Order U/S 45A Of ESI Act Cannot Be Passed During Moratorium Period U/S 14 Of IBC: NCLT Allahabad

Brief Facts

Harig Chankshaft Ltd. (corporate debtor) was admitted into insolvency on March 3, 2023. During the CIRP, Employee State Insurance Corporation (ESI/respondent) initiated proceedings under Employees' State Insurance Act, 1948 (ESI Act) pertaining to unpaid contributions and submission of returns for the time period starting from April, 2018 to March, 2023. A demand notice was sent on April 21, 2023 by the ESI in which contributions to the tune of Rs. 49,16,835 was claimed.

Thereafter, a summon was also issued to the Resolution Professional (RP) to appear before the ESI on May 18, 2023. Subsequently, a claim to the tune of Rs. 68,26,910 was submitted by the ESI on May 24, 2023. It was requested by the RP to submit documents to verify the claims but no document was submitted. Thereafter, the RP admitted the claim for Rs. 15,38,453.

The admission of this amount was notified to the ESI by the RP on July 6, 2023. Despite this, an order was issued by the ESI on August 7, 2023. This order was challenged by the RP (applicant) under section 60(5) read with section 14 of the IBC.

Contentions

The applicant submitted that proceedings initiated by the ESI under ESI Act during the CIRP of the corporate debtor violated section 14 of the IBC which provides for the moratorium. The moratorium under this section prohibits any recovery actions which also includes the proceedings under section 45A of the ESI Act.

It was further contended that the authority was notified of the moratorium despite this, it proceeded under the ESI Act. It was further submitted that section 63 of the IBC prohibits any civil court from entertaining any matter which is in the jurisdiction of the NCLT. Additionally, section 238 of the IBC gives overriding effect to the IBC over any law which is inconsistent with the provisions of the IBC. It was prayed that ESI recovery actions were in violation of law therefore they should be quashed.

Per contra, the respondent submitted that proceedings under the act were justified as section 38 to 44 of the act imposes an obligation on the employee to contribute for insurance. It was argued that alternative remedy under section 45AA of the act is available for the appellant to challenge the order passed on August 8, 2023.

They referred to the judgment of the High Court in SN Public School v ESIC (2019) wherein the petition was dismissed for alternative remedy being available. It was further contended that applicant breached the trust by not remitting the deducted employee contributions and referred the Supreme Court judgment in Maharashtra State Co-operative Bank Ltd. v. APFC (2009).

In this judgment, the court held that since ESI act is a social welfare legislation, it must be interpreted purposively considering article 38 and 43 of the DPSP. It was further submitted that the impugned order was passed in accordance with section 45A of the act and the applicant was duly informed of the right to appeal the order within 60 days.

NCLT's Analysis

The NCLT agreed with the contention of the appellant and observed that order issued on August 7, 2023 was inconsistent with the provisions of the IBC particularly section 14 which prohibits any recovery actions being initiated against the corporate debtor during CIRP. The primary purpose of this section 14 of the IBC is to protect the assets of corporate debtor from being claimed in the recovery proceedings under any other laws.

The Supreme Court judgment in Swiss Ribbons Pvt. Ltd. & anr. Vs. Union of India & Ors.(2019) was referred in which it was held that the moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. Another judgment of the Supreme Court in Sundaresh Bhatt, Liquidator of ABG Shipyard Vs. Central Board of Indirect Taxes and Customs 2022 LiveLaw (SC) 715 was referred in which the court held that the customs authority only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies. The customs authority does not have the power to initiate recovery of dues by means of sale/confiscation, as provided under the Customs Act.

The tribunal further referred to section 238 of the IBC which provides overriding effect to the provisions of the IBC. It states that any other law inconsistent with the provisions of the IBC will not be given precedence. Similarly, in the present case, since the CIRP had already been initiated against the corporate debtor and moratorium under section 14 of the IBC was in operation, recovery actions under ESI Act could not be initiated by the ESI authority. The tribunal further referred to the Supreme Court judgment in Innoventive Industries Ltd. v. ICICI Bank (2017) in which it was held that the non-obstante clause, in the widest terms possible, is contained in Section 238 of the Code, so that any right of the Corporate Debtor under any other law cannot come in the way of the Code.

The tribunal further observed that in the approved plan, the claim of the authority was admitted to be Rs. 4,30,000 against the claim of Rs. 15,38,453. Therefore, the claim of the authority was discharged effectively as per the plan for which no parallel proceedings could be initiated.

Conclusion

The NCLT concluded that section 14 of the IBC puts a halt on all proceedings which could be initiated under any other law. In the present, once CIRP was initiated against the corporate debtor, no recovery proceedings could be initiated under ESI Act. Accordingly, the impugned order was set aside.

Case Title: Saurabh Chawla v. Employee State Insurance Corporation

Court: NCLT, Allahabad

Case Reference: IA No. 438/2023 in CP (IB) No. 81/ALD/2019

Judgment Date: 03/10/2024

Click Here To Read/Download The Order