Partial Payment Of PF & Gratuity Dues Violative Of Section 30(2)(E) Of IBC: NCLAT Chennai Reiterates

Background Facts

Hindustan Newsprint Limited (“Corporate Debtor”) is a wholly owned subsidiary of Hindustan Paper Corporation Limited (HPCL), which is a Public Sector Undertaking of Government of India. The Corporate Debtor was incorporated for establishment of Kerala News Print Project Limited.

The Corporate Debtor was admitted into Corporate Insolvency Resolution Process (“CIRP”) on 28.11.2019. The Resolution Plan submitted by Kerala Industrial Infrastructure Development Corporation (“Successful Resolution Applicant/SRA”) was approved by the Committee of Creditors (“CoC”). The Resolution Plan proposed that the Secured Financial Creditors would be paid 45% of the total principal loan amount. The PF Dues and Gratuity Claims of all employees were also paid at 35.13 % of the admitted dues at par with Secured Financial Creditors and workman. Thereafter, the Adjudicating Authority vide an order dated 29.01.2021 approved the Resolution Plan of the SRA.

The employees and workmen of the Corporate Debtor filed appeals before the NCLAT challenging the order of resolution plan approval.

Contention Of Appellants

The Employees/Workmen argued that the approved Resolution Plan contravened Section 30(2)(e) of IBC, since it allocated only a partial amount towards the Provident Fund and Gratuity dues of the employees/workmen which were to be paid in full.

A trust fund was formed under the Corporate Debtor and CIRP was initiated after 11 months of production stoppage date. While placing reliance on the Supreme Court judgment in Sunil Kumar Jain v Sundaresh Bhatt, Civil Appeal No. 5910 of 2019, it was contended that wages/salaries of the Workmen/Employees of the Corporate Debtor for the period during CIRP can be included in the CIRP Cost if the Corporate Debtor continued as a going concern during the CIRP.

Contentions Of Respondent

The Respondent argued that there was no provision of fund. PF and Gratuity dues do not form part of the Liquidation Estate, therefore, the decision of the CoC and Resolution Professional could not be interfered with. The Secured Financial Creditors and workmen were treated equally under the Plan, with the allocation of 35.13 % of the admitted claim amounts. Therefore, the claims of workmen were fully considered.

Issue

Whether Provident Fund, Gratuity and Workmen/Employees dues have to be paid in full?

Relevant Law

Section 30(2)(e) of IBC

“Section 30(2): The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan – XXX

(e) does not contravene any of the provisions of the law for the time being in force…XXX”

NCLAT Verdict

The Bench relied on the Supreme Court judgment in Som Prakash Rekhi v Union of India, (1981) 1 SCC 449, wherein it was held that Social Justice is the conscience of the Constitution; the State being the Promoter of Economic Justice is bound by the statutes governing Gratuity and Provident Fund.

“The root of Gratuity and the foundation of Provident Fund are different but each one is a salutary benefaction statutorily guaranteed independently on the other and hence are having these overriding provisions engrafted in the statutes. The Public Sector, being a modal employer with a social conscience is bound by these welfare and beneficial provisions.”

The Bench observed that since the Resolution Plan has been approved, the Corporate Debtor is statutorily obliged to deposit the PF of the workmen/employees with the Employees Provident Fund Organization (EPFO) in accordance with law.

Further reliance was placed on the NCLAT judgment in Jet Aircraft Maintenance Engineers Welfare Association v Ashish Chhawchharia, Comp. App. (AT) (Ins.) No.752/2021, wherein it was held that the workmen and employees are entitled for payment of full amount of provident fund and gratuity till the CIRP commencement date. Such amount is payable by the Successful Resolution Applicant after approval of Resolution Plan, in addition to the 24 months workmen dues as the workmen is entitled to under Section 53(1)(b) of IBC. The NCLAT order was upheld by the Supreme Court.

“Having regard to the ratio of the Judgement in Jet Aircraft Maintenance Engineers Welfare Association (Supra) of this Tribunal, upheld by the Honble Apex Court, this Tribunal is of the earnest view that PF and Gratuity is to be paid in full as per the provisions of EPF and NP Act, 1952 and payment of Gratuity Act, 1972. Since admittedly the amounts paid are only 35.13% having treated them as Secured Creditors, we are of the considered view that indeed there was a violation of the provisions of Section 30(2) of the Code, with respect to the payment of PF and Gratuity only.”

The Bench held that payment of merely 35.13% of PF and Gratuity dues to workmen/employees was violative of Section 30(2)(e) of IBC. The Bench directed the SRA to make payment of unpaid Provident Fund, Gratuity Fund and pending dues to the Workmen/Employees of the Corporate Debtor till the date of CIRP, after deducting the amount already paid towards Provident Fund in the Resolution Plan. The disbursal has to be made in accordance to the principles laid down in Jet Aircraft Maintenance Engineers Welfare Association v Ashish Chhawchharia, Comp. App. (AT) (Ins.) No.752/2021.

Case Title: Mrs. C.G. Vijyalakshmi v Shri Kumar Rajan & Ors.

Case No.: Company Appeal (AT) (CH) (Ins.) No. 29 of 2021

Counsel for Appellant: Mr. K.R. Jinan, Advocate & Mr. Abhilash Nediyalil Abraham, PCS.

Counsel for Respondent: Mr. P.V. Dinesh, Mr. P.V. Vinod, Mr. P.H. Arvindh Pandian (Senior Advocate) For Mr. Shivshankar R. Panicker & Ms. Sirshti Thukral, Advocates.

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