Liquidation estate exclusion for provident fund and gratuity dues confirmed; recovery certificate salary claim remains within liquidation framework.

Provident fund, pension fund and gratuity dues are treated as excluded statutory entitlements and do not form part of the liquidation estate merely because no segregated fund exists on the liquidation commencement date. Those dues therefore remain outside the Section 53 waterfall and may be directed to be paid separately by the liquidator. By contrast, salary dues covered by a recovery certificate are not automatically excluded from liquidation and remain subject to the liquidation framework. For computing the 24-month workmen dues look-back, 1,656 days spent in bona fide litigation may be excluded to avoid prejudice caused by delay.

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Issues: (i) whether exclusion of sums due to workmen and employees from provident fund, pension fund and gratuity fund from the liquidation estate depends on the existence of a segregated fund on the liquidation commencement date; (ii) whether the liquidator can be directed to pay such dues outside the waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016; (iii) whether the claim under the recovery certificate for salary dues for January to March 2019 was required to be kept outside the liquidation estate; (iv) whether 1,656 days lost in litigation could be excluded for computing the 24 months' workmen dues preceding the liquidation commencement date.

Issue (i): whether exclusion of sums due to workmen and employees from provident fund, pension fund and gratuity fund from the liquidation estate depends on the existence of a segregated fund on the liquidation commencement date.

Analysis: Section 36(4)(a)(iii) excludes all sums due to workmen or employees from provident fund, pension fund and gratuity fund from the liquidation estate. The statutory scheme, read with the earlier regime under the Companies Acts and the welfare legislation governing provident fund and gratuity, treats these dues as earned statutory entitlements and not as assets of the corporate debtor available for general distribution. The absence of a separately earmarked fund on the liquidation commencement date does not extinguish the entitlement or convert the dues into ordinary liquidation claims.

Conclusion: The exclusion is not contingent on the existence of a segregated fund on the liquidation commencement date and the conclusion is in favour of the workmen.

Issue (ii): whether the liquidator can be directed to pay such dues outside the waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016.

Analysis: Dues attributable to provident fund, pension fund and gratuity fund are kept outside the liquidation estate and therefore do not enter the distribution waterfall under Section 53(1)(b). The statutory protection under Section 36(4)(a)(iii) is independent of the pari passu distribution of workmen's dues within Section 53. On that basis, the liquidator can be directed to discharge those dues as excluded amounts and not as claims sharing in liquidation proceeds along with other creditors.

Conclusion: The impugned direction requiring payment of provident fund, pension fund and gratuity dues outside the waterfall mechanism is in law and is upheld in favour of the workmen.

Issue (iii): whether the claim under the recovery certificate for salary dues for January to March 2019 was required to be kept outside the liquidation estate.

Analysis: The recovery certificate only quantified salary dues for the relevant period; it did not convert those dues into a category excluded by Section 36(4)(a)(iii). Salary dues of that kind remain workmen dues and, absent any statutory exclusion, fall to be dealt with under the liquidation distribution scheme.

Conclusion: The recovery certificate claim was not required to be kept outside the liquidation estate and remains subject to the liquidation framework.

Issue (iv): whether 1,656 days lost in litigation could be excluded for computing the 24 months' workmen dues preceding the liquidation commencement date.

Analysis: The liquidation commencement date itself remains fixed, but the period consumed in bona fide litigation during the corporate insolvency resolution process can be excluded for the limited purpose of computing the 24-month look-back under Section 53(1)(b). The object is to prevent workmen from being prejudiced by delay attributable to prolonged proceedings and to preserve the statutory protection attached to their dues.

Conclusion: The exclusion of 1,656 days was allowed and the workmen succeeded on this issue.

Final Conclusion: The appeals were disposed of by sustaining the direction that provident fund, pension fund and gratuity dues stand outside the liquidation estate and by granting exclusion of 1,656 days for computing the workmen's 24-month dues, while declining the prayer to remove the recovery certificate claim from the liquidation framework.

Ratio Decidendi: Sums due to workmen or employees from provident fund, pension fund and gratuity fund are excluded from the liquidation estate under Section 36(4)(a)(iii) of the Insolvency and Bankruptcy Code, 2016 irrespective of whether a separate fund exists on the liquidation commencement date, and such exclusion keeps those dues outside the Section 53 waterfall.

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