PAYMENT OF PROVIDEDN FUND DUES IS NOT THE ASSET OF THE CORPORATE DEBTOR

[Mr. M. GOVINDARAJAN]

Priority

Section 11(2) of the Employees Provident Funds and Miscellaneous Provisions Act,1952 provides that if any amount is due from an employer whether in respect of the employees contribution (deducted from the wages of the employee) or the employer's contribution, the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority to all other debts.

Issue

The issue to be discussed in this article is as to whether the dues of the Provident Fund in respect of a corporate debtor are to be allowed in full.  In some cases it was held that the dues of the Departments like that of Income Tax, GST etc. are to be treated as operational creditors and they are not entitled to have the full payment from the Resolution applicant.  In the case laws given below it was held that the PF dues are not the assets of the corporate debtor and the same has to be paid in full and the Resolution Applicant was directed to pay the dues of PF in full in order to prevent the invalidity of the resolution plan.

Case laws

In ‘JET AIRCRAFT MAINTENANCE ENGINEERS WELFARE ASSOCIATION VERSUS ASHISH CHHAWCHHARIA RESOLUTION PROFESSIONAL OF JET AIRWAYS (INDIA) LTD. & ORS; ASSOCIATION OF AGGRIEVED WORKMEN OF JET AIRWAYS (INDIA) LTD. VERSUS JET AIRWAYS (INDIA) LTD. & ORS. - 2022 (11) TMI 332 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI, along with the appeal filed by the PF Commissioner in ‘Regional P.F. Commissioner Vs Ashish Chhawchharia, Resolution Professional for Jet Airways (India) Limited and another’.  In this case the Claim of the Appellant-Regional P.F. Commissioner was for the Provident Fund dues and was not accepted in the Resolution Plan. Claim was filed by the Provident Fund Commissioner for Rs.24,40,65,594/-whereas the plan treating the Appellant as Operational Creditor held that Appellant is not entitled for any amount in view of the liquidation value of the Operational Creditor being Nil. 

The issue taken for consideration by the National Company Law Appellate Tribunal is whether the claim of Regional Provident Fund Commissioner verified to the extent of Rs.24,40,65,594/- arising out of an order dated 17.10.2018 passed under Section 14B of Employees' Provident Funds & Miscellaneous Provisions Act 1952 can be treated as secured debt and the Appellant was entitled to receive the amount as secured creditors.  The National Company Law Appellate Tribunal observed that the amount which was claimed by the Appellant was fully admitted by the Resolution Professional. List of Creditors mentions the admitted amount of the Appellant. The Appellant has filed his claim in Form B.  The Appellant’s claim was not in the nature of workmen dues. The claim was also with regard to damages imposed under Section 14B of the 1952 Act. The Appellant was treated as Operational Creditor by the Resolution Professional, hence, the Appellant was allocated a fixed amount of Rs.15,000/- which was allocated to all Operational Creditors except the workmen.

The challenge to the Resolution Plan by the Appellant is on the ground that Section 11 of the 1952 Act requires priority over all other dues and further Section 36(4)(a)(iii) excludes provident fund dues from the liquidation estate of the Corporate Debtor.  The priority for payment of debt under Section 11 of the 1952 Act has to be looked into in view of the mechanism which is specifically provided under Section 53(1) of the Code.  The  provident fund dues are not subject to distribution under Section 53(1) of the Code.  The National Company Law Appellate Tribunal held that provident fund dues were entitled to be paid in full.  The National Company Law Appellate Tribunal directed the Successful Resolution Applicant to make payment of the admitted claim of the Appellant towards provident fund dues to save the plan from invalidity.

In ASSAM TEA EMPLOYEES PROVIDENT FUND ORGANIZATION VERSUS MR. MADHUR AGARWAL, HAIL TEA LIMITED - 2022 (11) TMI 403 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI, corporate insolvency resolution process was initiated against the corporate debtor, Hail Tea Limited.  In response to the public announcement made by the Interim Resolution Professional the appellant filed a claim in Form B to the tune of Rs.2.10 crores  on account of default on part of the Corporate Debtor to deposit its-

• Provident Fund Contribution,
• Provident Fund Administrative Cost,
• Interest for delay in deposit of the Provident Fund Dues,
• Interest for delay in deposit of Deposit Linked Insurance Dues; and
• Provident Fund Contribution due and payment

for the period commencing from 28th March, 2019 till 26th September, 2019.  The claim of the appellant was accepted entirely by the Resolution Professional.  The Resolution Professional called for a resolution plan from the eligible Resolution Applicant.  Resolution plans were submitted and the resolution plan has been approved by the Committee of Creditors.  The Adjudicating Authority also approved the resolution plan. 

In the resolution plan the appellant was offered only Rs.1,07,21,592/- .  Rs.64,30,222/- as a part payment was made to the appellant. Against this the appellant filed the present appeal before the National Company Law Appellate Tribunal.  The appellant contended before the National Company Law Appellate Tribunal that-

•  The Resolution Professional having admitted the amount of Rs. 2,10,13,797.92/-, was required to be paid in full.
• Non-payment of the full amount is violation of provision of Section 30(2)(e) of the Code.
•  Provident Fund Dues are not dues of any other Operational Creditor.

The respondent submitted the following before the National Company Law Appellate Tribunal-

• The Appeal is barred by time it having been filed on 28th February, 2022 challenging the Order dated 3rd January, 2022.
• The approval of the Resolution Plan is in the domain of the commercial wisdom of the Committee of Creditors.
• Haircut has been given to all the Financial Creditor(s) and Operational Creditor(s).

The National Company Law Appellate Tribunal considered the arguments put forth by the parties to the present appeal.  The National Company Law Appellate Tribunal observed that the PF dues, amount mentioned in paragraph 8 of the Judgment is Rs. 2,10,13,798/- whereas total payment proposed in the plan is Rs. 1,07,21,592.

The National Company Law Appellate Tribunal relied on the order in ‘Regional P.F. Commissioner’ (supra) and held that the facts of the present case are fully covered under this judgment.  The National Company Law Appellate Tribunal held that provident fund dues are not the assets of the Corporate Debtor and they have to be paid in full. Hence, the Appellant was clearly entitled for payment of full provident fund dues i.e. an amount of Rs. 2,10,13,798/-.  The National Company Law Appellate Tribunal directed the Successful Resolution Applicant to make the payment of balance amount of Provident Fund to the Appellant to save the Resolution Plan from invalidity. 

In regard to time bar to file appeal the National Company Law Appellate Tribunal observed that the Judgment of the Supreme Court in IN RE: COGNIZANCE FOR EXTENSION OF LIMITATION - 2022 (1) TMI 385 - SC ORDER  extended the period of limitation till 28th February, 2022 for all Appeals and has further granted 90 days’ time to file the Appeal.   The present Appeal is fully covered by the Judgment of the Supreme Court in Suo Moto Writ Petition No. 03 of 2022 extending the period of limitation as afore-noted. Thus objection of the Respondent regarding limitation cannot be accepted.

Further the National Company Law Appellate Tribunal did not accept the contentions of the respondent that the Appellant is an Operational Creditor and both Operational Creditor and Financial Creditor have taken haircut.