Tuesday 6 December 2022

Imp. Rulings - Section 36(4)(a)(iii); Provident fund, the Pension fund and the Gratuity fund.

 Imp. Rulings - Section 36(4)(a)(iii); Provident fund, the Pension fund and the Gratuity fund.

Index;

  1. NCLAT (21.10.2022) in Jet Aircraft Maintenance Engineers Welfare Association Vs. Ashish Chhawchharia RP of Jet Airways (India) Ltd. & Ors.  [Company Appeal (AT) (Insolvency) Nos. 752, 643, 792, 801 915 of 2021, 361, 771 & 987 of 2022]

  2. NCLAT (30.09.2022) in Mr. B. Parameshwara Udpa RP of M/s. Easun Reyrolle Ltd. Vs. Assistant PF Commissioner EPFO [Company Appeal (AT) (CH) (Ins) No. 231 of 2021]

  3. Supreme Court (19.04.2022) in Sunil Kumar Jain and others Vs. Sundaresh Bhatt and others.  [Civil Appeal  No. 5910 Of 2019 ]

  4. NCLAT (11.03.2022) in Sikander Singh Jamuwal Vs. Vinay Talwar Resolution Professional. (Company Appeal(AT) (Ins)No. 483 of 2019)

  5. NCLAT (11.02.2020) in Mr Savan Godiwala Vs. Mr. Apalla Siva Kumar [Company Appeal (AT) (Insolvency) No. 1229 of 2019 ]

  6. NCLAT (19.12.2019) in Regional Provident Fund Commissioner-I, Ahmedabad  Vs. Ramchandra D. Choudhary [Company Appeal (AT) (Insolvency) Nos. 354, 364, 404 & 1001 of 2019]

  7. NCLAT (19.12.2019) in Tourism Finance Corporation of India Ltd. & Ors vs Rainbow Papers Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 354, 364, 404 & 1001  of 2019]

---------------------------------------------------------

Blogger’s Comments; There is a conflict between section 30(2)(e) & section 238. The Section 11 of the 1952 Act provides for priority of payment of contributions over other debts, which is in conflict with the arrangements proposed for distribution of funds during Resolution & Liquidation of the Company in the Code. Resolution of the CD can not be equated with recovery of dues of various stakeholders. 

 

As far Section 36(4)(a)(iii) of the Code, is concerned, Hon’ble Supreme Court in Sunil Kumar Jain and others Vs. Sundaresh Bhatt and others.  [Civil Appeal  No. 5910 Of 2019 ] held that;

  • # 14(ii) considering Section 36(4) of the IB code and when the provident fund, gratuity fund and pension fund are kept out of the liquidation estate assets, the share of the workmen dues shall be kept outside the liquidation process and the concerned workmen/employees shall have to be paid the same out of such provident fund, gratuity fund and pension fund, if any, available and the Liquidator shall not have any claim over such funds.


---------------------------------------------------------------

1. NCLAT (21.10.2022) in Jet Aircraft Maintenance Engineers Welfare Association Vs. Ashish Chhawchharia RP of Jet Airways (India) Ltd. & Ors.  [Company Appeal (AT) (Insolvency) Nos. 752, 643, 792, 801 915 of 2021, 361, 771 & 987 of 2022] held that;

  • # 72. Our answer to Question II and III is as follows:

(i) The workmen and employees are entitled to receive the amount of provident fund and gratuity in full since they are not part of the liquidation estate under Section 36(4)(b)(iii).

(ii) The workmen are entitled to receive their dues from the Corporate Debtor for period of 24 months as per provision of Section 53(1)(b) at least to minimum liquidation value envisaged under Section 30(2)(b) read with Section 53(1).

  • # 80. As observed above, in admitted claim of workmen provident fund, gratuity and leave encashment was included, and payment proposed in plan partly satisfy above dues also. The workmen are entitled to full payment of provident fund and gratuity, hence, the balance of above dues are to be paid by the Successful Resolution Applicant, to satisfy statutory obligations. Non-payment of full provident fund and gratuity shall lead to violation of Section 30(2)(e), hence, to save the plan the above payments have to be made.

  • # 119. The above judgment lays down that any amount due from employer appearing in sub-section (2) of Section 11 also covers the amount determined under Section 14B and there cannot be any quarrel to the preposition as laid down by the Hon’ble Supreme Court in the above case. 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. We have already dealt the provision of Section 36(4)(a)(iii) of the Code and held that provident fund dues are not subject to distribution under Section 53(1) of the Code. The issue is fully covered by three member bench judgment of this Tribunal in “Tourism Finance Corporation of India Ltd. vs. Rainbow Papers Ltd. & Ors.” (Supra). In view of foregoing discussion, we hold that provident fund dues were entitled to be paid in full. In view of the judgment of Supreme Court in “Maharashtra State Cooperative Bank Limited vs. Assistant Provident Fund Commissioner & Others” (Supra), the claim of Appellant was to be satisfied in full, otherwise breach of provision of Section 30(2)(e) would have occurred. We, thus, are inclined to issue direction to the Successful Resolution Applicant to make payment of the admitted claim of the Appellant towards provident fund dues to save the plan from invalidity.


[ Link Synopsis ]

-------------------------------------------------------------------

2. NCLAT (30.09.2022) in Mr. B. Parameshwara Udpa RP of M/s. Easun Reyrolle Ltd. Vs. Assistant PF Commissioner EPFO [Company Appeal (AT) (CH) (Ins) No. 231 of 2021] held that;

  • The `Provident Fund’ referred to Section 36(4)(a)(iii) of the I & B Code, 2016 applies to `Provident Fund Accounts’, maintained as per Section 16-A of the `Employees Provident Fund’ & `Miscellaneous Provisions Act, 1952’.

  • If we read Section 14(1)(a), it can be inferred that there shall be complete embargo to continue any proceeding against the ‘Corporate Debtor’ by any `Authority’ till the ‘Corporate Insolvency Resolution Process’ is completed and `Moratorium’ is lifted by the ‘Adjudicating Authority’ or it result into `Liquidation’ on failure of the ‘Corporate Insolvency Resolution Process’.

  • Thus, it can be presumed that `Attachment of Bank Account’ of the `Corporate Debtor’ by `EPFO’ cannot be continued when `Moratorium’ is declared under I & B Code, 2016 and proceedings are required to be kept in abeyance till lifting of moratorium.

  • It is therefore evident that amount deducted for `Provident Fund’, purely belongs to an `Employee’ and not to be treated as an `Asset’ of the ‘Corporate Debtor’ and cannot be touched by an `Interim Resolution Professional’/`Resolution Professional’/ `Liquidator’ as the case may be.

  • Therefore, it can be concluded that `Resolution Professional’ is right in seeking lifting of `Attachment Orders’ on `Bank Account’ of ‘Corporate Debtor’ and the ‘Adjudicating Authority’ should have done accordingly.

  • The Provident Fund referred to Section 36(4)(a)(iii) I & B Code, 2016 applies to Provident Fund Accounts maintained as per Section 16-A of the Employees Provident Fund & Miscellaneous Provisions Act, 1952. 

  • The Exclusion from the Liquidation Estate Assets as well as from Recovery in Liquidation, as stipulated in Section 36(4)(a)(iii) of I&B Code, 2016, applies in respect of sums due to any workman or employee from the Provident Fund, when the Corporate Debtor has maintained an Establishment fund in terms of Section 16-A of the Employees Provident Fund, Miscellaneous Provisions Act,1952.

  • This `Tribunal’ gave clear verdict that where no fund is created by a Company, the `Liquidator’ should not have been directed to make provision for payment of Gratuity to the Workmen. 

  • Based on this, the only inference which can be drawn is that Pension Fund, Gratuity Fund and Provident Fund cannot be utilised, attached or distributed by the liquidator, to satisfy the claim of other creditors. 

  • Section 36(2) of the I B Code 2016 provides that the Liquidator shall hold the Liquidation Estate in fiduciary for the benefit of all the Creditors. The Liquidator has no domain to deal with any other property of the corporate debtor, which is not the part of the Liquidation Estate.

  • In a case, where no fund is created by a company, in violation of the Statutory provision the Section 4 of the Payment of Gratuity Act, 1972, then in that situation also, the Liquidator cannot be directed to make the payment of gratuity to the employees because the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the liquidation estate. 

  • Therefore, the `Resolution Professional’ is not duty bound to make adequate provisions for ‘Provident Fund’ when the `Corporate Debtor’ did not have separate `Provident Fund Account’. 

  • Further, in terms of Regulation 13, the ‘Resolution Professional’ is mandated to verify the `Claim’ and subsequently determine the amount of `Claim’ as per Regulation. 14. It is therefore, necessary that any person having `Claim’ over the ‘Corporate Debtor’ has to prefer `Claim’ as stipulated in such regulations.


[ Link Synopsis ]

---------------------------------------------------------

3. Supreme Court (19.04.2022) in Sunil Kumar Jain and others Vs. Sundaresh Bhatt and others.  [Civil Appeal  No. 5910 Of 2019 ] held that;

  • The wages/salaries of the workmen/employees of the Corporate Debtor for the period during CIRP can be included in the CIRP costs provided it is established and proved that the Interim Resolution Professional/Resolution Professional managed the operations of the corporate debtor as a going concern during the CIRP and that the concerned workmen/employees of the corporate debtor actually worked during the CIRP.

  • In such an eventuality, the wages/salaries of those workmen/employees who actually worked during the CIRP period when the resolution professional managed the operations of the corporate debtor as a going concern, shall be paid treating it and/or considering it as part of CIRP costs and the same shall be payable in full first as per Section 53(1)(a) of the IB Code;

  • Considering Section 36(4) of the IB code and when the provident fund, gratuity fund and pension fund are kept out of the liquidation estate assets, the share of the workmen dues shall be kept outside the liquidation process and the concerned workmen/employees shall have to be paid the same out of such provident fund, gratuity fund and pension fund, if any, available and the Liquidator shall not have any claim over such funds.


[ Link Synopsis ]

----------------------------------------------------

4. NCLAT (11.03.2022) in Sikander Singh Jamuwal Vs. Vinay Talwar Resolution Professional. (Company Appeal(AT) (Ins)No. 483 of 2019) held that;

  • However, as no provisions of the Employees Provident Funds and Miscellaneous Provision Act, 1952’ is in conflict with any of the provisions of the ‘I&B Code’ and, on the other hand, in terms of Section 36 (4) (iii), the ‘provident fund’ and the ‘gratuity fund’ are not the assets of the ‘Corporate Debtor’


[ Link Synopsis ]

-----------------------------------------------------

5. NCLAT (11.02.2020) in Mr Savan Godiwala Vs. Mr. Apalla Siva Kumar [Company Appeal (AT) (Insolvency) No. 1229 of 2019 ] held that;

  • Sec 36(2) of the I B Code 2016 provides that the Liquidator shall hold the Liquidation Estate in fiduciary for the benefit of all the Creditors. The Liquidator has no domain to deal with any other property of the corporate debtor, which is not the part of the Liquidation Estate. 

  • In a case, where no fund is created by a company, in violation of the Statutory provision of the Sec 4 of the Payment of Gratuity Act, 1972, then in that situation also, the Liquidator cannot be directed to make the payment of gratuity to the employees because the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the liquidation estate.

  • In this case, we are not concerned with determination about the entitlement of Gratuity by the employees of the ‘Corporate Debtor‘. Payment of Gratuity to employees depends on their entitlement of Gratuity, subject to the fulfilment of the conditions laid down under the payment of Gratuity Act, 1972 and also on the availability of the fund in this regard. 

  • The annual cash flow statement for the ending 31st March, 2017 show that Gratuity Fund was proposed. However, it is noticed that no such fund was created. In the circumstances, the Liquidator should not have been directed to make provision for the payment of gratuity to the workmen as per their entitlement. 


[ Link Synopsis ]

----------------------------------------------------

6. NCLAT (19.12.2019) in Regional Provident Fund Commissioner-I, Ahmedabad  Vs. Ramchandra D. Choudhary [Company Appeal (AT) (Insolvency) Nos. 354, 364, 404 & 1001 of 2019] held that; - 

  • However, as no provisions of the ‘Employees Provident Funds and Miscellaneous Provision Act, 1952’ is in conflict with any of the provisions of the ‘I&B Code’ and, on the other hand, in terms of Section  36 (4) (iii), the ‘provident fund’ and the ‘gratuity fund’ are not the assets of the ‘Corporate Debtor’, there being specific provisions, the application of Section 238 of the ‘I&B Code’ does not arise.

  • Therefore, we direct the ‘Successful Resolution Applicant’- 2nd Respondent (‘Kushal Limited’) to release full provident fund and interest thereof in terms of the provisions of the ‘Employees Provident Funds and Miscellaneous Provision Act, 1952’ immediately, as it does not include as an asset of the ‘Corporate Debtor’. The impugned order dated 27th February, 2019 approving the ‘Resolution Plan’ stands modified to the extent above. The appeal preferred by ‘Regional Provident Fund Commissioner’ is allowed with aforesaid observations and directions. No costs.


[ Link Synopsis ]

--------------------------------------------------

7. NCLAT (19.12.2019) in Tourism Finance Corporation of India Ltd. & Ors vs Rainbow Papers Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 354, 364, 404 & 1001  of 2019] held that;.

  • # 44. However, as no provisions of the ‘Employees Provident Funds and Miscellaneous Provision Act, 1952’ is in conflict with any of the provisions of the ‘I&B Code’ and, on the other hand, in terms of Section 36 (4) (iii), the ‘provident fund’ and the ‘gratuity fund’ are not the assets of the ‘Corporate Debtor’, there being specific provisions, the application of Section 238 of the ‘I&B Code’ does not arise. 

  • # 45. Therefore, we direct the ‘Successful Resolution Applicant’- 2nd Respondent (‘Kushal Limited’) to release full provident fund and interest thereof in terms of the provisions of the ‘Employees Provident Funds and Miscellaneous Provision Act, 1952’ immediately, as it does not include as an asset of the ‘Corporate Debtor’. The impugned order dated 27th February, 2019 approving the ‘Resolution Plan’ stands modified to the extent above. The appeal preferred by ‘Regional Provident Fund Commissioner’ is allowed with aforesaid observations and directions.


-----------------------------------------------------

Let’s look into the issues from a different angle.


Claims of EPFO have the following components;

  1. Employee’s contribution (deducted from the wages of the employee)

  2. Employer’s contribution.

  3. Interest & penalties


a. Employee’s contribution towards PF (deducted from the wages of the employee)

The amount deducted from the salary of the workmen & employees for onward remittance to EPFO for credit to the PF account of the concerned workman or employee, are the trust funds in the hands of the employer (CD). As per section 18(1)(f) of the Code, IRP is required to take control and custody of any asset over which the CD has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets, with the exceptions as mentioned in the explanation in the section;

  • Explanation. – For the purposes of this section, the term “assets” shall not include the following, namely: -

(a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment;

(b) assets of any Indian or foreign subsidiary of the corporate debtor; and

(c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator.


In my opinion IRP/RP cannot take possession of the amount deducted from the salary of workmen & employees, lying with CD, pending onward remittance to EPFO. The situation is similar to Section 36(4), which provides for the details of assets which do not form the part of the Liquidation Estate, and are required to be paid off prior the distribution as per Section 53. Similarly, Employee’s contribution towards PF, should be paid prior to distribution under resolution plan.


b & c. Employer’s contribution with Interest & penalties

Let’s look into the provisions of the Code & E.P.F & M.P. Act, 1952.


I & B Code, 2016

# Section 30. Submission of resolution plan. -

(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board:


E.P.F & M.P. Act, 1952

# Section 11. Priority of payment of contributions over other debts.—

(1). Where any employer is adjudicated insolvent or, being a company, an order for winding up is made, the amount due. . . . . . . . .

(2) Without prejudice to the provisions of sub-section (1), if any amount is due from an employer whether in respect of the employee's contribution (deducted from the wages of the employee) or the. 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.


Conjoint reading of the above two provisions, will reveal that provision of payment of Employer’s contribution with Interest & penalties is required to be made in priority as secured creditor in the resolution plan.


Registration of Charge on the Assets of CD;


SARFAESI - Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

# Section 26B. Registration by secured creditors and other creditors.—(1) The Central Government may by notification, extend the provisions of Chapter IV relating to Central Registry to all creditors other than secured creditors as defined in clause (zd) of sub-section (1) of section 2, for creation, modification or satisfaction of any security interest over any property of the borrower for the purpose of securing due repayment of any financial assistance granted by such creditor to the borrower. (2) From the date of notification under sub-section (1), any creditor including the secured creditor may file particulars of transactions of creation, modification or satisfaction of any security interest with the Central Registry in such form and manner as may be prescribed.

(3) A creditor other than the secured creditor filing particulars of transactions of creation, modification and satisfaction of security interest over properties created in its favour shall not be entitled to exercise any right of enforcement of securities under this Act.

(4) Every authority or officer of the Central Government or any State Government or local authority, entrusted with the function of recovery of tax or other Government dues and for issuing any order for attachment of any property of any person liable to pay the tax or Government dues, shall file with the Central Registry such attachment order with particulars of the assessee and details of tax or other Government dues from such date as may be notified by the Central Government, in such form and manner as may be prescribed.

(5) If any person, having any claim against any borrower, obtains orders for attachment of property from any court or other authority empowered to issue attachment order, such person may file particulars of such attachment orders with Central Registry in such form and manner on payment of such fee as may be prescribed.


# Section 26E. Priority to secured creditors.—Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.


Explanation.—For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.


--------------------------------------------------------


No comments:

Post a Comment