Employees' Provident Fund Organisation vs Kanakadhara Ventures Private Limited

PER : BENCH

This is an application filed by the Applicant/Employees Provident Fund Organisation Under Regulation 12(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 read with Section 60(5), 87(1) (a) & (c), 88 of IB Code, 2016 seeking following reliefs:

The position of the Law that dues under EPF Act are not debts and do not form a part of the waterfall mechanism under Section 53 of IBC is judiciously settled after the judgment of Hon'ble NCLAT Judgment dated 11.03.2022 in CA (AT) 483/2019 in Sikander Singh Jamwal Vs. Vinay Talwar.

Gist of the application:

It is averred that the Corporate Debtor M/s. Kanakadhara Ventures Private Limited (which is presently undergoing Liquidation process under the supervision of Liquidator Sri. Rajesh Chillale appointed by this Tribunal) is registered under the EPF Act vide PF Code No. AP/HYD/61895 w.e.f. dated 01.08.2008. It is stated that the Applicant was seeking the detail of Employees’ Provident Fund (EPF) compliance from the Corporate Debtor since 09.09.2021 itself. It means before initiation of CIRP proceedings, EPFO authority has raised the question on the Provident Fund compliance status of Corporate Debtor. As per EPF Act, for determining the pending provident funds dues, quasi-judicial inquiry under section 7A of the Act was being conducted since 08.07.2014 during the assessment inquiry under section 7A, as per the financials of Corporate Debtor, default of EPF dues of Rs.1,45,29,011/- for the period from 01.04.2011 to 31.05.2014 was found and recorded.

It is further stated that as per Section 14B and 7Q of EPF Act, EPF dues liability were also computed for Rs.3,25,90,217/-. Accordingly, Appellant had informed the Corporate Debtor and Resolution Professional about the pending provident fund dues and filed claims vide letter dated 09.09.2021. It is stated that the liquidator vide letter and Email dated 29.07.2022 rejected all the claims filed by Applicant, EPFO, Hyderabad authority holding that, the Provident Fund dues need not be paid in priority to all other debts and that the waterfall mechanism envisaged under Section 53 of the IBC, 2016 shall only be applicable and complied with for the purpose of distribution of the sale proceeds from the liquidation assets.

It is stated that since 09.09.2021, at the time of initiation of CIRP proceeding, Resolution Professional has not communicated even a single letter/email for the EPFO authority. The Resolution Professional has failed to follow the regulations and has not made any communication with the applicant nor sought any clarification from the Corporate Debtor. It is further stated that on 11.10.2021 the liquidator has forwarded an E-mail stating that, “the PF dues need not be paid in priority to all other debts and that the water fall mechanism envisaged under section 53 of IBC 2016 shall be applicable and completed with for the purpose of distribution of the sale proceeds from the liquidation assets.

It is averred that the Liquidator clarified that there is no separate fund created by Corporate Debtor towards EPF dues and hence the EPFO claim will fall under section 53(1)(e) and further held that there are no separate funds to exclude the PF dues from liquidation estate. 2.5 It is stated that in the matter of assessment of arrear dues, the Hon'ble Supreme Court in S.V.Kondaskar, official Liquidator Vs. VM Deshpande, ITO (AIR 1972 SC 878) held that there is no provision by which Liquidation Court should be vested with the power to stop assessment proceedings. Further stated that, in case of Official Liquidator, High Court Vs. Commissioner of Income Tax, West Bengal, AIR 1970 Cal 349, Court held that no leave of court is necessary for any assessment proceeding. 2.6 It is stated that as per EPFO records and findings in the assessment inquiry reveals that, the Corporate Debtor was a habitual defaulter of EPF dues. But still recorded and accepted default on the part of employer, said part of EPF dues was not acknowledged by the Resolution Professional. It is stated that provision under IB Code 2016 does not authorize any authority/liquidator/IRP/COC to waive off the EPF dues which belongs to the poor workers and labourers. The EPF Act has been strengthen from time to time and statutory safeguards to Provident Fund has been provided through Section 8-B, 10, 11(1), 11(2), 17-B in EPF Act and provision made in IBC in Section 36(4) and Section 155(2).

It is stated recently in the matter of EPF dues, NCLT KOCHI BENCH in case number IA.No.176/KOB/2020, (MA.No.05/KOB/2020 in TIBA/01/KOB/2019 (Under Sections 35(1)(n) & 60(5) of IBC 2016) has delivered the order dated 18.02.2021 therein it has led the emphasis on the EPF dues and held that EPF Contribution, interest under section 7Q and damages payable under section 14 B are statutory dues and not claims, in Para 10 which is reproduced as under:

It is further submitted that the Hon’ble Supreme Court of India in Balbir Kaur Vs Steel Authority of India Ltd reported in (2000) 6 SCC 493 held that “It is significant to note that the Employees’ Provident Fund & Miscellaneous Provisions Act of 1952 is a beneficial piece of legislation and can amply described as a social security statue, the object of which is to ensure better future of the employees on his retirement and for the benefit of the dependents in case of his earlier death.”

It is further stated that the Hon’ble Supreme Court of India, in Maharashtra State Co-operative Bank Vs. Assistant PF Commissioner in Civil Appeal No. 6893 of 2009 held that the Provident Fund dues will include not only the dues under Section 7A but also the dues under Section 14B and 7Q. It is further stated that the amounts claimed by the Applicant under 7Q and 14B are the dues to be paid by the Corporate Debtor/ Employer/ establishment to the Applicant herein and the said amounts to be paid to the Applicant herein are termed as statutory dues but not the claims since as stated above the Applicant organization is established in the interest of the workers/employees of the respective establishments.

It is stated that Section 11(2) of the EPF Act wherein any dues payable to EPFO has been considered to be first charge notwithstanding in any content in any law enforced, to be put in priority to other debts (loans etc.) Section 11(2) of the EPF Act is produced below:

Hence, by the above said crystal clear provision in the EPF and MP Act, 1952 it is clear that Parliament is intended to protect the employees of an establishment etc. and also the said dues cannot be attached by virtue of civil courts decree or what so ever. Thus, from the above facts it clearly shows that, while rejecting the claims by Resolution Professional, Section 11 of EPF Act has been violated and at the same time, legal provision enshrined in Section 36(4) was also ignored which safeguards the Provident, Pension Funds and Gratuity Funds of employees.

It is stated that as per Section 36 of IBC Code the provident fund dues to be paid by the Corporate Debtor do not form part of liquidation estate. And similar protection of Provident Fund dues has been provided in the Section 155 (2) of IBC. That on 12-09-2018, the Ld. NCLT, Mumbai Bench delivered a judgment in the case of Precision Fasteners Ltd. (Through the Liquidator) v. Employees Provident Fund Organisation, M.A. No. 576 and 752 of 2018 in Company Petition No. 1339 of 2017 wherein it was, inter alia, clarified and held that EPF dues of the Corporate Debtor do not form part of the Liquidation Estate under Section 36 of the Code and hence, EPF dues have to be paid in priority over all remaining dues without the application of the waterfall mechanism provided under Section 53 of the Code. Those similar views have also been expressed and confirmed by this Hon'ble Appellate Tribunal in respect of the Resolution Process in the case of 'State Bank of India vs Moser Baer Karmchari Union & Another CA/AT/(Insolvency) No. 396 of 2019'; and in the case of Regional Provider Fund Commissioner-I, Ahmedabad vs Ramachandra D. Choudhary, Compar Appeal (AT)(Insolvency) No. 354 of 2019.

It is stated that the Liquidation process is still pending and the period of Liquidation process is going to end on 10.11.2022 as such no harm or loss would be cause any stake holders if the relief's sought herein are granted in favour of the Applicant herein in view of the paramount interest of the workers and if the relief's sought are not granted the applicant would suffer irreparable loss more particularly the workmen and employees otherwise it would lead to serious consequences to the families of the employees/ workers who worked/working in the Corporate Debtor establishment.

Respondent/Liquidator of Corporate Debtor filed reply, inter-alia stating that:

It is stated that the Respondent admitted the PF Claims of the applicant in full for Rs.4,71,19,228/-. The Provident Fund amounts being claimed by the applicant herein is only a multiplicity of the same. It is stated that for the reason the claim of the applicant herein could not be admitted by the Liquidator and the Liquidator had duly communicated his decision with the detailed reasons of Rejection of Claim vide his letter and email dated 29.07.2022.

It is stated that in Liquidation, Employees or workmen dues are payable at par with secured lenders dues for the period 24 months prior to Liquidation period and since 2014 there are no employees or workmen working and all the operations are closed since them. It is stated that the amounts claimed by the applicant towards short remittance is Rs.60.33 Lakhs and the remaining balance of Rs.410.95 Lakhs are towards damages and interest.

It is further stated that in relation to the position of law, Hon’ble NCLT Chandigarh Bench declared that, Resolution Professional cannot be directed to make payment of gratuity to the applicant as there is no gratuity fund created by the Corporate Debtor. As regards the salary and leave encashment during the period of CIRP, the same pertains to the amounts payable to an employee for the services rendered during the CIRP. It is stated that these expenses clearly fall within the definition of Insolvency Resolution Process cost as defined in Section 5(13)© of IBC, 2016.

It is stated that Section 36 of IBC clearly bars the liquidator from adjudication of these claims. It is stated that in terms of section 36(4)(a)(iii), as all the sums due to any workman or employees from the provident fund, the pension fund and the gratuity fund do not form part of the Liquidation Estate of the Corporate Debtor, the question of distribution of the provident fund or the pension fund or gratuity fund in order of priority and within such period as prescribed under section 53(1), does not arise. Thus, the Liquidator has rejected the claim of the applicant herein the rejection order needs no interference from any corner. It is prayed that the reliefs sought by the applicant are unjust and unlawful and liable to be dismissed.

The Counsel for the Applicant filed written submissions by reiterating the pleadings apart from that it is stated that as per the records of the Applicant Office no amount has been received out of the claim amount Rs.4,71,19,228/- and on other hand the Liquidator is Liquidating the Estate and distributing other Creditors, the Applicant herein objected in the COC meetings. Therefore, prayed this Tribunal to allow the application directing the Respondent/Liquidator to honor the Claim as per provisions/ case laws mentioned in the pleadings and also vis-à-vis complying the Section 36(4) of Insolvency and Bankruptcy Code, 2016.

The Counsel for the Respondent/Liquidator filed written submissions by reiterating the pleadings apart from that:

It is stated that the Provident Fund and Gratuity Fund, do not come within the purview of Liquidation estate for the purpose of the distribution of assets under Section 53 of the Code. It is stated that the Pension Fund, Gratuity Fund and the Provident Fund cannot be utilised, attached or distributed by the Liquidator, to satisfy the claims of other creditors. The adjudication of the Provident Fund is not within the realm of the Liquidator under IBC.

It is stated that the Hon’ble NCLAT in its judgements in Company Appeal (AT) (Insolvency) No. 354 of 2019, dated 19.12.2019 and in Company Appeal (AT) (Insolvency) No. 396 of 2019 dated 19.08.2019 and in Company Appeal (AT) ((Insolvency) No. 1229 of 2019, dated 11.02.2020) held that relying on earlier judgment, has held the liquidator cannot adjudicate the issue as the claims under PF or Gratuity are not forming part of Liquidation Estate. In all the matters the Hon’ble Appellate Tribunal clearly held that the pension fund and the gratuity fund shall not be included in the liquidation estate and cannot be used for the recovery in the liquidation and liquidator has no jurisdiction to interfere in such issues. The finding is also determined and upheld by the Hon’ble Supreme Court in its Judgement reported in 2023 SCC Online 140.

It is stated that as per section 36(2) of IBC, 2016, provides that the Liquidator shall hold the Liquidation Estate in fiduciary for the benefit of all the creditors. It is stated that the Liquidator cannot be directed to make the payment of PF dues of the workmen because the liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the Liquidators Estate. Further when there is no provision maintained by the Corporate Debtor, the liquidator cannot adjudicate or distribute any amount to the department, at this stage and prayed to dismiss the application.

In the light of the contest put forth by both the parties the following points emerge for our consideration :

Point 1 : “ Whether prayers sought by applicant are maintainable and thus Tribunal,s interference is warranted with reference to e-mail dated 29.07.2022 issued by liquidator to applicant and whether pleadings of the applicant that EPFO claim has priority over all other claims and waterfall mechanism of section 53 is not applicable to it, is maintainable and as per law ”

We have heard learned counsel Mr. B.Harinath Rao, for applicant and Learned Counsel Mr. Kalyan Chakravarthy, for liquidator.

Point 1 : “ Whether prayers sought by applicant are maintainable and thus Tribunal,s interference is warranted with reference to e-mail dated 29.07.2022 issued by liquidator to applicant and whether pleadings of the applicant that EPFO claim has priority over all other claims and waterfall mechanism of section 53 is not applicable to it, is maintainable and as per law”.

This is an application filed by EPFO with following prayers:

The learned counsel for the applicant submits that M/s. Kanakadhara Ventures Private Limited (which is presently undergoing Liquidation process under the supervision of Liquidator Sri. Rajesh Chillale appointed by this Tribunal) is registered under the EPF Act vide PF Code No. AP/HYD/61895 w.e.f. dated 01.08.2008. The applicant has filed a claim of Rs 4,71,19,228.00 which includes short remittance of PF of Rs 60,23, 947.00 and other charges of Rs 4,10,95281.00 which includes damages and interest as per Section 14B and Section & 7 Q. The applicant further contended that it wrote a letter dated 22.07.2022 ( Page 58 to 64 of application) seeking status of recovery of EPF dues and respondent sent an email dated 20.07.2022 in response to the said letter and liquidator clarified that there is no separate fund created by CD towards EPF dues and hence the EPFO claim will fall under section 53(1)(e) and further held that there is no separate funds to exclude the PF dues from liquidation estate hence the PF claim priority will be as per 53(1)(e). The applicant vehemently contended that EPFO claim is required to be paid in priority over all other claims and the liquidator has committed a grave error in stating that EPF dues have no priority and will follow as per the waterfall mechanism as envisaged under Section 53(1)(e)of IBC, 2016.

The learned counsel for the respondent out-rightly rejected the submission made by applicant and submitted that first prayer of the applicant is to set aside the Rejection Order/ Letter Dated 29/07/2022 passed by the Liquidator which is totally false as per facts of the case thus is non maintainable. Respondent submitted that PF Claims of the applicant in full for Rs.4,71,19,228/- has been admitted by the respondent and there is no rejection of claim of applicant as put forth in prayer. The respondent further submitted that because the applicant's claim is admitted that is why applicant is a member of SCC and on behalf of applicant Mr Vivek Ramana Reddy participated in 11th SCC held on 01.09.2022 in which this issue was discussed in detail. The respondent further submitted that even the second prayer which is to allow the claim made by the Applicant before the Liquidator Sri. Rajesh Chillale in respect of the recovery of provident fund dues is also infructuous as claim is already allowed in full. The respondent further submitted that he seeks dismissal of application as both the prayers are false and non maintainable. The respondent further submitted that the amounts claimed by the applicant towards short remittance is only Rs.60.33 Lakhs and the remaining balance of Rs.410.95 Lakhs are towards damages and interest. The respondent further contended that in Liquidation, Employees or workmen dues are payable at par with secured lenders dues for the period 24 months prior to Liquidation period and in this CD, operations are closed since 2014 and no employees or workmen are working since then. and all the them.

Liquidator further submitted that there is no separate fund created by Corporate Debtor towards EPF dues and hence the EPFO claim will fall under section 53(1)(e) and further held that there are no separate funds to exclude the PF dues from liquidation estate. Respondent further stated that as per Section 36 of IBC Code the provident fund dues to be paid by the Corporate Debtor do not form part of liquidation.

Our findings: For the sake of clarity and convenience , we reproduce hereunder scanned copy of the contentious e-mail dated 29.07.2022 issued by liquidator to the sApplicant is as below:

On perusal of the email supra, we find that this e-mail do not advise about rejection of the claim but it is an email providing some clarifications about the claim, therefore both the prayers i.e prayer a) set aside the Rejection Order/ Letter Dated 29/07/2022 and prayer b) to allow the claim made by the Applicant are non existent as on date and can not be considered.

We have perused the claim form filed by the applicant and find that the amount claimed by the applicant towards PF short remittance is only Rs.60.33 Lakhs and the remaining balance of Rs.410.95 Lakhs are towards damages and interest. Admittedly, as this amount will not be passed over to PF beneficiaries and the amount being proportionally very high as compared to the short remittance of PF, this Tribunal on 21.12.2023 sought clarification from the counsel of the applicant about calculation and genuineness of these amounts of interest and damages but respondent did not submit the same in spite of giving further adjournments on 09.01.2024, 06.02.2024 and 20.02.2024.

Though the applicant has not sought any prayer in the application in respect of waterfall mechanism in IBC,2016 but in the pleadings and submissions, the applicant has made a point that waterfall mechanism in IBC,2016 is not applicable to EPFO dues and EPFO claim is required to be paid in priority over all other claims whereas the respondent contend that since no separate fund is created for PF dues Section 36 of IBC Code which provides that the provident fund dues to be paid by the Corporate Debtor do not form part of liquidation estate is not applicable. To decide on this issue we place reliance on order of Hon'ble Supreme Court in Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma Vs. Union of India and Ors. : (2023) ibclaw.in 59 SC .

Hon’ble Supreme Court in this case has made it very clear that overriding preferential payments to workman’s dues as provided in Section 326 of the Companies Act, 2013 cannot be made applicable to liquidation of companies as envisaged under the IBC. Hon’ble Supreme Court held that in view of the enactment of IBC and Section 53 of the IBC, it necessitated to amend the Companies Act, 2013 and as per Sub-Section (7) of Section 327 of Companies Act, 2013, Sections 326 and 327 shall not be applicable in the event of liquidation under the IBC. Hon’ble Supreme Court also held that waterfall mechanism in IBC is based on a structured mathematical formula, and every change in the waterfall mechanism is bound to lead to cascading effects on the balance of rights and interests of the secured creditors, operational creditors and even the Central and State Governments. Thus, Hon’ble Apex Court concluded that as sub-section (7) of Section 327 of the Act, 2013 provides that Sections 326 and 327 of the Act, 2013 shall not be applicable in the event of liquidation under the IBC, the distribution of the assets shall have to be made as per Section 53 of the IBC subject to Section 36(4) of the IBC.

The concluding para VII of the said order of Hon’ble Supreme Court is reproduced hereunder:

Placing reliance on Hon'ble Supreme Court order, Supra we decide that applicant's contention that that waterfall mechanism in IBC,2016 is not applicable to EPFO dues and EPFO claim is required to be paid in priority over all other claims , is not maintainable and hence rejected.

In view of the above facts and case law , we decide that prayers sought by applicant are not maintainable and thus Tribunal’s interference is not warranted with reference to e-mail dated 29.07.2022 issued by liquidator to applicant and we also hold that pleadings of the applicant that EPFO claim has priority over all other claims and waterfall mechanism of section 53 is not applicable to it, is not maintainable . Accordingly, the point is decided.

In view of the above, this application is liable to be rejected , hence dismissed with no costs.