Demystifying the Countervailing Jurisprudence on Provident Fund Dues

Abstract

We often hear disclaimers and cautions against going headfast into jobs that seem to show meagre growth potential and unstable security. But do these risks limit themselves to the initial period of job hunting? Or do they stretch to situations where one might have to forsake their earnings simply because their company can no longer afford to pay them back? Let’s make the situation more riveting, what if, the funds that the company specifically retains and maintains for its employees, which must be delivered to the employees at a later period are refrained simply because these funds were not prioritized over other dues. The significance of the payment of such dues corresponds to the labour and growth that employees bring to the company. The sweat of an individual must non-arguably be valued at a superior rate than other commercial alliances of the company. While the same might seem like a straightforward choice, there are hurdles that put the employees at risk of unwantedly bidding farewell to such monetary entitlements. In the current article, the authors have attempted to navigate such instances while trying to decipher the rationales behind the trajectories courts have taken.

Introduction

With numerous corporations falling victim to the post-pandemic corporate breakdown, there were scarcely any that sailed and survived through the COVID-19 era. Most were severely unprepared for the situation, which resulted in them facing an alarming degree of monetary hardship. According to the OECD reports, approximately 10% of the multinational companies faced financial distress – i.e., the book value of their equity became negative. Consequently, a plethora of IBC-related cases arose, which brought the code under strict scrutiny. The previously pointed out concerns of the code were held under an unwavering spotlight. The code focuses on speeding up the resolution of insolvency proceedings by protecting stakeholders’ rights, maximizing asset value, and governing the resuscitation of viable businesses by aligning the declining business with an appropriate resolution plan.

Amongst the stakeholders, are the workmen and employees of a company who play the role of the wheels of the company. They play a crucial role by regularly nudging the company’s growth. Therefore, when a company has to sustain insolvency, it is crucial to offer due regard to the rights and dues of these workmen and employees. 

One of the most contentious of these rights with respect to the dues that garners debate is that of the Provident Fund. In plain terms, this fund encompasses certain amounts deducted from the salary of the workmen and employees for an onward remittance to the Employees’ Provident Fund Organization (EPFO) in order to build credit to the Provident funds account of the respective workmen or employees. It is a retirement fund body that provides Universal Social Security Coverage to all salaried employees in India on a mandatory basis. However, when a company struggles with insolvency, the treatment of dues becomes a matter of variance and disputation. The same has been witnessed in numerous cases. By means of a secondary method of research, the crux of the paper revolves around provident fund dues in light of the developing jurisprudence and the roadblocks that are being encountered frequently that raise hesitancy with respect to the intent of the code.

Significance of the Provident Funds Dues

Section 18 of the IBC mandates the Interim Resolution Professional or a Resolution Professional to take control and custody of any asset of the Corporate Debtor. However, it specifically excludes “assets owned by a third party being in possession of the corporate debtor held under trust or contractual arrangements including bailment.” These Provident fund dues that have been deducted from the salaries of the workmen and employees are fundamentally the assets of these employees being held by the Corporate Debtor. Moreover, under Section 36(4)(iii) of the IBC, the Provident fund dues have been kept out of the liquidation estate assets of the corporate debtor and thus cannot be used for recovery in the event of liquidation. This vividly portrays the intent of the legislature which is to protect the assets of the workmen and employees, as has been highlighted by the Supreme Court in the K Sashidhar case. 

The EPF Act of 1952 is a social welfare legislation designed to protect the weaker sections of society. Provident fund is not bounty but hard-earned benefits that accrue to an employee and thus are in the nature of property. Moreover, Provident fund dues violate the right to life under Art. 21 of the Constitution of India. In the Precision Fasteners Case, it was held that the EPF dues must be considered the first charge on the assets of the Corporate Debtor. The rights of the workmen & employees with regard to Provident fund dues are intertwined with the right to life under Art. 21. The rationale of the court was that though the rights of all creditors over the assets of the company is a property right but the Provident Fund dues of the workmen and employees are the hard-earned savings for their later life after retirement. Therefore, if such sums are interlinked on par with the other debts of the creditors, it would result in dilution of the most invaluable right of a person on par with a property right subordinate to the right to life. The inaction in settling the dues of the workmen & employees amounts to a transgression of fundamental rights. Hence, this denotes the weighty importance given to the Provident fund dues by the judiciary and legislature together. Thereby, reflecting the fact that non-payment of Provident Fund dues in full not only violates statutory rights but also leads to dilution of the fundamental and constitutional rights of the workmen and employees.

Significant Judicial Pronouncements

The current judicial trend in treating the Employment Provident Fund (EPF) dues under the provisions of the Employment Provident Fund Act and the Insolvency and Bankruptcy Code is highly characterised by judicial protectionism towards the employees, which is in line with the legislative intent behind the explicit exclusion of EPF dues under Section 36(4)(a)(iii) of the Insolvency and Bankruptcy Code. The approved resolution plan in the case of Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia did not provide for the full payment of the provident fund and gratuity to the workmen and employees. In light of the same, the court observed that “non-payment of the full provident fund till the insolvency commencement date amounts to non-compliance of the provisions of s. 30(2)(e).” Furthermore, it held that the full payment of the Provident Fund and Gratuity Fund’s dues would ensure the correct interpretation of Section 30(2)(e) of the Insolvency and Bankruptcy Code, 2016 read with the provisions of the EPF & MP Act. Section 30(2)(e) of the Insolvency and Bankruptcy Code, 2016 provides that the Resolution Plan shall be compliant with the provisions of any other law for the time being in force. Therefore, the provisions of the EPF Act cast a statutory obligation upon the Corporate Debtor to pay the Provident fund dues in full. 

A similar decision was held in the Tourism Finance Corp case, wherein the court ordered the full payment of the Provident Fund dues. In the same case, another collateral question was addressed by the court, that being whether Section 238 of the Insolvency and Bankruptcy Code, 2016 will have an overriding effect over the provisions of the Employment Provident Fund Act. The court held that no provision of the Employment Provident Fund Act is inconsistent with the Insolvency and Bankruptcy Code, 2016. Therefore, the statutory obligation on the Corporate Debtor would prevail. 

The Supreme Court in its recent judgement, Sunil Kumar Jain v. Sundresh Bhatt has concretized its position on law with regard to the explicit exclusion of EPF dues from the liquidation estate. A similar rationale was employed by the Apex court in the SBI v. Moser Baer Karamchari Union and the judiciary seems to confirm and uphold the social welfare character of the EPF Act through harmoniously construing the same with the provisions of the Code to protect and preserve the rights of the employees in relation to EPF dues. 

A Case against the non-payment of PF dues in full

There have been a few cases wherein the workmen and employees have not been granted full payment of their Provident fund dues. The Hon’ble NCLAT in the case of RPFC Telangana v. Vandana Garg, dismissed the appeal contesting the haircut in the Provident fund dues, which was a part of the approved resolution plan. It was held that all such claims that are not a part of the Resolution plan, which in this case was the forgone amount, shall stand extinguished. Reliance was placed on the Ghanshyam Mishra Judgement, wherein, the Hon’ble SC held that claims as provided in the resolution plan, after its approval, shall be frozen and binding on the Corporate Debtor, its employees, and other stakeholders.

To understand this, attention needs to be cast on the procedure dealing with the admission of the claims of the workmen and employees. Under Section 15 of the Insolvency and Bankruptcy Code, 2016, the Resolution Professional is mandated to make a public announcement regarding the initiation of the Corporate Insolvency Resolution Process against the Corporate Debtor. This also consists of a call for the submission of claims of the affected parties. Afterwards, based on these claims, an Information Memorandum is to be prepared. This Information Memorandum is provided to Resolution Applicants that come up with the Resolution Plans after scrutinizing the position of the company. The ratio of the courts reflects that if claims, post the approval of the resolution plan by the Committee of Creditors as well as the Adjudicating Authority under Section 31, are entertained then the whole objective of the code would fail. Under the Code, the CIRP or liquidation is accompanied by time constraints and limitations. If claims are entertained post the approval of the resolution plan, then it would unarguably be more time-consuming. The whole process would need to be reinitiated, followed by the reformulation of a resolution plan, subsequently delaying the company’s aim to revamp its operations. 

Another stumbling block is faced when companies do not maintain an EPFO account. Provident fund and gratuity dues given under the ambit of S.36(4)(a)(iii) are only applicable to the separate “Provident fund Accounts” given u/s 16-A of the EPF & MP Act, 1952. Further, S.36(4)(a)(iii) of the Code, 2016 unequivocally specifies that the exclusion from both the liquidation estate assets and recovery in liquidation is applicable to amounts owed to workmen or employees from the Provident funds only if the Corporate debtor has maintained an establishment fund as per S.16A of the EPF Act, 1952 and not otherwise. Moreover, a RP or liquidator cannot be directed to make provisions for the adequate payment of the Provident fund and gratuity dues of the Operational Creditors where a company itself has not created a separate fund account for the Provident fund and gratuity. This is so because the RP or the liquidator does not have jurisdiction to handle any properties of the CD that do not belong to the liquidation estate. Therefore, there is a need for specific provisions that determine how the Provident fund dues would be administered during the Insolvency proceedings of a company in the event where a separate EPFO account is not being maintained. 

Conclusion

The courts and tribunals have placed the intent of the legislature at the highest pedestal while dealing with the issues pertaining to the treatment of EPF dues under the Insolvency and Bankruptcy Code. Provident Fund dues have been put on a much-needed pedestal. Though the dust seems to be settling on the major concerns with respect to the payment of Provident fund dues, there are certain areas where the law needs comprehensive and systematic evolution. The need calls for specific provisions outlining the procedure to determine how claims can be entertained post the approval of the resolution plan. In conclusion, the treatment of Provident Fund dues in insolvency cases is a matter of significant legal and ethical importance. Judicial pronouncements and legislative intent consistently emphasize the protection of employees’ rights and welfare. However, challenges arise when companies lack EPFO accounts, highlighting the need for clear provisions to address such situations in insolvency proceedings. To end with, the barricade of saving the rights of workmen and employees where a company does not maintain an EPFO needs to be crossed cautiously.

This article is a part of the DNLU-SLJ (Online) series, for submissions click here.

Ashu Daga & Dhairya Gawde

Students at Maharashtra National Law University, Mumbai