Nurani Subramanian Suryanarayanan, Liquidator of M/s. Care IT Solutions Pvt. Ltd. vs Employees State Insurance Corporation & Ors.

The Liquidator of M/s. Care IT Solutions Pvt. Ltd. the Corporate Debtor is before us, putting a challenge to the Impugned Order dated 31^st December 2019, as it was rendered by the Learned Adjudicating Authority of National Company Law Tribunal, Chennai Bench, while deciding MA No.268/IB/2019 in CP/1056/IB/2018, as it was preferred by the Appellant herein by invoking the Provisions contained under Section 60(5)(b)(c) to be read with Section 25(a) of the I & B Code, 2016. By virtue of the application in MA/268/IB/2019 in CP/1056/IB/2018, the Appellant before the Learned Adjudicating Authority has claimed for the following relief, that the attachments which has been made on the Immovable Property of the Corporate Debtor may be lifted in order to enable him to meet the objectives as contemplated under the I&B Code, by auctioning the property, for the purposes of settlement of claims of the claimants as against the Corporate Debtor.

At this stage, we are not required to venture into the factual aspects except for the ones which has been argued by the Learned Counsel for the Appellant, that is, the Impugned Order as passed by the Learned Adjudicating Authority suffers from the various vices being

The Learned Counsel for the Appellant submitted that if Section 94 of Employees State Insurance Act, 1948 is taken into consideration it clearly shows that contribution etc. due to Corporation is in nature of statutory dues and will have priority among all other debts in the distribution of assets of a Company being wound up. The relevant section is extracted hereunder.

We are of the opinion, that the Provisions of Section 94 of Act, has to be read in its entirety and especially its concluding part, where it prescribes payment of ESIC dues on a priority basis, above all other debts in the event of distribution of assets of a Company being wound up. It shows that Legislature has consciously attached high importance to safeguarding of ESI dues in comparison to other debts in the event of winding up/liquidation of a Company. Further since Section 94 seeks to safeguard the contribution, it cannot be read by the Appellant in exclusion of the definition of ‘contribution’ as it has been provided under the ESI Act ‘Contribution’ is defined under Sub Section (4) of Section 2 of the ESI Act, 1948. A surgical interpretation is required to be made of the said definition in order to appreciate the argument of the Appellant, in the context of Section 94 and counter argument of the Learned Counsel for the Respondent in the context of Section 36(4)(a) of I&B Code. The term ‘contribution’ as defined under Sub Section (4) of Section 2 of the Act is extracted hereunder:-

Thus, Contribution will mean money payable to the Corporation by the employer, including any amount payable by or, on behalf of the employee for the benefit of the employees or the workmen working with the employer.

The term ‘money’ payable under the definition clause of Sub Section (4) of Section 2, will mean an amount payable by the principal employer in respect of an employee. The term used ‘in respect of an employee’ in the definition clause of contribution would mean that, the payment of money under the head of ‘contribution’ to the Corporation has to be in context of the amount which has already been earned by a workmen and determined to be made payable to an employee but which is to be paid to the Corporation, by way of a contribution.

In a nutshell, we are of the view, that, on a simpliciter interpretation of Sub Section (4) of Section 2, the employers liability of paying the money to the Corporation as ‘Contribution’ would be towards a money which already stands earned by an employee as a consequence of his employment and services discharged and since this money has been earned by an employee, as a consequence of employment, it will not amount to be the money of the employer at all, which is to be deposited by the employer to the Corporation to meet the objective of the Employees State Insurance Act, of providing a benefit of health insurance to the employees working, with the employer.

The argument extended by the Learned Counsel for the Appellant, is that the legislature with its clear intent has not included the ESI Act, under the list of Acts which have been specifically exempted under Section 36(4) and therefore ESI Act cannot be included the said list by interpretation by Courts automatically not cover the ESI Act itself. Apparently, this argument seems to be quite attractive and correct because the provision of an Act cannot be introduced to be included and made applicable within a provision already provided by the statute by an interpretation to be given by the Courts.

To support this argument, the appellant has referred to the deliberations which took place in the Parliament as referred to in Para 3(c) what he intends to convey is that as per the report of the Joint Committee on the Insolvency & Bankruptcy Code, 2015, and as it was discussed in the Lok Sabha on 20^th April 2016, there had been certain deliberation on the subject of excluding certain heads of deductions from the Workmen’s wages and salaries which are being made towards benefits of an employee, for example, the Provident Fund, Pensions, Gratuity, etc. from the Liquidation Estate of an employer who has been declared as to be a bankrupt and in view of the extraction made to para 27 of the Joint Committee’s Report dated 20^th April 2016, he submits that since ESI Act of 1948 has not been included in it, the same cannot be brought in now, by interpretation of statutes, within the list of deductions/contributions made from the wages of the workmen, to be placed outside the ambit of the estates of the Liquidator. There are two reasons for not to accept the argument of the Learned Counsel for the Appellant. The first reason is that the discussion which has taken place and as referred to in Para 3(c) of his written submissions which is with regard to the report of the Joint Committee, it is not for the purpose of the judicial consumption, since not being a statute or a subordinate legislation, as it is exclusively a discussion and deliberation only which has taken place in Lok Sabha. To what conclusion it has been reached, too could only be reflected from the statute books and that is to be interpreted under the law, by the Court of Law, as to what implication would it carry. In that context, if we take into consideration the exclusions expressly made in Section 36(4)(a)(i) of I&B Code vis-à-vis the provisions under Section 94 of the ESI Act, 1948, it is apparent that ESI Act is not been covered by the ‘Exclusion’. But, if the definition of ‘Contribution’ in ESI Act, which has been discussed above, is taken into account, in conjunction with the provisions contained under Section 40 of the Employees State Insurance Act, which speaks about the ‘Contribution’, which has to be paid by the principal employer at the first available instances and which will be inclusive of the Contributions made by the employee, then ‘Contribution’ made under ESI Act will stand on a different pedestal as compared to other statutory dues.

Relevant would be the Provisions contained under Sub-Section (4) of Section 40 of the ESI Act, 1948, which contemplates that any deduction of contribution made by the employer for an amount payable to the Corporation, from the income earned by the Workmen and the said amount thus placed with the Corporation would be a “trust” as it was creating an entrustment, because the amount of contribution being deducted by the employer for depositing the same with the Corporation is an amount which was already supposed to be received by the workmen, owing to his earnings made as a consequence of rendering his services. Section 40 Sub Section (4), is extracted hereunder.

It would be apt at this stage itself to deal with as to what implications would the term “entrustment”, would be in the context of the Provisions contained under Sub Section (4) of Section 40. This Provisions proceeds with a deeming clause, which means that there is an automatic entrustment which could be drawn without any interpretation to the contrary, that any amount thus deducted by the employer from the wages of an employee, which is the case at hand would be an entrustment created with the employer of the money earned by the employee for the purposes of the contribution to be made under the Act of 1948.

Now, the question which arises is as to whether the term “entrusted” as used under Sub Section (4) of Section 40 of the ESI Act (as extracted above) could at all be read to meet the spirit of Section 36 Sub Section 4(a)(i) of I & B Code, Section 36 (4)(a)(i) provides that the certain amounts are not to be included into the assets of the liquidator so as to be made as a part of the liquidation estate and that the said exemptions include within itself, the assets held in trust for any third party. The assets herein would denote to the “deduction” made by the principle employer under the Provisions of the ESI Act, as involved herein in the instant case, and as it would be the contribution or deductions made from the salary of the workmen as deducted by the employer so as to be paid to the Corporation and which is held as a ‘trust’ for a third party and third party herein would denote the workmen.

In that eventuality, the term ‘Assets’ held in trust’ in the Section 36 sub-Section 4(a)(i) of I&B Code would relate back to the provisions of the entrustment which precedes with the deeming clause under Sub-Section (4) of Section 40 of the ESI Act. In that eventuality, where there is a creation of an entrustment, that has to be read as a “trust for the third party”, in the context of the provisions contained under Sub Section (4)(a)(i) of Section 36 of I & B Code and, hence the amount thus deducted to be paid by the employer to the Corporation under the ESI Act, falling within the ambit of definition of ‘contribution’ prescribed under Sub Section (2) of Section 4 of the ESI Act 1948, will fall well within the exception provisions under Sub Section (4) of Section 36 of the I & B Code, and the amount thus deducted by the employer to be paid to the Corporation, under the Provisions of ESI Act, would be an entrustment, which would be read as to be synonymous to the ‘Trust’ referred to under Sub Section (4)(a)(i) of Section 36 of the I&B Code. In that eventuality, the amount which was deducted and has since been ousted from earnings of the workmen to be made as a part of contribution to ESIC cannot be brought back within the liquidation Estate, which was being attempted to by the Appellant by filing the IA before the Adjudicating Authority praying for that the order of attachment of immovable property by ESIC under Section 45G of ESI Act, 1948 vide order No.TN/RECY/45-G/51000775790000911/CCR-78252-81490 dated 14^th December 2018, may be declared as invalid. It is to be held that the attachment in consonance to the provisions of the ESI Act of 1948, has to be read as independent to the Provisions of the I&B Code and that too particularly when the amount for which the same has been attached pertains to a period one year prior to the order of Liquidation, which in the instant case happen to be dating back to 23^rd August 2017, that is the date of issue of first notice by ESIC for the amount payable towards the contribution by the employer for the period prior to it and the CIRP proceedings had commenced only on 17^th October 2018. Thus, attachment was much prior in time and even otherwise also, the attachment was done for a default for a period prior to 23^rd August 2017, i.e., prior to CIRP proceedings. Thus, it is to be ousted from the CIRP proceedings which has commenced only on 17^th of October 2018 i.e., much later on. Even on perusal of the Impugned Judgment, where the appellant has intended to invoke Section 60(5) of I&B Code to get the attachment made by ESIC declared as invalid, it is seen that the Adjudicating has rightly held that such ESIC dues will not fall to be within the liquidation estate under Section 36(4) of I&B Code.

We are of the view, that it cannot be ruled out that the Provisions contained under the ESI Act of 1948 is a beneficial piece of legislation, where the interests of the workmen is intended to be safeguarded by bringing them within the ambit of the benefit of insurance scheme, as enshrined under the ESI Act and to find the same, contribution is collected from workmen ESI Act since being a welfare statute where the liability is statutorily fastened upon the employer to contribute with regards to the deductions made from the salary of the workmen, it will be fitting that the contributions/deductions made towards is excluded from forming part of ambit of liquidation, to be brought in to be an asset of a Liquidator, and this position has been adequately justified by the Impugned Order in terms of the relevant legal provisions while rejecting the MA/268/IB/2019 preferred by the Appellant. Owing to the aforesaid reasons, we do not find that the Learned Adjudicating Authority has erred at law, in any manner whatsoever, by not making the deductions made towards the Contribution as defined under the ESI Act, as to be the part of the estate of the Liquidator to be placed under the Liquidation Proceedings.

Thus, for the aforesaid reasons, we do not find any error as such in the Impugned Order which could call for any interference, consequently, the Appeal lacks merit and the same is Dismissed.