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TMI Blog2018 (9) TMI 1532X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the respective authorities about the powers of the Resolution Professional and the provisions of the Code, and sought for release of the attachments on the units aforementioned, in the meanwhile, on Liquidation order, the RP has been appointed as Liquidator. On having the respondents filed claims aggregating to ₹ 16,06,62,939 before the Liquidator, when the Liquidator verified the historical material papers, he has noticed that Rl attached the plots of Kalwa unit, R2 attached some plots of Silvassa Unit and R3 attached movable properties at Plot No. B-5, B-8 B-10, Mahad MIDC, Tal Birwadi, Near Mahad - Dapoli Road, Mahad ( Mahad Unit ) belonging to the Corporate Debtor. 4. Now the case of this liquidator is that the assets attached by the Respondents are required to be formed part of the liquidation estate, thereby the retention of the attachments by the respondents over the assets of the Corporate Debtor is likely to derail the process of liquidation ordered by this Bench, henceforth to discharge his functions as liquidator, he says, the attachments ordered by the respondents shall be lifted. The counsel appearing on behalf of the Liquidator further submits that dues u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gratuity fund of any workmen or employee which have already credited to those accounts shall not be included in the liquidation estate, and that being so, the Liquidator as per the sub section shall not claw back the funds already deposited with provident fund or pension fund or gratuity fund. But as to the fund that has remained as arrears to be deposited with Employees Provident Fund Organization (EPFO), the counsel says that it cannot be treated as either provident fund, pension fund or gratuity fund as long as it has not been deposited with EPFO (the respondent organisation), in addition to it, he has further elaborated it saying that EPFO does not become a secured creditor of the Corporate Debtor, therefore, the attachments sought to be retained by R1-R3 is against the intent of the Code. 9. The Counsel further submits that this Liquidator is bound to comprise the assets of the Corporate Debtor as Liquidation estate and distribute the proceeds of the same among the creditors as specified in section 53 and Regulations thereto, for doing so, the Liquidator has to identify the assets and bring them to the kitty of liquidation estate, in pursuit of the same, the Liquidator file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all assets of the Corporate Debtor shall fall within the liquidation estate, but since those orders not being related to Provident Fund issue, they are not applicable to the present case. 15. On this argument advanced by the counsel of Liquidator, the counsel appearing on behalf of R1-R3 submits that EPFO is a statutory body established under the EPF Act, it is a social legislation with an endeavour to protect the weaker sections of the society i.e. workers employed in the factory and other establishments. EPFO is an organisation works under the superintendence of the central board of trustees, a tripartite body headed by Union Minister for Labour as Chairman. It administers the provisions of the EPF Act, and three schemes framed under the Act viz. Employees Provident Fund Scheme 1952, Employees Deposit linked Insurance Scheme 1976, Employees Pension Scheme 1995. 16. On hearing the submissions of either side, now the point for consideration is whether or not the Provident Fund, Pension Fund due and payable to the workers or employees of the corporate debtor will become part of Liquidation Estate in the light of section 36 ofIBC ? 17. The issue in this case is that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le assets, whether movable or immovable; (d) intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights; (e) assets subject to the determination of ownership by the court or authority; (f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter; (g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest; (h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and (i) all proceeds of liquidation as and when they are realised. (4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: - (a) assets owned by a third party which are in possession of the corporate debtor, including - (i) assets held in trust for any third party; (ii) bailment contracts; (iii) all sums due to any workman or employee from the provident fund, the pension fund and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in possession of corporate debtor for a specific purpose, corporate debtor being bailee not having title over such asset, that asset as per this sub clause shall not be included in the liquidation estate. 22. When it comes to sums due to any workmen or employees from the provident fund, the pension fund and the gratuity fund under sub clause (iii), they shall not be included in the liquidation estate. Similarly, another exhaustive definition has been given to sub clause (iv) saying that contractual arrangements not transferring title to corporate debtor except use of the assets will become an asset not falling within the ambit of liquidation asset, such assets shall not also be included and used for recovery in the liquidation. Lastly in sub-clause (v), any asset notified by the Central Government in consultation with any financial sector regulator shall not be included in the liquidation estate assets. 23. Now we are concerned with sub-clause (iii) of clause (a) of sub-section 4 of Section 36 because this sub-clause deals with dues payable to workmen or employees from the provident fund, the pension fund and the gratuity fund, which is relevant to the issue for consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand the paramount consideration given to the dues to any workman from the provident fund, it is necessary to insert para 16, 17 and 18 of the case supra, which are as below: l6. The background in which Amendment ActNo.33 of 1988 was passed is discernible from the Statement of Objects and Reasons appended to the Employees Provident Funds and Miscellaneous Provisions (Amendment) Bill, 1988, the relevant portions of which are extracted below. The Employees Provident Funds and Miscellaneous Provisions Act, 1952 provides for the institution of Compulsory Provident Fund; Family Pension Fund and Deposit Linked Insurance Fund, for the benefit of the employees in factories and other establishments. The Act is at present applicable to 173 industries and classes of establishments employing twenty or more persons. As on 31-3-1987, about 1.66 lakh establishments with about 1.38 crore subscribers were covered under the Act. 2. The Act was last amended in 1976. The Government had set up a high level Committee in April, 1980 to review the working of the Employees Provident Funds Organisation and to suggest improvements. The Committee had made a number of recommendations invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up, as the case may be. Explanation . - In this sub-section and in section 17, insurance fund means any fund established by an employer under any scheme for providing benefits in the nature of life insurance to employees, whether linked to their deposits in provident fund or not, without payment by the employees of any separate contribution or premium in that behalf. (2) Without prejudice to the provisions of sub-section (1), if any amount is due from an employer whether in respect of the employee s contribution (deducted from the wages of the employee) or the employer s contribution, the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority to all other debts. 18. An analysis of Section 11 of the EPF Act shows that it gives statutory priority to the amount payable to the employees over other debts. Section 11(1) relates to an employer who is adjudged insolvent or being a company against whom a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Industries v. Union of India (1979) 4 SCC 573, this Court negatived challenge to the constitutionality of Section 14-B of the EPF Act. In the main judgment delivered by him, A.P. Sen, }. referred to the Statement of Objects and Reasons contained in the Bill presented before Parliament, which led to the enactment of Amendment Act No. 40/1973 and observed: Each word, phrase or sentence is to be considered in the light of general purpose of the Act itself. A bare mechanical interpretation of the words devoid of-concept or purpose will reduce must of legislation to futility. It is a salutary rule, well established, that the intention of the legislature must be found by reading the statute as a whole. In his concurring judgment, Krishna Iyer, J. observed: The measure was enacted for the support of a weaker sector viz. the working class during the superannuated winter of their life. The financial reservoir for the distribution of benefits is filled by the employer collecting, by deducting from the workers wages, completing it with his own equal share and duly making over the gross sums to the Fund. If the employer neglects to remit or diverts the moneys for alie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of priority where an employer is adjudicated insolvent or being a company subjected to an order of winding up. Sub-section (2) of section 11 deals with other types of priorities and reads as under: 11(2) Without prejudice to the provisions of sub-section (1), if any amount is due from an employer, whether in respect of the employee s contribution deducted from the wages of the employee or the employer s contribution, the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law, for the time being in force, be paid in priority to all other debts. Sub-section (2) of section 11 of the E.P.F. and M.P. Act has two facets. First, it declares that the amount due from the employer towards contribution under the E.P.F. and M.P. Act shall be deemed to be a first charge on the assets of the establishment. Second, it also declares that notwithstanding anything contained in any other law for the time being in force, such debt shall be paid in priority to all other debts. Both these provisions bring out the intention of Parliament to ensure the social benefit as contained in the legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in relation to a company, means the aggregate of the following sums due from the company to its workmen, namely: - (i) all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman, in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947 (14 of 1947); (ii) all accrued holiday remuneration becoming payable to any workman, or in the case of hisdeath to any other person in his right, on the termination of his employment before, or by the effect of, the winding up order or resolution; (iii) unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, or unless the company has, at the commencement of the winding up, under such a contract with insurers as is mentioned in section 14 of the Workmen s Compensation Act, 1923 (8 of 1923) rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial or otherwise, work, a living wage, conditions of work ensuring a decent standard of life and full enjoyment of leisure and social and cultural opportunities and, in particular, the State shall endeavour to promote cottage industries on an individual or co-operative basis in rural areas. I believe that Hon ble Justice Bhagwati holding in Bandhua Mukti Morcha v. Union of India (1984 AIR 802) strengthens this concept, let us look into the words of Honourable Justice Bhagwati, which are as below: It is the fundamental right of everyone in this country... to live with human dignity free from exploitation. This right to live with human dignity enshrined in Article 21 derives its life breath from the Directive Principles of State Policy and particularly clauses (e) and (f) of Article 39 and Articles 41 and 42 and at the least, therefore, it must include protection of the health and strength of workers, men and women, and of the tender age of children against abuse, opportunities and facilities for children to develop in a healthy manner and in conditions of freedom and dignity, educational facilities, just and humane conditions of work and maternity relief These are the minim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... men have not been sent to the EPFO, that sum alone will be the sum due from the establishment (in this case the Corporate Debtor). Since the former situation, cannot be called as due and payable by the Corporate Debtor, the later situation alone is to be considered as a situation that has been envisaged under section 36(4)(a)(iii) of the Code. The reason being, when provident fund contribution from the workmen is deducted from the wages of the workmen by the Corporate Debtor, it has to be deemed that the matching contribution has been allocated by the Corporate Debtor. It makes no difference as to whether it has been released from the Corporate Debtor or not, once deduction has been made from the workmen s wages, it is to be deemed as the asset of the workmen and not as an asset of the Corporate Debtor or the company as the case may be. Therefore, we have not found any merit in the argument of the Liquidator counsel canvassing that sub-clause (iii) of clause (a) of subsection 4 of section 36 denotes in respect to the provident fund already released and lying with the EPFO, henceforth, the said argument of the Liquidator counsel is rejected. 32. In addition to the above provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se dues fall within the ambit of liquidation estate. Therefore, this argument of inconsistency raised by the Liquidator counsel has no merit, hence the same is rejected. 35. Despite Presidency Insolvency Act, Provincial Insolvency Act and Companies Act 1913 were in existence by the time EPF Act 1952 has come into force, an overriding effect was given in the EPF Act over all the above said enactments placing the PF dues in priority over any other dues payable by the Corporate Debtor or the insolvent as the case may be. After Companies Act 1956 came into existence, EPF Act was further amended including applicability of section 11 of EPF Act to the Companies Act 1956 stating that these dues are to be paid in priority to all other debts in distribution of the property of the insolvent or the asset of the company being would up as the case may be. Since these dues being treated as an asset of the workmen u/s 36(4)(a)(iii) of the Code, for realisation of such debt, EPF Act 1952 is applicable, not IBC 2016. 36. As against the argument of the Liquidator counsel saying that the assets attached by the respondents are the assets secured as security by other creditors as mentioned above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d/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. 39. As to citation Leo Edibles Fats Ltd. v. Tax Recovery Officer Ors. (WP No. 8560 of 2018, order dated 26.07.2018 passed by Hon ble High Court of Hyderabad) relied upon by the liquidator counsel to say that even if the order of attachments constitutes an encumbrance on the property, still it will not have the effect of taking it out of the purview of section 36(3)(b) of the Code, the answer is in section 36 (3) of the Code itself, it has been stated as to what assets could be included in the liquidation estate, but before saying so, the legislature has added a caveat to sub section 3 of section 36 saying that subsection -3 is subject to subsection - 4 of section 36, therefore the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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