A complex clash between insolvency law and employee rights took center stage in a recent judgment involving a high-profile corporate insolvency resolution. At issue was the fate of provident fund dues amid a winding-up and resolution process, a matter that raises significant questions about statutory protections, creditor priorities, and the scope of resolution plans under the Insolvency and Bankruptcy Code. The Court’s detailed examination of these competing interests set important precedents, making this a judgment every stakeholder in insolvency and labor law will want to explore closely.
Facts of the case:
The present petition traces its origins to the corporate insolvency proceedings (“CIRP”) initiated against Murli Industries Limited, whereby on April 05, 2017, the National Company Law Tribunal (NCLT) admitted Company Petition filed by Edelweiss Asset Reconstruction Company Limited (EARC), a financial creditor, under Section 7 of the IBC. Simultaneously, six winding-up petitions were already pending before the Nagpur Bench of the Bombay High Court, dating back to 2011 and 2012, which were filed by various operational creditors, including M/s Regent Overseas Pvt. Ltd., M/s Sunmax General Trading LLC (Dubai), and others.
Later on, following the CIRP admission, the Employees’ Provident Fund Organisation (EPFO – Respondent) lodged a claim of Rs.54,98,118. The CIRP culminated in the approval of a resolution plan submitted by Dalmia Cement (Bharat) Ltd., which thereby acquired Murli Industries Limited. The said resolution plan was approved under Section 30(6) read with Section 31 of the IBC, binding all stakeholders, including the Central and State Governments and local authorities. Importantly, this resolution plan did not contain a specific provision for the PF dues claimed by the EPFO, nor were they explicitly recognised in the list of admitted claims.
Subsequently, the Adjudicating Authority (NCLT) approved the resolution plan, and the matter transitioned from resolution to implementation. At this stage, the EPFO issued notices to Dalmia Cement (Bharat) Ltd. and its subsidiaries seeking recovery of the unpaid PF dues originally claimed during CIRP but not satisfied under the plan. These recovery actions prompted the petitioners to approach the High Court under Article 226 of the Constitution, challenging the legality of such recovery attempts.
Submissions of the Petitioners:
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.
Submissions 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:
Essentially, 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 purposes of 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 recognized 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:
Observing that the IBC was enacted with the aim of reviving viable businesses and not stripping employees of their post-retirement security, and that employees must be protected during insolvency proceedings, especially in terms of statutory dues such as gratuity and provident fund, the Court dismissed the petition.
Case Title: Murli Industries Ltd (Now represented by Dalmia Cement Ltd) & Ors vs. Union of India & Ors
Case Number: Writ Petition No. 693 of 2022
Coram: Hon’ble Justice Abhay J. Mantri and Hon’ble Justice Avinash G. Gharote,
Counsel for the Petitioner: Senior Adv M.G. Bhangde and Adv R.M. Bhangde
Counsel for the Respondent: Adv R.S. Sundaram
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