Author: Mihir Wagh is a 4th-year law student at Gujarat National Law University, Gandhinagar
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 is a landmark piece of legislation. It governs provisions regarding social security schemes for millions of people. These schemes play an instrumental role in the benefit of the salaried class, as the schemes provide them with a source of income upon retirement, acting as a third rail. Similarly, the Insolvency and Bankruptcy Code, 2016 is another landmark piece of legislation, which has been enacted to streamline the process of corporate restructuring in cases of insolvency and bankruptcy. With many companies entering into the restructuring and liquidation process every day, it becomes pertinent to analyze how these two enactments, seemingly worlds apart, interact with each. The article focuses on provisions in the IBC, protecting the dues of the workman, as well as the powers of the EPFO to ensure that rights of the workman are protected.
Introduction
In the recent past, insolvency proceedings in India have seen an increase. A prominent recent example of a company entering into insolvency proceedings is that of GoFirst, the airline. The insolvency process leads to structural changes in the functioning of the company. In this regard, it becomes pertinent to examine the effect the process, as entailed by the Insolvency and Bankruptcy Code, 2016 (IBC) has on the provident fund, and other dues of the workman, as covered by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act). It becomes crucial to examine how workers dues are treated when a company enters insolvency proceedings, as the EPF Act, serving as a welfare legislation, aims to protect the interest of the weaker sections of society.
Determination of EPF Dues
Any contributions that the employer is required to make on behalf of the employee, as a part of the provident fund scheme, as mandated by the EPF Act, are considered to be EPF dues. §7A of the EPF Act grants the Provident Fund Commissioner the authority to conduct inquiries to identify any shortfalls in the contributions made by an establishment under the EPF Act. It is through this inquiry a shortfall, if any, is detected in the contributions of the company. While a corporate debtor is undergoing the IBC process, the Employee Provident Fund Office (EPFO) has the power to make 3 types of claims:
- Contributions, made by the employee, which have been deducted from their salary, but have not been deposited with the EPFO.
- Contributions which the employer ought to make to the EPF, matching the contributions of the employee.
- Claims against the employer for interest and the penalties, payable to the EPFO, on account of the employer failing to abide by the timelines in remitting the contributions due to the employees.
The IBC and the EPF Act
The IBC was introduced in order to streamline and consolidate the law regarding restructuring and liquidation of companies in India. The primary aim of the Code is to revive the corporate debtor, and liquidation is the last resort. The Supreme Court, in Moser Baer Karamchari Union v. Union of India, has held that the Code adequately protects the unpaid dues of the workmen, and the provisions of the grant statutory protection to the workmen. The dues of the workmen remain protected regardless of whether the resolution plan is accepted and implemented (as the EPFO can stake claim on the dues, on behalf of the employees), or the corporate debtor undergoes liquidation.
§36(4)(a)(iii) of the IBC entails that “all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund” are excluded from the liquidation estate of the corporate debtor. A workman’s dues include, amongst others, “wages or salaries, remuneration to approved holidays and sums due to any workman from a provident fund, pension fund, gratuity, etc.” These sums are explicitly taken out of the liquidation process. Similarly, §11 of the EPF Act provides that payment of contributions of employees shall be given priority over other debts.
This article will now examine the following effects of intersection between the EPF Act and the IBC:
- When a claim may be filled by the EPFO;
- Effects of moratorium;
- Effects of liquidation; and
- Effect of a successful CIRP Application.
When a Claim may be filled by the EPFO?
When it comes to a claim of damages and interests, the EPFO has an obligation to follow the timeline as provided by the IBC, and claims must be filed within the timeline. No claim can be filled by the EPFO once the date of the commencement of the liquidation is reached. Claims, which are made after the IBC deadline, cannot be accepted. Even if the EPFO is unaware of the CIRP process, should the corporate debtor have made sufficient announcements, a claim cannot be filled for damages and interests. Damages and interests fall outside the purview of §36 IBC, and thus, are not considered to be a part of workmen’s dues. In Anuj Bajpai v. EPFO, it was held by the NCLAT that, all outstanding amounts, including interest and damages, are excluded from the liquidation estate of a corporate debtor. These dues take precedence over all other liabilities and cannot be utilized for settling claims during the liquidation process. Through this judgement, damages and penalties, due to the EPFO, has been equated to workmen’s dues under §36, IBC.
Effects of Moratorium
Once a moratorium is imposed when the CIRP is admitted, as dictated by §14 of the IBC, all pending proceedings are paused automatically. In KSS Petron Vineet K Chaudhary v. The Regional PF Commissioner, it was held by the NCLT that the term “proceedings”, as envisaged under the IBC, was broad, and it included assessment proceedings, quasi-judicial proceedings, as well as judicial proceedings. Even if there are on-going EPFO proceedings against a company, the moment a moratorium is declared, such proceedings are to be halted. This, however, does not foreclose the statutory entitlement of the EPFO. Furthermore, the moratorium only pauses proceedings against the corporate debtor. Any proceedings against the directors of such a corporate debtor may continue.
Effects of Liquidation
Should a corporate debtor, per §33 IBC, enter into liquidation, the employer-employee relationship which previously existed, stands terminated. It is then the waterfall mechanism, per §53 IBC, comes into play. The waterfall mechanism of the IBC provides for the order in which the assets are to be distributed when liquidation is entered into. However, workmen’s dues have been explicitly protected. Workmen’s dues such as provident fund and gratuity fund do not fall under the liquidation estate, and thus, cannot be used for recovery in the liquidation process. Dues such as the pension fund and the gratuity fund are required to be kept outside the purview of the liquidation process, and only the workmen have the right to be paid such from such funds, with the liquidator having no claim to such funds.
Effect of a successful CIRP Application
A diverging stance regarding the payment of EPF dues with respect to a successful resolution plan exists. In Reg. PF Commr., EPFO, Telangana v. Vandana Garg it was held by the NCLAT that §36 is applicable only in cases of liquidation and not in case of a resolution plan, and such dues are not liable to be paid at the time of the resolution plan stage. This can also be seen in EPFO v. Krishna Saibaba, wherein the NCLAT held that a Resolution Plan where only a part of the employee provident fund dues were accounted for was approved, could not be overturned by the NCLAT, as that would question the “commercial wisdom of the Committee of Creditors”. However, in Assam Tea Employees Provident Fund Organization v. Madhur Agarwal, it was held that EPF dues are not a part of assets of the corporate debtor, and have to be paid in full.
This diverging position has now been settled. In Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia, it was held that dues related to provident funds, pension funds, and gratuity funds are not part of a corporate debtor’s estate. These funds are assets over which employees have rights, and they cannot be controlled by insolvency resolution professionals or successful resolution applicants. A duty exists on the successful resolution applicants to establish and maintain an internal fund. This ruling of the NCLAT was upheld by the Supreme Court in Jalan Fritsch Consortium v. Regional Provident Fund Commissioner. Thus, even if a debtor is undergoing CIRP, the employees are entitled to receive the EPF in full. EPF dues are assets of the employees, who possess the right over them, even if the control may be with the employer.
Conclusion
The primary objective of the EPF Act is to provide workers with a robust social security mechanism to support them during their retirement. The contributions mandated under the Act, including those from the employer, are integral to maintaining this safety net. To safeguard these contributions, the EPF Act incorporates stringent protections, further reinforced by the provisions of the IBC. Provisions of both enactments work in tandem with each other, without any conflict, to ensure that the dues of the workman are protected. Judicial pronouncements have further consistently upheld the intent of these enactments read together, which is the socio-economic welfare of the workman, aligning with the legislative intent of protecting workers’ rights.
Leave a Reply