In an interesting judgment NCLAT, Principal Bench consisting of Justice Ashok Bhushan, Chairperson and Dr. Ashok Kumar Mishra, Technical Member in the case of Sikander Singh Jamuwal v. Vinay Talwar held that there is no conflict between the provisions of Section 17B of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and the Insolvency and Bankruptcy Code, 2016 and directed the Resolution Applicant to pay PF dues to the employees. The said judgment has raising some serious queries and concerns from legal and practical stand point. This article explores the scope of ‘Section 30’ and the inconsistency of the same with Section 17B of the Employees Provident Funds and Miscellaneous Act, 1952 , in the light of the said judgment.
What is the intent of the law with respect to the Government Dues.
Insolvency and bankruptcy Code, 2016 (IBC)has been introduced with an intention to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto. From the preamble, it is clear that , one of the main intent of the legislature is to bring ‘alteration in the order of priority of payment of Government dues’. In contrast to other credit recovery legislations such as SARFAESI, where the Government dues are being paid in priority, IBC puts the Government within the footing of an ‘Operational Creditor’. Operational Creditor is the one who had provided services or supplied goods/products to the Corporate Debtor, payment of which is defaulted. While submitting the claim form , all the Operational Creditors except workmen/ employees are required to submit the Form B to the Resolution Professional. Similarly while distributing the assets, the Government dues are classified under Section 53 of the Code with fifth in terms of priorit , which is after Insolvency Resolution Process Cost, dues to workmen, dues to secured creditors(whose security interest are waived off), dues to employees and financial debts of unsecured financial creditors. So the intent of the legislature is very clear- to give less priority to Government dues and to treat them at par with Operational Creditors.
With respect to the dues such as Provident Fund, there is no separate classification under the Code and hence the EPFO is also treated at par with the Operational Creditor and have to follow the same procedures while submitting a Claim under the provisions of the Code.In the matter of Sikander Singh Jamuwal v. Vinay Talwar the NCLAT had arrived at a conclusion that there is no conflict between the provisions of Section 17B of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and the Insolvency and Bankruptcy Code, 2016 and hence the Resolution plan have to provide for the Provident Fund dues in view of the following observations.
Resolution Plan fails to consider the payment of provident fund dues as computed by the Assistant Provident Fund Commissioner vide its order dated 19th March, 2019. The Resolution Plan approved by the Adjudicating Authority is on 02nd April, 2019. The amount so computed is Rs.1,35,06,391/- whereas the provisions has been made for Rs.78 lacs only.
Financial Creditors are being paid 21.6% whereas Operational creditors are being paid 12.67%.
To arrive at a conclusion the Appellate authority had also analysed Section 31 (1), Section 30(2), Section 36(4)(a) (iii) & Section 238 of the I& B Code, 2016 in detail.
After detailed analysis, the Hon’ble bench arrived at a conclusion that , as per Section 30(2)(e) of the Code, it is the responsibility of the Resolution Professional/Adjudicating Authority to ensure that the Resolution Plan does not contravene any of the provisions of the law for the time being in force .
In this particular case, the matter is connected with Section 17-B of the Employees Provident Funds and Miscellaneous Act, 1952, which deals with the liability of employer in case of ‘transfer of establishments’. After perusing the records and hearing both sides, the Bench observed that as per Section 17-B of the Employees Provident Funds and Miscellaneous Act, 1952 (PF Act) the Resolution Applicant is also liable to pay the contribution and other sums due from the employer under any provisions of the said act in respect of the period up to the date of such transfer. The Hon’ble Bench had also noted that the explicit provisions of the above said PF Act needs to be complied with and the said aspect is justiciable as a duty has been casted on the Resolution Professional/Adjudicating Authority/ on this Tribunal. The Bench while disposing off the matter, had noted that the said matter is not a commercial wisdom as compliance of law is a must. However the aspect of parity for payment of Finance Creditors and Operational creditors was looked into by the Tribunal as it is a commercial wisdom of CoC.
The practical stand point.
Here , a logical as well as practical issue is popping up. Section 30(2) clearly demarcates the duties of the Resolution Professional with respect to the consideration of a Resolution Plan. Following are the specifications of Section 30(2).
Insolvency Resolution Process Cost to be paid in priority
Plan should provide for the payment of debts of Operational Creditors, which shall not be less than, higher of the following amount:-
Amount eligible under Section 53 in the event of liquidation; or
Amount eligible under the Resolution Plan, when allocating the Plan amount as per Section 53.
The Plan should include the provision for the management of the Corporate Debtor , once the plan is approved
The plan should contains provisions for the payment of debts of financial creditors
The plan should contain the provisions for the implementation and supervision of the resolution plan
The plan does not contravene any of the provisions of the law for the time being in force
And finally the plan should confirm with such other requirements as may be specified by the Board.
If all the above, conditions are met, then the Resolution Plan can be placed before the Committee of Creditors (CoC) for its consideration and approval. Once the plan is placed before the CoC, then the Commercial wisdom shall come into play and the plan shall be approved or rejected accordingly.
While reading the Section 30(2), it is very clear that, the Code clearly provides that is eligible for an Operational Creditor and is that part is addressed in the plan, then the same is eligible to be placed before the Committee of Creditors. As per Section 238, the provisions of this Code shall have effect is there is an inconsistency with any other law for the time being in force or any instrument having effect by virtue of any such law.
Here, the question is , whether the Resolution Applicant is liable to pay the contribution and other sums due from the employer Section 17-B of the Employees Provident Funds and Miscellaneous Act, 1952. To arrive at a proper answer the following factors to be considered
a. Whether EPFO is an operational Creditor under the Code?
As per section 5(21) of the CIRP Regulations, “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority. EPFO being a Central Government Authority, clearly falls under the definition of Operational Creditor.
b.Whether the dues towards the EPFO is coming under the classification of Government dues , in view of absence of specific provisions under the Code to classify it as “Employee Liability”?
EPFO, being an operational creditor have to submit their Claim in Form B, whereas the workmen/ employees have to submit their claims in Form D. As per the definition of Operational Creditor, EPFO being a Government authority , is undisputedly an Operational Creditor.
c. Whether the dues to EPFO is covered under the provisions Section 30(2)(b) of the Code, which deals with the payment priority to Operational Creditors?
Section 30(2)(b) clearly provides that the payment to be paid to the operational creditors in ‘priority’ if there are any such payment based on the formula mentioned there but it does not ensures a minimum payment. If there is no amount that are required to be paid to operational creditors while applying the provisions of the said section, then there is no further claim for them under the Code.
d. Whether the intent of the legislature is to consider the Government dues in priority over other dues which are clearly specified under Section 53?
The Legislative intent is very clear in the preamble of the Code. It clearly states that alteration of the priority in payment to Government Dues is one on the intention of the law. The definitions, forms and section 53 of the Code also underlining that intent very clearly.
e.If the Resolution Plan is fully in compliance with Section 30 (2) of the Code and the Code is having overriding power over other laws, is there an inconsistency with the provisions of Section 17B of the of the Employees Provident Funds and Miscellaneous Act, 1952?
Section 238, which deals with overriding effect of IBC comes into play whenever there is an inconsistency with provisions of the Code with any other law for the time being in force. Once the payment to EPFO is allocated as specified under Section 30(2), then EPFO, being an operational Creditor cannot claim their dues on top of the said allocation. In such case, there is a clear inconsistency between provisions of Section 30(2) and Section 17B of the of the Employees Provident Funds and Miscellaneous Act, 1952. If there is such an inconsistency, then, as per Section 238 of the Code, Section 30(2) shall prevail over the other. Section 30(2)(e) of the Code stipulates that Resolution Professional have to ensure that the plan does not contravene any of the provisions of the law for the time being in force.
When reading the provisions of Section 30(2)(e), it can be inferred that, the term ‘contravene any of the provisions of the law for the time being in force’ is exclusive of the ‘payment to operational creditors envisaged under section 30(2)(b) of the Code. As per that, hair-cuts in the admitted claim amount while approving a Resolution Plan does not tantamount to contravention of any of the provisions of the law for the time being in force. From the above, it is clear that the directions of the Appellate Authority in Sikander Singh Jamuwal v. Vinay Talwar is having due merits for further appeal before Hon’ble Supreme Court of India.
Bijoy P Pulipra
Senior Partner | Artis Law House