Payment Of EPF Dues Under The IBC – Supreme Court Paves Way For Full Realization

However, the mandate of the Code had remained shrouded in ambiguity over several aspects which had necessitated judicial and legislative intervention to clarify the mandate of the Code. A recent issue imbued with vagueness concerned the payment of Employees’ Provident Fund dues [EPF dues] dues arising under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 [the EPF Act].

Mandate Under The EPF Act

The EPF Act imposes a statutory duty upon the employers to establish a corpus for disbursal of the EPF dues to the employees at the establishment. Similar to the Gujarat Value Added Tax in the State Tax Officer v. Rainbow Papers Ltd.  [Rainbow Papers] judgment, the EPF dues are given the first charge on the assets of the establishment under Section 11 of the EPF Act. While any contravention or default in compliance with the statutory provisions of the EPF Act results in imposition of penalties under Section 14.

Additionally, Section 17-B of the EPF Act states that the employer and the person to whom the establishment is so transferred shall jointly and severally be liable to pay the contribution and other sums due under the EPF Act.

However, the introduction of the Code led to ambiguity with respect to the mandate provided under the EPF Act. The Apex Court in Innoventive Industries Ltd. v. ICICI Bank [2018] 1 SCC 407 had held that the Code is a complete code and is exhaustive in nature. Section 53 of the Code prioritizes the unpaid dues owed to employees ‘for the period of twelve months preceding the liquidation commencement date’.

It can be evinced from the EPF Act that any unpaid EPF dues shall be disbursed from the corpus created by the employer. However, in instances where the employer, i.e. the corporate debtor, has failed to create and maintain a separate corpus for the EPF dues, there emerges conflicting NCLAT jurisprudence.

Split Jurisprudence on Payment of EPF Dues

Beginning from Tourism Finance Corp. of India Ltd. v. Rainbow Papers Ltd. 2019 SCC OnLine NCLAT 910, [Tourism Finance] the three-members Principal bench of NCLAT had held that the provisions of the EPF Act and the Code are not in conflict. Thus, implementing the harmonious interpretations with respect to the two legislations, the bench modified the approved plan & directed the Applicant to release full provident fund and interest as per the EPF Act.

However, a contrasting view arose from the NCLAT Chennai bench in the case of Savan Godiwala v. Appalla Siva Kumar 2020 SCC OnLine NCLAT 191. The Chennai bench noted that the gratuity fund did not fall within the purview of the liquidation estate under the Code, hence, the Liquidator cannot be directed to make any special provision in absence of a corpus for the same. The same was reiterated in Regional Provident Commissioner EPFO v. Vandana Garg 2021 SCC OnLine NCLAT 163 wherein the two-members Chennai bench relied on Ghanshyam Mishra to hold that the approved resolution plan shall remain binding upon the stakeholders. Hence the claims under the approved resolution plan stood frozen while all other claims stood extinguished. Similar verdict was pronounced in the case of B. Parameshwara Udpa RP of Easun Reyrolle Ltd. v. Assistant PF Commissioner Company Appeal (AT)(CH)(Insolvency) No. 231 of 2021, where the two-members Chennai bench held that the Resolution Professional is not dutybound to make provisions for provident fund when the Corporate Debtor did not have any separate provident fund.

The Principal bench followed an incongruous stand with respect to the NCLAT Chennai bench which began with Tourism Finance and continued with Sikander Singh Jamuwal v. Vinay Talwar 2022 SCC OnLine NCLAT 125. In Sikander Singh Jamwal case, the Principal bench relied upon Section 17-B of the EPF Act to hold that the Applicant as the transferee shall be liable to pay the outstanding dues under the EPF Act in respect of the period up to the date of such transfer of the establishment. The bench held that the payment of EPF dues is a mandatory compliance of law. Thus, the payment of EPF dues is a must and it is not subject to the commercial wisdom of Committee of Creditors. A similar finding was pronounced by the Principal bench in Nitin Gupta v. M/s Applied Electro-Magnetics Pvt. Ltd. Company Appeal (AT)(Ins) No. 502 of 2019.

Although the Apex Court in the case of Sunil Kumar Jain v. Sundaresh Bhatt [2022] 7 SCC 540 clarified that the employees have to be paid the workman dues out of ‘such provident fund, gratuity fund and pension, if any, available’.

But, the two-member Principal Bench in Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia RP of Jet Airways 2022 SCC OnLine NCLAT 418 took a peculiar course while considering the Sunil Jain judgment. The Principal Bench observed that as the Sunil Jain judgment was in context of liquidation of the company, thus, it is not applicable for cases where the resolution plan has been approved. Interestingly, the bench voiced no such qualms while placing reliance upon State Bank of India v. Moser Baer Karamchari Union 2019 SCC OnLine NCLAT 447, which also dealt with liquidation, to hold that the provident fund must be paid in full as the same cannot be made subject to the waterfall mechanism under Section 53(1) of the Code.

Moreover, the bench observed that the words ‘if any, available’ as stated by the Supreme Court were incapable of being read to mean that the workmen and employees are not entitled for provident fund, gratuity fund and pension fund if not available with the Liquidator. Yet, with respect to disbursal of pension dues, the bench noted that as no material established that the Corporate Debtor had ‘any rules/provisions for payment of pension, hence, no direction with regard to pension need to be issued’. Ultimately, the bench directed only to the extent of payment of EPF dues.

Subsequently, the Principal bench adjudicated Assam Tea Employees Provident Fund Organization v. Madhur Agarwal & Anr. CA[AT][Ins] No. 262 of 2022 on a similar note by placing reliance upon the rationale provided in Ashish Chhawchharia.

On the other hand, the two-member Chennai bench in EPFO v. Dommeti Surya Rama Krishna Saibaba Company Appeal (AT)(CH)(Insolvency) No. 215 of 2022 remained steadfast on the view that the EPF dues cannot be incorporated in the approved resolution plan. The Chennai bench relied on Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. (2021) 7 SCC 474 wherein the Supreme Court had held that the judicial intervention or innovation from the Tribunal should be kept at a bare minimum to avoid any disturbance to the foundational principles of the Code. Consequently, the Chennai bench observed that the Appellate Tribunal had a limited jurisdiction to examine the approved resolution plan only to the extent of compliance with Section 30 and 31 of the Code. Thus, the jurisdiction of the Appellate Tribunal cannot be extrapolated to instances where the approved resolution plan is modified unilaterally by the Tribunal.

The reliability upon the case of Tourism Finance becomes disputable due to the recent Sunil Jain verdict by the Supreme Court, specifically in instances where the corpus remains unavailable for disbursal of funds. In Ashish Chhawchharia, the Principal Bench of the NCLAT had placed a restrictive interpretation upon the Sunil Jain judgment only to liquidation instances. Yet, the Principal Bench refrained from issuing any directions to the extent of payment of pensions in absence of rules/provisions created by the Corporate Debtor for disbursal of the same.

The Supreme Court has dismissed the appeals against the Ashish Chhawchharia and Assam Tea Employees Provident Fund Organization and upheld the view of the Principal Bench of NCLAT. Thus, it is established by the Apex Court that the EPF dues must be discharged by the Successful Resolution Applicant.

However, the Supreme Court did not make any observations to clarify whether the liability remains intact even in instances where no corpus exists for the payment of EPF dues or whether the bench can issue directions for unilateral modification of the approved resolution plan. To add further, recently the NCLAT Chennai Bench itself in C.G.Vijyalakshmi v Shri Kumar Rajan & Ors has held that the Supreme Court’s approval of the verdict in the Jet Airways case, clarifies that EPF dues have to be paid in full – a view divergent from its earlier stand and without going into the question of whether the previous management had kept a corpus for payment of PF dues.

It is pertinent to recognize that any tampering with the already approved resolution plan pushes the Resolution Applicant back to the drawing board to draw up a feasible plan incorporating the latest changes. Such a modification also interferes with the exercise of commercial wisdom of the Committee of Creditors as it denies the Committee an opportunity to consider the viability of the modified plan.

Thus, it is necessary that a three-member bench of the NCLAT dispel the incongruity and provide clarity for the future Resolution Applicants with respect to their liability in instances where no corpus has been created by the corporate debtor for payment of the outstanding EPF dues.

The authors are Advocates. Views are personal.