Evolving Jurisprudence Related To Priority Of Employees Provident Fund Dues Vis A Vis Dues Payable To Secured Creditors

However, post insertion of Section 31-B in the Recovery of Debts and Bankruptcy Act, 1993 ('RDB Act') and Section 26-E in the Securitization and Asset Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) there has been increased litigation in various courts and tribunals where secured financial creditors have claimed priority in payment of their dues vis a vis the dues payable to the EPFO towards pending employer/employee contributions. The ambiguity with respect to priority of EPF dues vis a vis dues payable by the defaulting Employer to the secured creditors has arisen particularly in light of the judgment dated April 21, 2020 of the Hon'ble Telangana High Court in the case of State Bank of India v. Union of India and Ors^[2].

Review Of The Applicable Provisions Of Law:

Section 11(2) of the EPF Act states that dues payable to the EPFO with respect to Employer's contribution as well as the employee's contribution deducted by the Employer shall deemed to hold first charge on the assets of the Employer/Defaulting company and shall, notwithstanding anything contained in any other law for the time being force, be paid in priority to all other debts.

Section 31-B (pari materia to Section 26-E of the SARFAESI Act) of the RDB Act states that notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and other rates due to the Central Government, State Government or local authority.

Section 31-B of the RDB Act was brought into effect on September 01, 2016 by way of an amendment and Section 26-E of SARFAESI Act was brought into effect on January 24, 2020.

Analysis Of Judicial Precedents:

The legal position with regard to priority of EPFO dues vis a vis the dues of a secured creditor was considered by various High Courts in India. In Indian Overseas Bank v. Employees Provident Fund Organisation and Others^[3], the Hon'ble High Court of Gujarat, considered a challenge to an order of attachment of immovable properties issued by EPFO where the same immovable properties were also mortgaged in favour of the writ petitioner. It was held that the mention of Government dues (in Section 31-B of the RDB Act) which would include revenues, taxes, cesses and rates due to the Central Government, State Government or local authority would not cover the first charge created by operation of law under Section 11(2) of the EPF Act. The Hon'ble High Court of Gujarat held that in light of the provisions of EPF Act, the EPFO dues would have priority over the dues of the secured creditor and therefore the EPFO was within its power to issue the order of attachment of immovable properties.

In the matter of Phoenix ARC Private Ltd v. Assistant Provident Fund Commissioner & Recovery Officer and Others, the secured assets of the borrower were attached by the order passed by the authorities under Section 8-F of the EPF Act, claiming first charge in terms of Section 11 (2) of the EPF Act for recovery of provident fund dues, and the said order was challenged by the petitioner ARC in the two writ petitions being WP Nos. 4259 of 2018 and WP Nos. 4260 of 2018 filed in the Hon'ble High Court of Madras. The issue pending consideration before the Hon'ble High Court of Madras is whether the secured creditor would have priority of charge over secured assets in view of the amendments made by way of introduction of Section 31-B of the RDB Act read with Section 26-E of the SARFAESI Act, over and above the charge of the EPFO under the EPF Act.

As the issue framed by the Hon'ble Madras High Court in the writ petitions filed by Phoenix ARC Private Limited writ petitions was involved/raised in several other matters before the Hon'ble High Court of Madras, the Hon'ble High Court tagged these petitions with such other petitions being inter alia WP No. 10585 of 2018; WP No. 3090 of 2020 and WP No. 10094 of 2020 ('Pending Writ Petitions'). These matters have been referred to a larger bench of the Hon'ble High Court of Madras vide order dated January 27 2021 and are currently pending adjudication.

Phoenix ARC in the aforementioned writ petitions had filed miscellaneous applications seeking interim injunctions against the action of EPF authorities i.e., issuance of a sale notice for sale of movable assets of the company without compliance with the due process of law and without notice to the petitioner ARC. The Hon'ble High Court of Madras, while deciding the interim applications vide its order dated April 4, 2018^[4], prima facie held that the EPF Act is a welfare legislation and the provisions of the EPF Act, relating to settlement of provident fund dues of the employees, have to be given paramount importance. The said order dated April 04, 2018 was challenged in appeal before the division bench, and the latter vide its order dated April 28, 2018^[5], disposed of the appeals confirming the order dated April 04, 2018. The special leave petition filed against the order dated April 28, 2018 was also dismissed by the Hon'ble Supreme Court vide order^[6] dated June 1, 2018.

The order dated April 04, 2018 has been relied upon by High courts in subsequent judgments even though it was an interim order and the main writ petition is still pending adjudication.

In the case of State Industrial and Investment Corporation of Maharashtra Limited v. Veeky Cotysn Limited and Others^[7], the Hon'ble Bombay High Court at Nagpur has also held that the EPFO dues would have priority over amounts realised from sale of assets of the company over and above the dues of the secured creditor.

Conflicting Judgment Of The Hon'ble High Court Of Telangana

In State Bank of India v. The Union of India & Ors (supra), the division bench of the High Court of Telangana vide its judgment dated April 21, 2020 held that Section 31-B of RDB Act and Section 26-E of SARFAESI Act give priority to claims of secured creditors like the petitioner over the dues under the EPF Act. The High Court relied upon the Supreme Court judgment in Solidaire India Ltd v. Fairgrowth Financial Services Ltd ^[8] wherein it was held that in the event of a conflict between two special acts, where both contain non obstante clauses, the clause in the later act will prevail. As Section 31-B of the RDB Act and Section 26-E of the SARFAESI Act were enacted post the EPF Act, the High Court of Telangana held that the secured creditors would be given priority over and above the EPF dues. The judgment of the Telangana High Court has been challenged -by way of a Special Leave Petition filed by the Regional Provident Fund Commissioner and Recovery Officer before the Hon'ble Supreme Court of India. The said Special Leave Petition is currently pending adjudication before the Hon'ble Supreme Court of India.

Liability To Pay The Outstanding EPF Dues During Insolvency Resolution Process Or The Liquidation Process Initiated Under The Insolvency And Bankruptcy Code, 2016 ('IBC'):

As per Section 36(4)(a)(iii) of IBC, the amounts due to EPFO shall not be a part of the liquidation estate and cannot be used for distribution under section 53 of the IBC during liquidation process.

In the case of Sikandar Singh Jamuwal v. Vinay Talwar and others^[9], the resolution plan approved by the NCLT, Delhi was challenged by an ex-employee of the Corporate Debtor before the NCLAT, Delhi on the ground that the plan did not consider the entire provident fund dues of the employees and the full amount of EPF dues would not be remitted by the resolution applicant. The NCLAT, New Delhi vide its judgment dated March 11, 2022 concluded that the resolution plan should be in compliance of all laws in time being force including the EPF Act and in light of Section 36(4)(a)(iii) of the IBC, the provident fund, pension fund or gratuity fund are not assets of the corporate debtor. Therefore, the resolution applicant was directed to immediately release the full amount of provident fund dues to the relevant authority as per the EPF Act.

Even in the case where liquidation proceedings have commenced under the IBC, the NCLT-Mumbai bench has held in the matter of Precision Fasteners Ltd. through the Liquidator v. Employees Provident Fund Organization, Thane and others^[10] on September 12, 2018 that the liquidator shall pay the provident fund/pension fund dues to the relevant authority under the EPF Act prior to making any payment to any entity falling under the waterfall mechanism under section 53 of the IBC. NCLT further observed that the liquidator shall sell the assets of the corporate debtor (in liquidation) over which the EPFO has ordered attachment and the liquidator shall first pay off all provident dues in priority to all other claims payable by the Corporate Debtor.

It has been observed in many insolvency proceedings, that even though recovery proceedings under the EPF Act have been commenced by the authorities under the EPF Act against the Corporate Debtor during or before the corporate insolvency resolution process ('CIRP'), the EPF authorities have failed to file their claim before the concerned resolution professional. As a result of non-filing of claim with the resolution professional during the CIRP, EPFO claims are not mentioned in the Information Memorandum and hence not considered in resolution plans. In such a scenario, the Hon'ble NCLAT in EPFO v. Mr. Subodh Kumar Agrawal^[11] vide its judgment dated May 27, 2022 noted the lacunae in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 with respect to the obligation of the resolution professional to disclose the fact of any ongoing proceedings/orders against the Corporate Debtor which are in his knowledge in the Information Memorandum. The NCALT further directed the IBBI and Secretary, Ministry of Corporate Affairs to take necessary action in light of the observations made by the bench in the aforementioned judgment.

Recently, the IBBI vide the publication of the Insolvency Resolution Process for Corporate Persons (Fourth Amendment) Regulations, 2022 on September 16, 2022 ('Fourth Amendment to CIRP regulations') has mandated (as per Rule 36(2)(a) that the resolution professional shall disclose all assets, liabilities including contingent liabilities of the Corporate Debtor in the Information memorandum. Further the Fourth Amendment to CIRP Regulations also mandates that the Interim Resolution Professional shall send a communication either by post or electronic means with a copy of the Public Announcement to all creditors as per the latest available books of accounts of the Corporate Debtor. It is expected that the amendment will lead to disclosure of ongoing proceedings/show-cause notices sent by the statutory authorities to the Corporate Debtor.

From a review of the statutory provisions and judicial precedents mentioned above, it is clear that the majority view of the courts in India is that EPFO dues rank prior to the dues of secured creditors under SARFAESI Act and RDB Act.

Views are personal.