NCLAT rules provident fund dues excluded from liquidation estate under Section 36(4)(iii), must be paid to employees on priority

The NCLAT dismissed an appeal regarding distribution of provident fund dues under the Insolvency and Bankruptcy Code. The tribunal held that provident fund, pension fund, and gratuity fund dues are excluded from liquidation estate assets under Section 36(4)(iii) and must be paid to workmen/employees on priority basis without following the waterfall mechanism under Section 53. The EPFO's claims including contributions, interest, and damages under the EPF Act are to be treated as extended parts of contribution and fall outside the liquidation estate, requiring preferential payment to workers.

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Issues Involved:

1. Whether provident fund dues are to be decided and distributed in accordance with Section 36(4)(iii) of the Insolvency & Bankruptcy Code, 2016 (the Code) or in accordance with Section 53 of the Code.
2. Treatment of the various components of claims of the Employees Provident Fund Organisation (EPFO) i.e., contribution under Section 7A, interest under Section 7Q, and damages under Section 14B of the Employees Provident Funds & Miscellaneous Provisions Act, 1952 (EPF Act) and whether all these will constitute as PF dues in terms of EPF Act.
3. What constitutes part of the liquidation estate and what does not constitute part of the liquidation estate in terms of Section 36 of the Code, especially with respect to Provident Fund dues.

Issue-wise Detailed Analysis:

1. Distribution of Provident Fund Dues:

The primary issue is whether provident fund dues should be distributed according to Section 36(4)(iii) or Section 53 of the Code. Section 36(4)(a)(iii) of the Code specifies that all sums due to any workman or employee from the provident fund, pension fund, and gratuity fund shall not be included in the liquidation estate and shall not be used for recovery in the liquidation. This provision ensures that provident fund dues are protected and prioritized over other claims in the liquidation process.

2. Treatment of Various Components of EPFO Claims:

The components of EPFO claims include contributions under Section 7A, interest under Section 7Q, and damages under Section 14B of the EPF Act. The judgment clarifies that these components collectively constitute PF dues. The Supreme Court in Maharashtra State Cooperative Bank Vs. Assistant Provident Fund Commissioner & Ors. [(2009) 10 SCC 123] held that the expression "any amount due from an employer" includes contributions, interest, and damages. Therefore, all these components are considered part of the provident fund dues and are given priority in payment.

3. Inclusion in Liquidation Estate:

Section 36(1) of the Code describes the liquidation estate, which includes assets mentioned in Section 36(3). However, Section 36(4) explicitly excludes certain assets from the liquidation estate, including sums due to workmen or employees from the provident fund, pension fund, and gratuity fund. This exclusion ensures that these dues are settled before any distribution of the liquidation estate under the waterfall mechanism in Section 53 of the Code.

Findings and Conclusion:

The Tribunal found that the Adjudicating Authority correctly classified the provident fund dues as assets not forming part of the liquidation estate under Section 36(4)(iii) of the Code. The claims of the EPFO, including contributions, interest, and damages, are covered under the definition of "any amount due from an employer" and are prioritized for payment. The judgment of the Supreme Court in Maharashtra State Cooperative Bank (Supra) supports this interpretation.

The Tribunal also noted that the dues of the provident fund, pension fund, and gratuity fund are protected under Section 36(4) of the Code and are not subject to the waterfall mechanism under Section 53. This protection ensures that these dues are settled on priority without reference to the distribution of liquidation assets.

The appeal was dismissed, and the Tribunal upheld the decision of the Adjudicating Authority, affirming that the provident fund dues should be treated as per Section 36(4)(iii) of the Code and not included in the liquidation estate for distribution under Section 53.

Separate Judgments:

No separate judgments were delivered by the judges in this case. The decision was a collective judgment by the Tribunal.

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