Damages Under Section 14B Of EPF Act Are Government Dues, Subject To Section 53 Of IBC, Not Section 36(4)(a)(iii): NCLT Mumbai

Section 14B of the EPF Act allows the authorities to levy damages on employers who fail to pay their contributions to the Employees' Provident Fund (EPF), the Employees' Pension Fund, or the Employees' Deposit-Linked Insurance Scheme within the prescribed time limits.

Section 53 of the Insolvency and Bankruptcy Code, 2016, outlines the order of priority for the distribution of the proceeds from the sale of the liquidation assets of a corporate debtor. The priority list is as follows:

1. Insolvency Resolution Process Costs and Liquidation Costs
2. Workmen's Dues and Secured Creditors
3. Employee Dues
4. Financial Debts Owed to Unsecured Creditors
5. Government Dues and Remaining Secured Creditors
6. Any Remaining Debts and Dues
7. Preference Shareholders
8. Equity Shareholders or Partners

Section 36(4)(a)(iii) deals with the exclusion of certain amounts from the liquidation estate during the liquidation process.

Brief Facts:

The Employees' Provident Fund Organization (EPFO) office issued an order regarding the delayed payment of EPF dues by Asmi Metal Products Pvt Ltd (Corporate Debtor). This order imposed damages under Section 14B of the EPF Act amounting to Rs. 11,83,997/- and interest under Section 7Q of the EPF Act amounting to Rs. 6,28,974/- which cumulatively totaled Rs. 18,12,971/-. Out of this total amount, Rs. 12,20,976/- was recovered from the Corporate Debtor.

The NCLT admitted the Corporate Debtor into the Corporate Insolvency Resolution Process (CIRP) and appointed Milind B. Kasodekar (Respondent) as the Interim Resolution Professional (IRP). Subsequently, NCLT passed a Liquidation order under Section 33(2) of the Insolvency and Bankruptcy Code and appointed the Respondent as the Liquidator. The Liquidator recognized the dues of Rs. 5,96,946/- as statutory dues to the government during the liquidation process.

Regional Provident Fund Commissioner (Appellant) argued that EPF dues are third-party assets, specifically the assets of the workers, and thus should be excluded from the liquidation estate as outlined under Section 36(4)(a)(ii) of the Insolvency and Bankruptcy Code. It argued that the Liquidator cannot classify EPF dues as amounts payable to an Operational Creditor or government dues as these are social security dues of workers managed by a specialized statutory institution established under legislation by Parliament. However, the Respondent stated that a sum of Rs. 1,00,00,000/- was received from the sale of liquidation assets, and since the claim of the secured financial creditor exceeded the realized value, no priority could be given to the EPF dues claimed by the EPFO under Section 53 of the IBC.

The Appellant argued that the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) is a welfare legislation providing social security benefits for employees and workmen. According to Section 11(2) of the EPF Act, dues under the EPF Act have the first charge on the assets of the Corporate Debtor and should be paid in priority over all other debts. Further, it argued that Section 36(4)(a)(iii) of the IBC specifies that EPF dues are not assets of the Corporate Debtor but earned benefits of the employees and should be prioritized above all other debts.

Observations by the NCLT:

The central issue before the NCLT was whether the damages of Rs. 5,91,996/- under Section 14B of the EPF Act and the recovery cost of Rs. 4,950/- could be prioritized for release to the EPFO over secured financial creditors. The Appellant argued that the balance dues under Section 14B of the EPF Act should be excluded from the liquidation estate as provided under Section 36(4)(a)(iii) of the IBC and should have been released before distributing the assets of the corporate debtor.

The NCLT referred to Elecon Engineering Company Limited vs. Enviiro Bulkk Handling Systems Pvt. Ltd where similar issues were raised. In that case, the NCLT concluded that damages under Section 14B of the EPF Act are not considered sums due to any workman or employee from the provident fund and, therefore, are not covered under Section 36(4)(a)(iii) of the IBC. The NCLT's decision, which was upheld by the NCLAT, held that these damages are government dues and must be paid according to the priority established under Section 53 of the IBC.

Further, the NCLT Kochi Bench in the case of M/s. Regional Provident Fund Commissioner (Compliance), Employee Provident Fund vs. M/s. Excel Glass Limited (Under Liquidation) held that amounts payable under Sections 7Q and 14B of the EPF Act are government dues and not sums due to workmen or employees. Consequently, these amounts fall under the government dues category as defined in Section 53(1)(e)(i) of the IBC and cannot be excluded from the liquidation estate.

Therefore, the NCLT held that the damages of Rs. 5,91,996/- imposed under Section 14B of the EPF Act and the recovery cost of Rs. 4,950/- could not be prioritized for release to the EPFO over secured financial creditors. It held that these amounts are considered government dues and must be paid according to the priority established in Section 53 of the IBC.

Case Title: Regional Provident Fund Commissioner -II (Legal), Regional Office, Pune- II vs Mr. Milind B. Kasodekar

Case Number: Company Appeal (IB)/ 35/MB/ C-III/2023 In C.P. (IB) No. 3806 of 2018

For Appellant Adv. Payoja Gandhi

For Respondent/ Liquidator Adv. Avinash R Khanolkar a/w Adv. Surekha Yadav

Date of Judgment: 16.07.2024

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