Employees’ Provident Fund Organization vs CA. S. Prabhu

Per : Justice Sharad Kumar Sharma, Member (Judicial):

The Appellant herein, i.e., the Employees Provident Fund Organization, challenges the impugned order dated 19.01.2024 rendered by the Ld. NCLT, Chennai in IA (IBC)/1785 (CHE)/2023, which was preferred in IA (IBC)/1228(CHE)/2022 in IBA/42/2020 by the Appellant, under Section 60(5) of the I & B Code, 2016.

In the aforesaid application, the Appellant had prayed for issuance of a direction to the Respondents in the Company Petition, i.e., the Liquidator of M/s. Abra Motors Private Limited, the Company under Liquidation, to recover and realize from the assets of the Corporate Debtor the amount due to be paid to the Appellant, and if the same has already been distributed, to recover it, and to pay the EPFO dues on a priority basis over other Creditors, and to furnish the complete payment details, address, and other contact details regarding the quantification and distribution of money, including to whom and when it was distributed.

The facts which emerged for consideration are that the Corporate Debtor was established under the provisions of the Companies Act and was covered as per the stipulations contained under the EPF & Miscellaneous Provisions Act of 1952, that the Corporate Debtor had defaulted in payment of the employees’ contribution, although the same had already been deducted for the Financial Years 2008–2019 from the salary of the employees and that the total EPF amount determined to be due was Rs. 26,16,268/-.

On filing of an application under Section 9 of the I & B Code, 2016 by the Operational Creditor against the Corporate Debtor, M/s. Abra Motors Private Limited, corporate insolvency resolution process (CIRP) was commenced in respect of the CD on 08.05.2020 in IBA/42(CHE)/2020. Subsequently, observing that there were no assets left with the Corporate Debtor to realize the defaulted amount due to be paid by the Corporate Debtor, the CD was placed into liquidation proceedings by an order passed by the Ld. Adjudicating Authority on 16.04.2021 in IA (CHE)/1228/2020.

On commencement of the aforesaid liquidation proceedings, the Respondent had invited claims, and the Appellant had submitted its claim amounting to ₹26,16,268/-, being its claim under 7A, 7Q and 14B of EP Act in the prescribed Form to the Liquidator with supporting documents to substantiate the claim. Since the liquidator raised various objections and did not include EPFO in the list of stakeholders, the Appellant had to file an application before the Ld. NCLT along with the claim form for a suitable amendment in the list of Stakeholders being IA No. 1027/2021 seeking directions for admission of the claim submitted by the Appellant and for a suitable amendment in the list stakeholders.

Ld. Tribunal rejected the said application by order dated 21.03.2022, observing that the Applicant had not filed any order passed by the EPF Authority under the provisions of the Provident Fund Act or any proof or evidence by way of issuance of a notice or order passed by the Provident Fund Authorities regarding fixation of liability payable to the workmen registered with the Appellant as per the Act of 1952 to support its claim. Then the Appellant approached the NCLAT against the order dated 21.03.2022 of the Ld. NCLT, wherein the NCLAT, while considering the claim in Company Appeal (AT) (CH) (INS) No. 176/2022, passed an order on 02.08.2023 allowing the Company Appeal and remanding the matter to the Ld. Adjudicating Authority to reconsider the Applicant’s claim. Consequently, the liquidator reconsidered its order admitted the claims of the appellant by issuing a formal letter of acceptance on 11.09.2023 and by filing a modified list of stakeholders on 08.09.2023.

In the meantime, an application had been filed by the Liquidator seeking dissolution of the Corporate Debtor by way of IA No. 1185/2022 in IA No. 1228/2020 in IBA/42/2020, which was pending before the Ld. Tribunal. This application for dissolution of the Corporate Debtor at the behest of the Liquidator under Section 54 of the I & B Code, 2016 was decided by the impugned order dated 25.01.2024, which is the subject matter under challenge in the connected Company Appeal, i.e., Company Appeal (AT) (CH) (INS) No. 181/2024.

The appellant filed an application, IA(IBC)/1785(CHE)/2023 seeking directions to the respondent liquidator to recover the amount to be realized from the assets of the Corporate Debtor for its distribution and the ultimate payment of the Employees Provident Fund dues on a priority basis for the Financial Years 2008–2009 to 2018–2019, has been closed due to the closure of the liquidation process and the order of dissolution passed on 25.01.2024.

The same was considered by the Ld. Tribunal and, by the impugned order dated 19.01.2024, after considering the rival contentions, the Ld. Tribunal rejected the application on the ground that, since there were no assets of the Corporate Debtor left, the same could not be considered. This is an aspect that can now be borne out from the order of dissolution dated 25.01.2024 passed in IA(IBC)/1128(CHE)/2022. The relevant para is given below.

The Ld. Counsel for the Appellant has now submitted that his application has been wrongly rejected, because, the amount he would be entitled to receive would fall within the provisions contained under Section 36(4) of the I & B Code, 2016, which reads as under:

The Appellant contends that, since under Section 36(4)(a)(iii) of the I & B Code, 2016, the EPFO dues have been kept outside the ambit of the Liquidation Assets and they do not fall under Section 53 relating to the waterfall mechanism, the amount due to be paid to workmen or employees from the Provident Fund would stand excluded, being assets owned by a third party but in possession of the Corporate Debtor. Accordingly, he contends that the Stakeholders would be responsible to forthwith return the money received by them in the distribution process which they were not entitled to receive at the time of distribution, and that it was required to be remitted to the Appellant in light of the provisions contained under Regulation 43 of the IBBI (Liquidation Process) Regulations, 2016.

The Ld. Tribunal considered various ratios laid down by the Hon’ble Apex Court, particularly in the matter of Jet Aircraft Maintenance Engineering Welfare Association, which decided the question of whether Workmen and Employees were entitled to receive their dues under the head of PF, pension and gratuity in priority from the liquidation estate of the Corporate Debtor as per the provisions of the Code.

Ld. Tribunal considered the implications laid down in Jet Aircraft Maintenance Engineering Welfare Association (supra) as well as the judgment rendered in Tamilnad Mercantile Bank Limited v. Recovery Officer, reported in 2023 ibclaw.in 964 (HC) and concluded that, in light of the observations in Tamilnad Mercantile Bank Limited, the dues of workmen and employees payable towards Provident Fund, Gratuity, or Pension shall be governed by Section 36(4), and specifically Section 36(4)(a)(iii), which excludes all sums due to any Workman or Employee from the Provident Fund, Pension Fund, and Gratuity Fund from the ambit of the Liquidation Estate assets. Accordingly, the Tribunal concluded that the amount due towards Workmen dues would fall outside the mechanism of Section 53(1) of the I & B Code, 2016 and would be treated as falling outside the ambit of the liquidation process and that the claim of EPFO ought to be paid in priority over claims of other creditors in the liquidation process.

Based upon the aforesaid principles, the Ld. Tribunal considered the claim raised by the Appellant and concluded that the Application filed by the Appellant before the Ld. Tribunal on 21.09.2023, post-admission of its claim, praying for recovery of the amount and thereafter disbursement of the same, would not be sustainable within the ambit of Regulation 43 of the IBBI (Liquidation Process) Regulations, 2016. The Ld. Tribunal observed that, only ₹24,39,00,000/- was available for distribution by the liquidator and he distributed the same by accounting for CIRP cost (Rs.10.23 lakh), liquidation costs (Rs.6.35 lakh) and due to 6 employees on account of their PF and gratuity dues (Rs.7.82 lakh) and that this distribution is completed on 30.09.2021. It has cited the judgement of NCLAT in the matter of Jet aircraft maintenance engineers welfare Association (supra) to hold that EPFO dues are to be paid in priority over the dues of other creditors and that CIRP cost and liquidation cost will not fall to be a due of other creditors because CIRP and liquidation processes are statutory processes as prescribed under the code for orderly closure of the corporate debtor and the cost incurred in such processes have to be met out before any other dues are settled, including that of EPFO. The Appellant has contended that the EPFO dues of Rs.26,16,268/- ought to have been adjusted by the Ld. Adjudicating Authority from the amount received by the Liquidator from the refund of Income Tax dues of Rs. 24.39 lakhs instead of allowing it to be distributed under Section 53 as per the waterfall mechanism for meeting the CIRP costs, as detailed in Para 26 of the impugned order.

Ld. Counsel for the Respondent has submitted that Creditors, as defined under the I & B Code, 2016, had been paid out of the amount thus received as income tax refund, that the entire was effected on 30.09.2021 and no payment was made thereafter.

It is seen that the liquidator has distributed the amount received through income tax refund, that is the only fund available with him, under three heads-priority payment u/s 36(4)(a)(iii), CIRP costs and liquidation costs. The issue to decide now is whether the said act is valid considering there was a claim of EPFO which has to be treated on priority and whether the distributed amount should have been ordered to be recovered under the provisions of regulation, 43 of liquidation regulations to be paid to EPFO. We tend to agree with Ld. NCLT that CIRP and liquidation processes are statutory processes and the costs of the same must be paid to the extent possible because without that, the entire process of insolvency resolution will come to a standstill. The ratios relied upon by the appellant to those cases where distribution of liquidation estate was attempted to be done to creditors/other stakeholders in supersession of the claim of EPFO by bypassing the provisions of section 36(4)(a)(iii) up the code. The same situation does not exist here. Here, admittedly, there is no money to be distributed to the stakeholders outside CIRP and liquidation costs and a small portion of PF dues. This is a very peculiar and exceptional situation where strict compliance to the provisions of Section 36(4)(iii) may not be possible. For example, if the RP or the liquidator is not paid, then how the process of CIRP or liquidation can be taken forward?

Thus, owing to the finding recorded by the Ld. Tribunal that no amount was left for making payment of the EPFO dues, after paying the priority payments contained under Section 36(4)(a)(iii), CIRP costs and Liquidation costs (in part) and therefore, no payment could be made to EPFO and that no recoveries can be made under Regulation 42 of the Liquidation Regulations appear justified given the facts and circumstances of the case which is one of its kind and may not recur again. Hence, the dismissal of the Application by the Ld. Tribunal does not call for any interference by this Tribunal in the exercise of its Appellate Jurisdiction.

Hence, the Company Appeal (AT) (CH) (INS) No. 72 / 2024 lacks merit, and the same is accordingly dismissed. All pending Interlocutory Applications, if any, stand closed.

The connected Company Appeal, being Company Appeal (AT) (CH) (INS) No. 181/2024 (Employees’ Provident Fund Organization v. CA. S. Prabhu), arises out of the impugned order dated 25.01.2024 passed by the Ld. NCLT, Division Bench, Chennai in IA No. 1185 (CHE)/2022 in IA (IBC) No. 1228 (CHE)/2022 in IBA/42/2020, being the application preferred by the Liquidator under Section 54 of the I & B Code, 2016 seeking dissolution of the Corporate Debtor.

Apart from the reasons which we have already discussed while deciding Company Appeal (AT) (CH) (INS) No. 72/2024 against the order dated 19.01.2024 whereby the application preferred under Section 60(5) of the I & B Code, 2016 was rejected we further observe that the said reasoning shall also be treated as a ground for deciding the present Company Appeal.

The provisions of Section 54 of the I & B Code, 2016 contemplate the contingency that where the Corporate Debtor has been put into liquidation and its assets have been completely liquidated, the Corporate Debtor shall be dissolved upon an application preferred under Section 54 of the I & B Code, 2016. It is upon the application of the Liquidator that the Ld. Adjudicating Authority must pass an appropriate order of dissolution of the Corporate Debtor, depending upon the facts and circumstances of each case.

In the instant case, we do not have to make a detailed analysis as to how the Corporate Debtor has been put to dissolution, owing to the admitted facts already considered by us in the earlier judgment rendered in Company Appeal (AT) (CH) (INS) No. 72/2024, which shall be read in conjunction with this Judgment. The following facts are not in dispute:–

There were various heads of claims admitted by the Liquidator as detailed in the priority payments, payments towards unsecured Financial Creditors, Government Dues, and dues payable to Operational Creditors as detailed in the Schedules in Para 5 of the impugned order. The order dated 21.03.2022 was challenged before this Tribunal in Company Appeal (AT) (INS) No. 176/2022, which was allowed by order dated 02.08.2023, whereafter the matter was remitted back for reconsideration. The Liquidator admitted the claim by order dated 11.09.2023 as per the directions issued by the Appellate Tribunal by the judgment dated 02.08.2023.

The Ld. Tribunal, while considering the application preferred under Section 54 of the I & B Code, 2016, and particularly in view of the fact that there were no assets left of the Corporate Debtor and there was no possibility of its revival, proceeded to pass an order under Section 54 of the I & B Code, 2016 directing dissolution of the Corporate Debtor in accordance with the provisions contained under the IBBI (Liquidation Process) Regulations, 2016.

After completing the processes contemplated under the Regulations, as detailed in Para 8, Form-H was issued and, consequently, after considering the amounts distributed to the Stakeholders under Sections 52 and 53 of the I & B Code, 2016, the Ld. Adjudicating Authority, for the reasons assigned in Para 14, directed the dissolution of the Corporate Debtor. The relevant extract reads:–

On a conjoint reading of the reasons given in the two impugned orders under challenge in the above Company Appeals and owing to an admitted position, which has been arrived at that, there was no assets left with the Corporate Debtor and there was not even a remotest possibility of revival, the direction of dissolution of the Corporate Debtor by the impugned order was in consonance to the implications of Section 54 of I & B Code, 2016 and particularly when in accordance with the schedule of payments as given in the impugned order it is specified that, after settlement of all the claims, there was no balance left with the Corporate Debtor, hence, the dissolution was an inevitable situation, which was to be resolved by the Ld. Adjudicating Authority, which has been done by the impugned order, which too stands affirmed with the dismissal of the instant Company Appeal (AT) (CH) (INS) No. 181 / 2024. All pending Interlocutory Applications, if any, would stand closed.