benefits:The Tribunal held that workmen and employees are entitled to receive the full amount of provident fund and gratuity up to the date of insolvency commencement. This entitlement is based on Section 36(4)(a)(iii) of the IBC, which excludes such funds from the liquidation estate. The Successful Resolution Applicant must pay the unpaid provident fund and gratuity dues after adjusting the amounts already received under the Resolution Plan.2. Compliance of the Resolution Plan with Section 30(2)(b) of the IBC:The Tribunal found that the Resolution Plan initially allocated only Rs. 52 crores to workmen, while the liquidation value estimated by the Resolution Professional was Rs. 113 crores. The Tribunal directed the Successful Resolution Applicant to pay at least Rs. 113 crores to the workmen to comply with Section 30(2)(b) of the IBC.3. Compliance of the Resolution Plan with Section 30(2)(e) of the IBC concerning Industrial Disputes Act provisions:The Tribunal held that the demerger of employees to AGSL did not amount to retrenchment under Section 25F and 25FF of the Industrial Disputes Act, 1947. The demerger was a business decision aimed at reviving the Corporate Debtor and did not violate Section 30(2)(e) of the IBC.4. Validity of the demerger of employees to AGSL:The Tribunal upheld the demerger, stating that it was a commercial decision approved by the Committee of Creditors (CoC) and was necessary for the revival of the Corporate Debtor. The demerger did not amount to termination of services, and the employees were not entitled to retrenchment compensation.5. Entitlement of workmen and employees to dues during the CIRP:The Tribunal held that only those workmen and employees who actually worked during the CIRP period are entitled to be paid as part of CIRP costs. Since the Corporate Debtor was not a going concern during the CIRP, the claim for Rs. 750 crores or more was not accepted.6. Calculation of payment to secured financial creditors under Section 53(1)(b) of the IBC:The Tribunal held that the entire debt owed to secured creditors should be considered while computing their entitlement under Section 53(1)(b), not just the value of their security interest.7. Contingency and conditionality of the Resolution Plan:The Tribunal found that the conditions precedent in the Resolution Plan were necessary for the revival of the Corporate Debtor's aviation business and did not warrant rejection of the plan. The conditions were business prerequisites and not contingent in a manner that would invalidate the plan.8. Fairness and equity of the allocation to Operational Creditors:The Tribunal noted that the liquidation value for employees and other Operational Creditors was nil, and thus, the allocation of Rs. 15,000/- each was in compliance with Section 30(2)(b) of the IBC. The Tribunal suggested that the Government and relevant authorities consider legislative changes to ensure fair and equitable distribution to Operational Creditors.9. Claims of the Regional Provident Fund Commissioner:The Tribunal directed the Successful Resolution Applicant to make full payment of the admitted claim of Rs. 24,40,65,594/- towards provident fund dues to the Regional Provident Fund Commissioner, as non-payment would breach Section 30(2)(e) of the IBC.10. Claims of the Department of State Tax:The Tribunal held that the Department of State Tax is an Operational Creditor and not a secured creditor. The claim was admitted as an Operational Creditor, and the liquidation value being nil, no additional payment was warranted under the Resolution Plan.Reliefs Granted:1. Payment of Rs. 113 crores to workmen.2. Full payment of unpaid provident fund and gratuity dues to workmen and employees.3. Payment of admitted provident fund dues to the Regional Provident Fund Commissioner.4. Dismissal of appeals by the Department of State Tax and Concor Air Ltd.The Tribunal upheld the Resolution Plan subject to the above directions and appreciated the assistance provided by the counsel for the parties.