2019 (8) TMI 915 - AT - Insolvency and Bankruptcy

Initiation of CIRP - Liquidation process - preference of workmen for payment of dues - first charge or not - denial of payment of the gratuity fund, the provident fund and the pension fund preferentially and included the same for the payments under the waterfall mechanism - whether the provident fund, pension fund and gratuity fund come within the meaning of assets of the Corporate Debtor for distribution under Section 53 of the I B Code? HELD THAT - From sub-section (4) (a) (iii) of Section 36, it is clear that all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund, shall not be included in the liquidation estate assets and cannot be used for recovery in the liquidation - From sub-section (1) of Section 53, it is clear that the proceeds from the sale of the liquidation assets of the Corporate Debtor , the distribution is to be made in order of priority and within such period and in such manner as provided thereunder. In terms of sub-section (4) (a) (iii) of Section 36, as all sums due to any workman or employees from the provident fund, the pension fund and the gratuity fund, do not form part of the liquidation estate/ liquidation assets of the Corporate Debtor , the question of distribution of the provident fund or the pension fund or the gratuity fund in order of priority and within such period as prescribed under Section 53(1), does not arise - The workmen s dues is mentioned in clause (b) (i) of Section 53(1), which are the dues for the period of twenty-four months preceding the liquidation commencement date. While applying Section 53 of the I B Code , Section 326 of the Companies Act, 2013 is relevant for the limited purpose of understanding workmen s dues which can be more than provident fund, pension fund and the gratuity fund kept aside and protected under Section 36(4) (iii) - This apart, as the provisions of the I B Code have overriding effect in case of consistency in any other law for the time being enforced, we hold that Section 53(1) (b) read with Section 36(4) will have overriding effect on Section 326(1) (a), including the Explanation (iv) mentioned below Section 326 of the Companies Act, 2013. Once the liquidation estate/ assets of the Corporate Debtor under Section 36(1) read with Section 36 (3), do not include all sum due to any workman and employees from the provident fund, the pension fund and the gratuity fund, for the purpose of distribution of assets under Section 53, the provident fund, the pension fund and the gratuity fund cannot be included - The Adjudicating Authority having come to such finding that the aforesaid funds i.e., the provident fund, the pension fund and the gratuity fund do not come within the meaning of liquidation estate for the purpose of distribution of assets under Section 53, no interference is required. Appeal dismissed.

Summary

Issues Involved:
1. Whether the provident fund, pension fund, and gratuity fund come within the meaning of assets of the 'Corporate Debtor' for distribution under Section 53 of the 'I&B Code'.

Issue-wise Detailed Analysis:

1. Initiation of Corporate Insolvency Resolution Process (CIRP):
The CIRP was initiated against the 'Corporate Debtor' on 14th November, 2017, under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code). Subsequently, on 20th September, 2018, the Adjudicating Authority (NCLT) ordered the liquidation of the Corporate Debtor, discharging the workmen under Section 33(7) of the I&B Code.

2. Liquidator's Denial of Preferential Payment:
The Liquidator, via email dated 5th December, 2018, denied preferential payment of the gratuity fund, provident fund, and pension fund, including them under the waterfall mechanism of Section 53 of the I&B Code.

3. Application by Moser Baer Karamchari Union:
In January 2019, the 'Moser Baer Karamchari Union' filed CA No. 19(PB)/2019, seeking directions for the Liquidator to exclude the amounts due towards 'Provident Fund', 'Pension Fund', and 'Gratuity Trust Fund' from the waterfall mechanism and to pay these dues as they do not constitute part of the liquidation estate.

4. Adjudicating Authority's Order:
The NCLT, by order dated 19th March, 2019, allowed CA No. 19(PB)/2019, holding that 'Provident Fund Dues', 'Pension Fund Dues', and 'Gratuity Fund Dues' cannot be part of Section 53 of the I&B Code. This order was challenged by the 'State Bank of India', a 'Secured Creditor'.

5. Appellant's Argument:
The 'State Bank of India' argued that under Section 53 of the I&B Code, the dues of employees, including the contribution to the 'Provident Fund', should be distributed as part of the assets of the 'Corporate Debtor'. They relied on the Explanation below Section 53 and Section 326 of the Companies Act, 2013, which includes sums due to workmen from various funds as 'workmen’s dues'.

6. Resolution Professional's Argument:
The Resolution Professional argued that Section 36(3) of the I&B Code, which defines the liquidation estate, specifically excludes sums due to workmen or employees from the provident fund, pension fund, and gratuity fund. Therefore, these funds should not be part of the liquidation estate and should not be distributed under Section 53.

7. Legal Provisions Discussed:
The judgment delved into Section 36 of the I&B Code, which outlines the formation of the liquidation estate and explicitly excludes sums due to workmen from certain funds. Section 53, which deals with the distribution of assets, was also examined, emphasizing that the proceeds from the sale of liquidation assets must be distributed in a specific order of priority.

8. Conclusion:
The Tribunal concluded that since sums due to workmen from the provident fund, pension fund, and gratuity fund are excluded from the liquidation estate under Section 36(4)(a)(iii) of the I&B Code, they cannot be included in the distribution of assets under Section 53. Therefore, the provident fund, pension fund, and gratuity fund do not form part of the liquidation estate of the 'Corporate Debtor'.

9. Final Judgment:
The appeal by the 'State Bank of India' was dismissed, upholding the NCLT's order that the provident fund, pension fund, and gratuity fund are not part of the liquidation estate for the purpose of distribution under Section 53 of the I&B Code. No costs were awarded.