Pension Fund U/s. 36(4)(a)(iii) of IBC Clarified.
Confusion prevails as to what constitutes the provident fund, the pension fund and the gratuity fund mentioned U/s. 36(4)(a)(iii) of IBC.
# 36. Liquidation estate. -
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(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: -
(a) assets owned by a third party which are in possession of the corporate debtor, including -
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(iii) all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund;
2. As per the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.(hereinafter called PF Act.), an employer is mandatorily required to deposit employer’s contribution & employees contribution towards provident fund & pension fund with the PF Commissioner in terms of section 6, 7A, 8 of the Act. Shortfall in depositing of employer’s contribution & employees contribution by the employer with the PF Commissioner result in EPFO claims before IRP/RP/Liquidator during CIRP/Liquidation process.
3. However, the government can grant exemption to a scheme of provident fund & pension fund created & administered by the employer, under the provisions of section 16A of PF Act.
# 16A. Authorising certain employers to maintain provident fund accounts.—
(1) The Central Government may, on an application made to it in this behalf by the employer and the majority of employees in relation to an establishment employing one hundred or more persons, authorise the employer, by an order in writing, to maintain a provident fund account in relation to the establishment, subject to such terms and conditions as may be specified in the Scheme:
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4. Similarly, employers with the prior permission of the government can establish & maintain a Gratuity Fund under the provisions of section 4A(2) of the Payment of Gratuity Act, 1972.(hereinafter called PG Act.)
# 4A. Compulsory insurance.—
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(2) The appropriate Government may, subject to such conditions as may be prescribed, exempt every employer who had already established an approved gratuity fund in respect of his employees and who desires to continue such arrangement, and every employer employing five hundred or more persons who establishes an approved gratuity fund in the manner prescribed from the provisions of sub-section (1).
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5. Thus it can be deduced as under;
There is a clear cut distinction between the dues/arrears of payments (in respect of employer’s contribution & employees contribution) to be made by CD to EPFO in terms of section 6, 7A, 8 of the Act, or with that of provident fund, pension fund & gratuity fund created & maintained by the CD under the provisions of section 16A of PF Act & section 4A(2) of PG Act.
Provisions of section 36(4)(a)(iii) of IBC are thus applicable to the funds maintained (provident fund, pension fund & gratuity fund) under the provisions of section 16A of PF Act & section 4A(2) of PG Act only. Dues/arrears payable to EPFO does not have any relevance with provisions of section 36(4)(a)(iii) of IBC.
6. Workmen/employees contribution towards provident fund deducted from the paid salaries, but not deposited by the employer (CD) with EPFO or Exempted PF/Gratuity Fund/Trust with the employer, are trust funds in the hands of CD, as such can be paid in priority during CIRP/Liquidation process, Whereas the employer’s contribution towards PF etc. is CD’s statutory liability under the provisions of PF Act. hence operational credit & is a secured operational credit under section 11 of the PF Act.
7. Some important case laws;
Supreme Court (17.07.2023) In Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Pvt. Ltd. & Ors.[Civil Appeal Nos. 7976 of 2019, (2023) ibclaw.in 81 SC]
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]
Supreme Court (19.04.2022) in Sunil Kumar Jain and others Vs. Sundaresh Bhatt and others. [Civil Appeal No. 5910 Of 2019 ]
NCLAT (11.03.2022) in Sikander Singh Jamuwal Vs. Vinay Talwar Resolution Professional. (Company Appeal(AT) (Ins)No. 483 of 2019)
NCLAT (11.02.2020) in Mr Savan Godiwala Vs. Mr. Apalla Siva Kumar [Company Appeal (AT) (Insolvency) No. 1229 of 2019 ]
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8. Supreme Court (17.07.2023) In Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Pvt. Ltd. & Ors.[Civil Appeal Nos. 7976 of 2019, (2023) ibclaw.in 81 SC] held that;
# 46. The specific mention of other class of creditors whose dues are statutory, such as dues payable to workmen or employees, “the provident fund, the pension fund, the gratuity fund” under Section 36(4), which excludes these enumerated amounts from the liquidation, especially clarifies that not all dues owed under statute are treated as ‘government’ dues. In other words, dues payable to statutory corporations which do not fall within the description “amounts due to the central or state government” such as for instance amounts payable to corporations created by statutes which have distinct juristic entity but whose dues do not constitute government dues payable or those payable into the respective Consolidated Funds stand on a different footing. Such corporations may be operational creditors or financial creditors or secured creditors depending on the nature of the transactions entered into by them with the corporate debtor. On the other hand, dues payable or requiring to be credited to the Treasury, such as tax, tariffs, etc. which broadly fall within the ambit of Article 265 of the Constitution are ‘government dues’ and therefore covered by Section 53(1)(f) of the IBC.
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9. 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.
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10. 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.
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11. 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’
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12. 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.
Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.
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