2018 (9) TMI 1532 - Tri - Insolvency and Bankruptcy

Corporate insolvency process - attachment of movable and immovable properties of the Corporate Debtor - priority of claims - whether the dues payable towards the provident fund of the workmen of the company is to be considered as claim falling within the ambit of Liquidation Estate? - Held that - Since liquidation process should not get obliterated by the attachment taken against the assets of the Corporate Debtor, the only viable answer to this situation is, the liquidator shall pay the dues that are payable under the head of Provident Fund/Pension Fund/Gratuity Fund earmarking it as asset of the workmen and pay off the same to the respondents in priority to the waterfall mechanism made under section 53 of the Code. In view of the law in force, we hereby hold that by virtue of EPF Act and section 34(4)(a)(iii) of the Code, the charge will remain in force against the assets of the corporate debtor until it has been paid off before making any payment to any entity falling under waterfall mechanism devised under section 53 of the Code. Since the Liquidator filed another MA stating that further attachments have been slapped on the assets of the corporate debtor even after initiation of the Corporate Insolvency Resolution Process (CIRP), it makes no difference whether attachments have been made prior to or subsequent to admission of Company Petition under IB Code, the statutory first charge having remained in force against the assets of the corporate debtor company, we have not seen any merit to differentiate in respect to attachments made prior to filing of the Company Petition and during CIRP period. For the reasons stated above, the Petitioner is directed to pay the Provident Fund dues from the liquidation estate before distributing the liquidation estate of the Corporate Debtor to the claimants, to which, since the Liquidator has to sell the asset of the Corporate Debtor, the respondents are directed to allow this Liquidator to sell the assets of the Corporate Debtor and pay off the Provident Fund dues in priority to all other claims payable by the Corporate Debtor in liquidation. Since the liquidator has not disputed the quantum of Provident Fund dues payable to workmen, the liquidator shall pay the Provident Fund dues along with interest accrued, after selling any of the assets of the Corporate Debtor earlier in point of time. With this direction, the attachments made against the assets of the Corporate Debtor are hereby vacated with a direction against the Liquidator as mentioned above.

Issues Involved:
1. Validity of the attachment of the corporate debtor's assets by the Employees Provident Fund Organization (EPFO).
2. Whether Provident Fund, Pension Fund, and Gratuity Fund dues are part of the liquidation estate under the Insolvency and Bankruptcy Code, 2016 (IBC).
3. Priority of payment of Provident Fund dues over other debts.
4. The liquidator's authority and obligations under the IBC.

Issue-wise Detailed Analysis:

1. Validity of the attachment of the corporate debtor's assets by the EPFO:
The liquidator filed an application seeking a declaration that the attachment of movable and immovable properties of the corporate debtor by the EPFO under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) is null and void. The liquidator argued that the assets attached by the EPFO should form part of the liquidation estate under the IBC, and the attachments should be lifted to enable the disposal of these properties. The respondents (EPFO) had attached various properties of the corporate debtor due to unpaid provident fund dues.

2. Whether Provident Fund, Pension Fund, and Gratuity Fund dues are part of the liquidation estate under the IBC:
The Tribunal examined Section 36(4) of the IBC, which explicitly excludes sums due to any workman or employee from the provident fund, pension fund, and gratuity fund from the liquidation estate. The Tribunal emphasized that these funds are not to be used for recovery in the liquidation process. The Tribunal referred to the legislative intent and historical context, noting that provident fund dues have always been given priority and treated as distinct from other debts.

3. Priority of payment of Provident Fund dues over other debts:
The Tribunal cited Section 11 of the EPF Act, which provides that provident fund dues shall be treated as the first charge on the assets of the establishment and shall be paid in priority to all other debts. The Tribunal reinforced that this priority is maintained under the IBC, as provident fund dues are excluded from the liquidation estate and must be paid before any other claims. The Tribunal also referred to various judicial precedents that support the priority of provident fund dues over other debts.

4. The liquidator's authority and obligations under the IBC:
The liquidator is empowered under Section 35 of the IBC to take custody and control of all assets of the corporate debtor and form a liquidation estate. However, the Tribunal clarified that the liquidator must exclude provident fund, pension fund, and gratuity fund dues from the liquidation estate as mandated by Section 36(4) of the IBC. The liquidator is obligated to pay these dues in priority before distributing the liquidation estate among other creditors.

Conclusion:
The Tribunal directed the liquidator to pay the provident fund dues from the liquidation estate before distributing the remaining assets to other claimants. The attachments made by the EPFO were vacated to allow the liquidator to sell the assets of the corporate debtor and pay off the provident fund dues. The Tribunal emphasized that the provident fund dues have a statutory priority and are excluded from the liquidation estate, thereby reinforcing the protection of workers' rights under the IBC and EPF Act.

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