Recently, the Bombay High Court held that while statutory dues owed to the government under Section 5(21) of the Insolvency and Bankruptcy Code, 2016, fall within the definition of ‘operational debt’, employees’ provident fund dues stand on a different footing, as employees cannot absorb such losses. The Court clarified that although a failing company has the right to revival, it cannot come at the cost of employees’ statutory security, particularly their provident fund, which stems from their rendered services forming the foundation of the company’s operations.
Facts of the case:
The present petition arises from the corporate insolvency resolution process (CIRP) initiated against Murli Industries Ltd., following admission of a petition filed by Edelweiss Asset Reconstruction Co. under Section 7 of the IBC by the NCLT on April 5, 2017. Prior to this, six winding-up petitions filed by various operational creditors, including M/s Regent Overseas Pvt. Ltd. and M/s Sunmax General Trading LLC, were pending before the Bombay High Court, Nagpur Bench.
Following CIRP admission, the Employees’ Provident Fund Organisation (EPFO) submitted a claim of ₹54,98,118. A resolution plan submitted by Dalmia Cement (Bharat) Ltd. was later approved under Sections 30(6) and 31 of the IBC, without specifically acknowledging or providing for EPFO’s PF dues. Despite the plan being binding on all stakeholders, EPFO issued recovery notices to Dalmia Cement, prompting the present writ petition under Article 226 challenging the validity of such recovery efforts.
Contentions of the Petitioners:
The counsel appearing on behalf of the petitioners have argued that under Section 36(4)(a)(iii) of the IBC, sums due to employees from the Provident Fund are excluded from the liquidation estate, but in the resolution process, governed by Section 30, there is no statutory mandate to mandatorily provide for such excluded sums unless duly admitted and verified during CIRP. They further contend that Section 31(1) of the IBC confers statutory finality to the resolution plan, making it binding on all authorities, including the EPFO.
Contentions of the Respondent:
The EPFO, in its rebuttal, relies heavily on Section 11 of the EPF Act, which provides for priority of dues owed to the Fund over other debts. It further maintains that Provident Fund contributions are statutory dues that cannot be waived or extinguished by a resolution plan, particularly when Section 36(4) of the IBC expressly excludes such funds from the liquidation estate, suggesting legislative intent to preserve them outside insolvency proceedings. EPFO asserts that the resolution plan cannot override its statutory rights under a separate central legislation.
Observations of the Court:
The Division Bench of Justice Abhay J. Mantri and Justice Avinash G. Gharote, examined the interplay between the IBC’s binding effect of a resolution plan (Section 31) and the non-inclusion of certain statutory dues (like EPF contributions) in the resolution plan due to non-compliance with procedural submission norms during CIRP. The Court opined that the claim of the respondents, cannot be said, to have been wiped out, on account of the resolution plan having been approved by the Committee of Creditors and consequently by the adjudicating authority and would be a claim, which is beyond the scope and ambit of Chapter II of the IB Code, and thus is a claim, which is payable by the petitioners. Since the claim is for a period earlier than the insolvency commencement date, there is no call for the issuance of any directions in that regard.
Explanation (a) to Section 18(1) of the IBC unequivocally provides that “assets” for the Code shall not include assets held in trust for any third party. The provident fund (PF), being a statutory social security fund, constitutes such a trust asset. In the context of corporate insolvency resolution, this means that both the employee’s contribution, which is deducted from salary, and the employer’s matching contribution, once deposited in the Employees' Provident Fund (EPF), do not belong to the corporate debtor and therefore cannot be included in the resolution applicant’s pool of assets.
The Court elaborated that the provident fund is not merely a contractual obligation but is recognised under statutory law as a social security measure under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act). The IBC must be interpreted harmoniously with the EPF Act, ensuring that Section 36(4)(a)(iii) of the IBC is respected. This section excludes PF, gratuity, and pension funds from the liquidation estate. Furthermore, Section 11 of the EPF Act gives first charge to provident fund dues over the assets of the establishment, overriding any other claim. This statutory charge cannot be extinguished through a resolution plan, as it is neither subject to waiver nor discharge without explicit compliance with statutory mandates.
The Court also noted that Section 17-B of the EPF Act squarely places joint and several liability on the transferee companies for the provident fund dues, pension, and insurance obligations of employees whose services are transferred due to a merger, sale, or transfer of an undertaking. This means that even if the corporate debtor is under resolution, the transferee entities are mandatorily liable for the PF contributions and cannot escape liability through the resolution mechanism. Since provident fund dues are not payable to a government body, but to a statutory trust fund administered by the EPFO. Hence, they do not qualify as operational debt, and their non-inclusion in the resolution plan cannot lead to automatic extinguishment under Section 31(1).
The decision of the Court:
Emphasising that the IBC aims to revive viable businesses without compromising employees’ post-retirement security, particularly in respect of statutory dues like gratuity and provident fund, the Court dismissed the petition, affirming the need to safeguard employees’ rights during insolvency proceedings
Case Title: Murli Industries Ltd (Now represented by Dalmia Cement Ltd) & Ors vs. Union of India & Ors
Case No: Writ Petition No. 693 of 2022
Coram: Justice Abhay J. Mantri, Justice Avinash G. Gharote,
Counsel for the Petitioner: Adv. M.G. Bhangde (Sr. Advocate), R.M. Bhangde
Counsel for the Respondent: Adv. R.S. Sundaram
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