2025 (5) TMI 81 - HC - IBC

Determination of nature of Provident Fund (PF) dues - employer s contribution under the Employees Provident Funds and Miscellaneous Provisions Act 1952 (EPF Act) constitute an asset or a debt of the corporate debtor for purposes of the Insolvency and Bankruptcy Code 2016 - PF dues forms part of the resolution plan or not - HELD THAT - The provident fund of an employee is a combination to two components. Employees Contribution being that amount which is deducted from the salary/wages payable to an employee which deduction is made by the employer. The other component being the contribution to be made by the employer generally known as the Employer s contribution. Both combined constitute the provident fund of an employee. Under section 5 (1) of the EPF Act a fund is required to be established after framing of the Employees Provident Fund Scheme which is to be administered by the Board constituted under section 5A of the EPF Act - In case there is any dispute as to the applicability of the provisions of the EPF Act or the contribution of the employer such a dispute is to be determined by the authorities as provided under section 7-A of the EPF Act in the mode and manner as provided thereunder. Section 7-B of the EPF Act provides for a review of the order passed under section 7-A. Section 7-B (5) of the EPF Act provides for an appeal against an order passed under review as if the order passed under review were the original order passed by the Reviewing Authority under section 7A. Under section 7-I of the EPF Act an appeal lies to the Tribunal as constituted under section 7-D of the EPF Act. The Provident Fund is in sum and substance the property of an employee part of which is contributed by such employee and part by the employer. Though part of the provident fund is contributed by the employer however in terms of sec.6 of the EPF Act it is on account of a Statutory obligation and though at times if for any reason such contribution is not paid by the employer that however cannot mean that the employers contribution to the provident fund would become the property or asset of the employer over which he would have control or dominion of disposition for in such a case it would be held by the employer in trust for the employee as the employers contribution to the provident fund - The protection against attachment to the provident fund as envisaged by section 10 of the EPF Act as indicate hereinafter not only supports but emphasizes the primacy of workers dues over everything else. The Provident Fund of an employee which includes both the components (a) employee contribution and (b) employers contribution cannot be held to be assets over which the corporate debtor can be held to have any rights of ownership or dominion and would even in case it is not deposited in the Provident Fund account by the employer would continue to be property owned by the employee held in trust by the employer on behalf of the employee for being deposited in the provident fund account and thus would be outside the scope and ambit of the duties of the IRP as specified in Sec. 18 of the IB Code. There cannot be any doubt that payment of the employers provident contribution is on account of the statutory imposition arising under the EPF Act. It is however equally true that the same is not payable to the Central Government any State Government or any Local Authority but it is payable in the Fund established under sec.6 of the EPF Act which is administered by the Board as constituted under the provisions of the EPF Act which is an independent body. Conclusion - The claim of the respondents cannot be said to have been wiped out on account of the resolution plan having been approved by the Committee of Creditors and consequently by the adjudicating authority and would be a claim which is beyond the scope and ambit of Chapter II of the IB Code and thus is a claim which is payable by the petitioners. Since the claim is for a period earlier than the insolvency commencement date there is no call for issuance of any directions in that regard. The petition fails and is dismissed.

Summary

The core legal questions considered by the Court include:

1. Whether the Provident Fund (PF) dues, specifically the employer's contribution under the Employees Provident Funds and Miscellaneous Provisions Act, 1952 ("EPF Act"), constitute an 'asset' or a 'debt' of the corporate debtor for purposes of the Insolvency and Bankruptcy Code, 2016 ("IB Code"), and whether such dues can be included in or excluded from the Resolution Plan approved under the IB Code.

2. Whether the failure of the Provident Fund Organization (respondent) to submit proof of claim within the stipulated time during the Corporate Insolvency Resolution Process ("CIRP") results in extinguishment of its claim under the approved resolution plan.

3. The scope and applicability of Section 36(4)(a)(iii) of the IB Code, which excludes Provident Fund dues from the liquidation estate, and whether this exclusion applies to insolvency resolution proceedings under Chapter II or only to liquidation proceedings under Chapter III.

4. Whether the resolution plan approved by the National Company Law Tribunal ("NCLT") covered all units of the corporate debtor, including the cement, paper, and solvent extraction units, and the implications thereof on the PF dues liability.

5. The effect of the scheme of arrangement and amalgamation sanctioned under Sections 230-232 of the Companies Act, 2013, on the liability for PF dues of the employees of the corporate debtor.

6. The interpretation and application of relevant statutory provisions under the EPF Act and IB Code, including Sections 5, 6, 10, 11, 17B of the EPF Act, and Sections 3(11), 5(8), 5(21), 18, 30, 31, 33, and 36 of the IB Code.

7. The impact of judicial precedents, including the judgments of the Supreme Court and National Company Law Appellate Tribunal ("NCLAT") on similar issues, particularly the binding effect of the judgment in Ghanshyam Mishra & Sons Pvt. Ltd. and others.

Issue-wise Detailed Analysis:

1. Nature of Provident Fund Dues: Asset or Debt?

The Court examined whether the employer's contribution to the Provident Fund is an 'asset' of the corporate debtor or a 'debt' payable by it. The IB Code defines 'debt' as a liability or obligation in respect of a claim due from any person, including financial and operational debts. However, the employer's contribution to the Provident Fund is not payable to the Central Government, State Government, or any local authority but to a Fund administered by an independent Board constituted under the EPF Act.

The Court referred to Section 18(1)(f) and its Explanation (a) of the IB Code, which excludes assets owned by a third party held under trust or contractual arrangements from the assets over which the Interim Resolution Professional (IRP) can take control. The employer's contribution to the Provident Fund, even if unpaid, is held in trust for the employee and thus is not an asset of the corporate debtor. This interpretation is supported by the social welfare intent of the EPF Act, as expounded in the Supreme Court's judgment in Maharashtra State Coop. Bank Ltd. v. Provident Fund Commissioner, emphasizing the protective purpose of the EPF Act for employees.

The Court also considered the protection against attachment under Section 10 of the EPF Act, which shields Provident Fund amounts from attachment or charge under any decree or order of any court, including insolvency proceedings against the member. Section 11 of the EPF Act further prioritizes payment of contributions over other debts in insolvency or winding up, reinforcing the special status of PF dues.

Therefore, the Court concluded that the employer's contribution to the Provident Fund is not an asset of the corporate debtor but a statutory obligation held in trust for employees, and thus cannot be included in the resolution plan as an asset or extinguished by its approval.

2. Effect of Non-submission and Non-verification of PF Claim During CIRP

The Provident Fund Organization had intimated a claim during the CIRP but failed to submit proof of claim in the prescribed form, resulting in non-verification and exclusion of the claim from the resolution plan. The petitioners contended that this failure extinguished the claim under the binding effect of the approved resolution plan, supported by Rule 12(2) and Rule 13 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

The Court analyzed that the Rules must be read in the context of the IB Code's provisions and the Explanation (a) to Section 18(1), which excludes PF dues from the assets of the corporate debtor. Since the employer's contribution is not an asset or operational debt payable to the government or local authority, the procedural lapses in claim submission do not extinguish the statutory obligation to pay PF dues. The Court further referred to the Supreme Court's judgment in Ghanshyam Mishra, which held that claims not part of the resolution plan stand extinguished, but clarified that this applies to debts included within the scope of the IB Code, not to PF dues excluded by statutory provisions.

Thus, the Court held that the Provident Fund claim cannot be extinguished by non-inclusion in the resolution plan due to procedural lapses, as it is a statutory right of employees beyond the ambit of the resolution process.

3. Applicability of Section 36(4)(a)(iii) of the IB Code

Section 36(4)(a)(iii) excludes all sums due to any workman or employee from the provident fund, pension fund, and gratuity fund from the liquidation estate and prohibits their use for recovery in liquidation. The petitioners argued this provision applies only to liquidation proceedings under Chapter III and not to insolvency resolution under Chapter II.

The Court agreed, noting that Chapter II (Sections 6 to 32-A) governs the insolvency resolution process aimed at revival, while Chapter III (Sections 33 to 54) governs liquidation. Section 36 falls under Chapter III and thus is not directly applicable to the resolution process. However, the Court emphasized that the rationale behind Section 36(4)(a)(iii) is reflected in the Explanation (a) to Section 18(1) of the IB Code, which excludes PF dues from the assets the IRP can take control of during CIRP.

Therefore, while Section 36(4)(a)(iii) does not apply during CIRP, the protective principle for PF dues is embedded in the IB Code's insolvency resolution provisions.

4. Scope of Resolution Plan: Entire Corporate Debtor or Specific Units?

The respondent contended that the resolution plan related only to the cement unit of Murli Industries, excluding the paper and solvent extraction units, which were acquired later by the petitioners through amalgamation. The petitioners argued the resolution plan covered the entire corporate debtor, including all three units.

The Court examined the resolution plan and the NCLT order approving it, which identified the corporate debtor as operating three business segments: cement, paper, and solvent extraction units. The plan contemplated reviving the cement unit as a going concern and selling the other two units. The NCLAT and Supreme Court rejected challenges to the plan, confirming its comprehensive scope.

Further, the Court noted the scheme of arrangement and amalgamation sanctioned under the Companies Act, which transferred the paper and solvent extraction units to the petitioners, who assumed statutory obligations, including PF liabilities, under clauses 16.1 and 16.3 of the scheme. Section 17B of the EPF Act provides for joint and several liability of transferor and transferee employers for PF contributions up to the date of transfer.

Thus, the Court held the resolution plan covered the entire corporate debtor, and the petitioners, as transferees, are liable for PF dues of employees of the transferred units.

5. Effect of Scheme of Arrangement and Amalgamation on PF Liability

The Court considered the sanctioned composite scheme of arrangement and amalgamation which transferred various business units and employees to the petitioners. The scheme expressly provides for continuity of employee benefits, including provident fund, gratuity, and other retirement benefits, with the resulting companies assuming all obligations and rights.

The Court observed that the scheme's provisions ensure uninterrupted service conditions and benefits, including PF contributions, and that the petitioners have assumed responsibility for these liabilities. Section 17B of the EPF Act further supports the joint and several liability of transferor and transferee employers for PF dues.

Therefore, the Court concluded that the petitioners cannot disclaim liability for PF dues on account of the scheme of arrangement and amalgamation.

6. Interpretation of Relevant Statutory Provisions and Precedents

The Court extensively analyzed the EPF Act provisions, emphasizing Sections 5, 6, 10, 11, and 17B, which establish the nature, administration, protection, priority, and transfer of PF dues. It underscored the social welfare purpose of the EPF Act and the protective intent behind provisions shielding PF dues from attachment or liquidation.

Regarding the IB Code, the Court analyzed Sections 3(11), 5(8), 5(21), 18, 30, 31, 33, and 36, distinguishing between insolvency resolution and liquidation processes, and interpreting the terms 'asset', 'debt', and 'operational debt' in light of statutory context and judicial precedents.

The Court referred to the Supreme Court's judgment in Ghanshyam Mishra, which clarified that claims not included in the resolution plan stand extinguished, but emphasized that this principle applies only to claims within the IB Code's scope, excluding PF dues. The Court also considered the NCLAT and Supreme Court decisions in Jet Aircraft Maintenance Engineers Welfare Association and Fanendra Harakchand Munot, noting distinctions in factual and legal contexts.

It rejected the petitioners' reliance on Fanendra Harakchand Munot as supportive, clarifying that the case concerned claims made post-approval of the resolution plan and procedural delays, which are not analogous to the present case.

7. Application of Law to Facts and Treatment of Competing Arguments

The Court found that the respondent's claim for PF dues was intimated but not verified during CIRP, resulting in non-inclusion in the resolution plan. However, this procedural lapse does not extinguish the statutory right to recover PF dues, given their exclusion from the definition of assets and debts in the IB Code and their special protection under the EPF Act.

The petitioners' argument that the resolution plan extinguished all claims not included therein was rejected in respect of PF dues, as these fall outside the scope of claims that can be extinguished under the IB Code.

The Court also rejected the petitioners' contention that Section 36(4)(a)(iii) of the IB Code applies to insolvency resolution proceedings, clarifying it applies only to liquidation. However, the protective principle is reflected in Section 18(1) Explanation (a).

The respondent's contention that PF dues are not a 'debt' payable to the government or local authority, and thus not an operational debt under the IB Code, was accepted. The Court held that the PF dues are statutory obligations owed to employees and the Fund, which is an independent statutory body, not a government authority for IB Code purposes.

Regarding the scope of the resolution plan and the amalgamation scheme, the Court found that the entire corporate debtor, including all units, was covered, and the petitioners assumed liabilities accordingly.

Conclusions and Significant Holdings:

"The employer's contribution to the Provident Fund is not an 'asset' of the corporate debtor but a statutory obligation held in trust for employees, and therefore cannot be included in the resolution plan as an asset or extinguished by its approval."

"Section 36(4)(a)(iii) of the IB Code, which excludes Provident Fund dues from the liquidation estate, applies only to liquidation proceedings under Chapter III and not to insolvency resolution under Chapter II; however, the protective principle for PF dues is embedded in the Explanation (a) to Section 18(1) of the IB Code."

"The failure of the Provident Fund Organization to submit proof of claim during CIRP does not extinguish its statutory right to recover PF dues, as these are outside the scope of debts extinguishable under the IB Code."

"The resolution plan approved by the NCLT covered the entire corporate debtor, including the cement, paper, and solvent extraction units, and the petitioners, as transferees under the sanctioned scheme of arrangement and amalgamation, assumed joint and several liability for PF dues in respect of the transferred employees."

"The statutory protections under Sections 10 and 11 of the EPF Act prioritize PF dues over other debts and shield them from attachment or liquidation, underscoring the social welfare intent of the legislation."

"The binding effect of an approved resolution plan under Section 31 of the IB Code does not extend to extinguishing Provident Fund dues payable to employees and the EPF Fund, which are excluded from the definition of 'debt' and 'assets' under the IB Code."

"The petitioners' claim that the Provident Fund dues stood extinguished on account of non-inclusion in the resolution plan is rejected, and the claim of the respondent for recovery of PF dues remains enforceable."

Accordingly, the petition was dismissed, and no relief was granted to the petitioners regarding extinguishment of the Provident Fund dues.