Mr. Nagalingam Muthiah Vs. Office of the Recovery Officer - Priority in payment & Statutory first charge of EPFO dues in Liquidation process.

NCLT Chennai ( 08.04.2021) Mr. Nagalingam Muthiah Vs. Office of the Recovery Officer [IA/370/2020, IA/31/2021 and MA/868/2019 in CP/567(IB)/CB/2018] 

• the PF Authorities are entitled to the satisfaction of the full claim in relation to the PF dues including interest in a sum of Rs.36,11,902/- as well as any additional amounts as may be found due under the EPF & MP Act, 1952 as reflected in the Proclamation of Sale Notice issued dated 23.07.2019 following the decision of the Hon’ble NCLAT in Regional Provident Fund Commissioner Ahmedabad vs Ramachandra D. Choudhry [Company Appeal (AT)(Insolvency) No.1001 of 2019] referred supra.

• As the Order of Attachment issued by the PF Authorities-Respondent dated 25.04.2018 is held to be not hit by the provisions of the moratorium declared thereafter and for the reasons stated in paragraph supra, the action of the Liquidator in conducting an auction on 12.02.2020 while the matter was pending before this Tribunal dealing inter-alia with the said property as well under attachment, is required to be set aside as the same cannot be sustained in view of the statutory first charge prevalent on the assets of the Corporate Debtor in relation to PF dues and not being discharged as provided under Section 11 of the EPF & MP Act, 1952 read with Section 36(4)(iii)(a)(iii) of IBC, 2016.

Excerpts of the Order;

The facts in brief, which are required to be considered with a view to enable to dispose of this Application by this Tribunal are as follows:-

# 3. While so, it is seen that the Respondent, namely, Employees’ Provident Fund Organisation (EPFO) through the Office of the Recovery Officer had issued a sale notice dated 23.07.2019 for the sale of movable properties of the Corporate Debtor claiming that an outstanding amount in a sum of Rs.38,89,229/- is due and the date of sale was also fixed as 22.08.2019 pursuant to the sale notice. The said notice provoked the Applicant herein, in the capacity as a Liquidator, to move the Application in MA/868/2019 before this Tribunal, wherein, it was stated that the Respondent without filing a claim during the process of CIRP or thereafter when this Tribunal ordered for the Liquidation of the Corporate Debtor, however, had issued the sale notice dated 23.07.2019 proclaiming the sale of the movable assets of the Corporate Debtor.

# 5. While so, the Applicant herein, had sought to auction of both the land and building, plant and machinery by way of e auction sale notice dated 05.02.2020 in relation to which the liquidation value had been arrived at Rs.2,06,41,500/- against which value a sum which was fetched in the eauction, is stated to be Rs.2,16,00,000/-. In view of the status quo Order passed in MA/868/2019 as above by this Tribunal on 19.02.2020, even though a sum of Rs.22,50,000/- had been lodged by the successful bidder in the e-auction, the sale by auction of plant and machinery could not be finalized as the successful bidder did not make further payment.

# 6. In the circumstances, IA /370/2020 has been filed by the Applicant seeking for the following reliefs:

• “(a) To pass an order for re-locating the machinery of the Corporate Debtor, namely, M/s. SAS Autocom Engineers India Private Limited, which is undergoing Liquidation Process;

• (b) To pass an order for co-operation of the Respondent for relocating the machinery of the Corporate Debtor, namely, M/s. SAS Autocom Engineers India Private Limited while it is undergoing Liquidation Process; and

• (c) To pass such other orders or further orders which may deem to be fit and proper in the interest of justice”.

On its part, the Respondent herein, in relation to the Order dated 19.02.2020 passed by this Tribunal in MA/868/2019, had chosen to file a Writ Petition in WP/9036/2020 before the Hon’ble High Court of Madras seeking for the issue of Writ of Certiorari to call for the records of this Tribunal in MA/868/2019 and quash the same.

# 8. It is further seen that, on 31.08.2020, the Hon’ble High Court of Madras (DB) had chosen to dispose of the said Writ Petition No.9036 of 2020 filed by the Respondent herein, and as the Petitioner before the Hon’ble High Court of Madras, the operative portion of which reads as follows:

• “7.  . . . Accordingly, the Tribunal is directed to consider the Original Application No.MA/868/2019 in No.CP/567/1B in the light of the discussion made above, by way of speaking order and by giving a finding on its jurisdiction, within a period of eight weeks from the date of receipt of a copy of this order. We make it clear that all the issues both on fact and law are left open.

• 8. In view of the above, the writ petition stands allowed. No costs. Consequently, the connected miscellaneous petitions are closed”.

# 9. In view of the above directions given in WP /9036/2020, the matter was heard in detail and both the parties were also allowed to file their Written Submissions before this Tribunal, of which it is seen from the records of this Tribunal that the parties also seem to have availed.

# 10. It is also seen that in the meanwhile IA/31/2021 has been filed by the Applicant based on the averments contained in the said Application for the reliefs as sought as follows:

• “(a) That this Hon’ble Adjudicating Authority pass an order allowing the Applicant to register the property in favour of the successful bidder to complete the liquidation process within the mandated timeline; and

• (b) To pass such other orders or further orders, which may deem to be fit and proper in the interest of justice”.

# 16. Keeping in consideration the decision of the Hon’ble Supreme Court in relation to the jurisdictional aspect of this Tribunal under IBC, 2016 we now venture into the pleadings of the parties. From the rival pleadings, it is evident that since the admission of the Petition on 05.10.18 and initiation of CIRP of the Corporate Debtor, the concerned Corporate Debtor has become, due to its insolvency, amenable to the jurisdiction of this Tribunal. Upon initiation of the CIRP of the Corporate Debtor it is to be noted that a sequence of steps is required to be initiated by this Tribunal and the IRP appointed by this Tribunal, including action under Section 13 of IBC, 2016, the declaration of moratorium for the purposes of Section 14 of IBC, 2016 and causing a public announcement calling for the submission of claims under Section 15 of IBC, 2016. In this regard, definition of a ‘claim’ has been given, it is pertinent note, under sub Section (6) of Section 3 of IBC, 2016 as follows:-

• “(6) ‘Claim” means

• (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;

• (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, un-matured, disputed, undisputed, secured, secured or unsecured;

# 18. While so, during the course of submissions made by the Respondent, a vehement contention was taken by the Ld. Counsel for the Respondent that it is not necessary for the Respondent even to lodge a claim with IRP/RP as the case may be during the CIRP or with the Liquidator during the liquidation process in view of Section 11 of EPF & MP Act, 1952. Section 11 of the EPF & MP Act, 1952 reads as follows:- . . . . 

# 19. In view of the above provision, namely, Section 11 of the EPF & MP Act, 1952, it is submitted by Ld. Counsel for the Respondent, that the debts arising under the EPF & MP Act, 1952 up to the date of insolvency or winding up, is deemed to be included in the list of debts also having a statutory first charge on the assets of the establishment in relation to dues as envisaged under Section 11(1)(a) of the EPF & PF Act, 1952 which stands created and is required to be paid in priority to all other debts and hence, whether a claim is lodged or not the same is required to be factored during the CIRP or Liquidation process.

# 20. Further, it is also pointed out that the provisions of IBC, 2016, more particularly, by virtue of Section 36(4)(a)(iii) of the Code provides that all sums due to any workman or employee from the Provident Fund, the Pension Fund and the Gratuity Fund are not to be included in the liquidation estate assets and shall not be used for recovery in liquidation.

# 21. Thus, we pose ourselves with a question as an Adjudicating Authority having jurisdiction exclusively over the insolvency of Corporates, like that of the company under liquidation can such a view be entertained or countenanced.

# 22. A careful perusal of both i.e., Section 11 of the EPF & MP Act, 1952 or for that matter Section 36(4)(a)(iii) of IBC, 2016 primarily deals with the assets concerned of the establishment, and the Corporate Debtor respectively and nowhere specifies that the EPF Authorities are not required to even lodge a claim before the IRP /RP/Liquidator in relation to a Corporate Debtor undergoing a Insolvency or Liquidation Proceedings even though liability accrued only prior to insolvency is deemed to be included amongst the debts. The Respondent, if at all, taking into consideration the decisions of the Hon’ble Supreme Court rendered in the cases of M/s. Embassy Property Developments Ltd., and M/s. Gujarat Urja Vikas Nigam Limited, can only advance an argument that IRP/RP/Liquidator or even for that matter this Tribunal will not have any scope for adjudication of the claim or the correctness of it as put forth by the Respondent authorities already ascertained and quantified, prior to initiation of the insolvency proceedings, before the concerned IRP/RP/Liquidator and that if at all the RP/Liquidator has any grievance in relation to the quantum of claim made or otherwise, the remedies by way of an appeal is required to be preferred as provided under the EPF & MP Act, 1952, itself and cannot call upon this Tribunal to decide on the same under the provisions of IBC, 2016.

# 28. Perusal of the above paragraph clearly establishes that the onus of this Tribunal as an Adjudicating Authority named in IBC, 2016 are of much wider amplitude as compared to the statutory authority named in EPF & MP Act, 1952 as during the course of insolvency and liquidation and more so during liquidation as contemplated IBC, 2016 to balance the interests of all the stakeholders concerned including employees.

# 29. In the circumstances, this Tribunal is required to take a broader view without in any way compromising the interests of the employees, taking into consideration the provisions of EPF & MP Act, 1952 and Section 36 of IBC, 2016 while considering and exercising in relation to the jurisdictional issue in relation to the question on hand, of course within the textual hook of IBC, 2016 in doing so, as laid down by the Hon’ble Apex Court in Gujarat Urja Vikas Nigam Limited’s case and noted above in paragraphs supra. In this connection, it is seen that it in the course of implementation of the Code in retrospect, both binding as well as persuasive precedents that have evolved which if it has a bearing, this Tribunal is bound to take note of in arriving at its decision in the instant case.

"(i) In the matter of Regional Provident Fund Commissioner Ahmedabad vs Ramachandra D. Choudhry [Company Appeal (AT)(Insovency) No.1001 of 2019] In answering the question as to whether PF authorities are entitled to a claim of interest charged by the said authority during the course of CIRP of the corporate debtor post CIRP, in addition to the principal amount of provident fund due of which has been fully taken care of in the approved Resolution Plan, negating the contention of the successful resolution applicant that Sections 7Q and 14B of the EPF & MP Act, 1952 cannot be relied upon, as the provisions of IBC, 2016 has an overriding effect on the same in terms Section 238 of the Code, it was held that no provisions of EPF & MP Act, 1952 and IBC, 2016 are in conflict and on the other hand in terms of Section 36(4)(iii), the provident fund and gratuity funds are not the assets of the corporate debtor, there being specific provisions, the application of Section 238 of the Code will not arise. In the circumstances the successful resolution applicant was directed to release full provident fund and interest thereof in terms of EPF& MP Act, 1952 and the appeal of PF authorities was thereby allowed.

(ii) In the matter of State Bank of India vs. Moser Baer Karamchari Union & Anr [Company Appeal (AT)(Insolvency) No.396 of 2019] The question which arose for decision before the Appellate Tribunal in this matter was as to whether for the purpose of distribution of assets of the Corporate Debtor during the course of its liquidation under Section 53 of IBC, 2016, whether dues of employees as mentioned in sub clause (c) of sub-section (1) therein includes the contribution of Provident Fund, in view of Explanation to Section 53 stating that ‘workmen’s dues’ shall have the same meaning as assigned to it in Section 326 of the Companies Act, 2013. Relying on the definition of Liquidation Estate under Section 36(1) read with Section 36(3) of IBC, 2016 and since it does not include all sums due to any workman and employees from the provident fund, for the purpose of distribution of assets under Section 53, the provident fund, the pension fund and the gratuity fund cannot be included and in the circumstances the adjudicating authority having held that the same will not form part of the Liquidation Estate of the corporate debtor for the purpose of distribution of assets under Section 53 of IBC, 2016, the said decision was upheld

(iii) In the matter of Regional Provident Fund Commissioner EPFO Regional Office Chennai vs T.V.Balasubramanian Resolution Professional Sholingur Textiles Limited in [Company Appeal (AT)(Insolvency) No.1521 of 2019] The issue which came up before the Appellate Tribunal concerned about the attachment of immovable properties of the Corporate Debtor by the PF authorities in relation to PF dues and consequent attachment and thereafter issue of a Recovery Certificate to the concerned Recovery Officer in exercise of the powers conferred under Section 8(B) to 8(G) of EPF & MP Act, 1952 and the validity of such attachment in view of the initiation of the CIRP and moratorium imposed under Section 14 of IBC, 2016 by this Tribunal it was held by the Appellate Tribunal that the attachment effected by the PF authorities was prior in time to the initiation of the CIRP of the corporate debtor, even though the entries in the concerned Sub Registrar’s record of the said attachment was recorded in the register during the CIRP, would still be a valid attachment.

(iv) In the matter of Precision Fasteners Ltd through the Liquidator Vs Employees Provident Fund Organisation, Thane & Ord in [MA 576 & 752/2018 in C.P.(IB) 1339(MB)/2017] (NCLTMumbai Bench) reported in 2018 SCC Online NCLT 27284 Upon a detailed consideration of the interplay of EPF& MP Act,1952, Companies Act of 1956 and 2013 as well as IBC, 2016 and the decisions of the Apex Court it has been held that:-

• a) In relation to attachments effected by the PF authorities, 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, there is no merit to differentiate in respect of attachments made prior to filing of the Company Petition and during CIRP period;

• b) The charge in relation to PF dues will be the first charge in priority to all other debts, including Liquidator costs because the PF dues has been excluded from the Liquidation Estate;

• c) PF 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;

• d) 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 36(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;

• e) Liquidator directed to pay the PF 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 assets of the Corporate Debtor, the respondents i.e., PF authorities are directed to allow the Liquidator to sell the assets of the Corporate Debtor and pay off the Provident Fund dues including interest in priority to all other claims payable by the Corporate Debtor in Liquidation.

The above decisions clearly bring out the complexity of the issue on hand before this Tribunal as well as gives guidance as to the way forward in resolving the claim and priority as staked by the Liquidator-Applicant on the one hand and the EPFO authorities-Respondent on the other. However, it is also required to be noted that because of the dispute between the parties, the Liquidation Process of the Corporate Debtor is stuck in a legal quagmire which is also required to be put on track.

CONCLUSION

(i) In relation to the Claim of the PF Authorities in the instant case, the PF Authorities are entitled to the satisfaction of the full claim in relation to the PF dues including interest in a sum of Rs.36,11,902/- as well as any additional amounts as may be found due under the EPF & MP Act, 1952 as reflected in the Proclamation of Sale Notice issued dated 23.07.2019 following the decision of the Hon’ble NCLAT in Regional Provident Fund Commissioner Ahmedabad vs Ramachandra D. Choudhry [Company Appeal (AT)(Insolvency) No.1001 of 2019] referred supra.

(ii) Since the attachment of movables effected by the PF Authorities by way of Order of Attachment of Property issued dated 25.04.2018 for the recovery of the PF dues is even prior to the initiation of CIRP by this Tribunal on 05.10.2018, the said order of attachment will not be hit by the declaration of moratorium under Section 14 of IBC, 2016 following the ratio of the Hon’ble NCLAT as held in Regional Provident Fund Commissioner EPFO Regional Office Chennai vs T.V.Balasubramanian [Company Appeal (AT)(Insolvency) No.1521 of 2019] also referred supra and hence this Tribunal is not required to delve any further on the aspect of attachment.

(iii) As the Order of Attachment issued by the PF Authorities-Respondent dated 25.04.2018 is held to be not hit by the provisions of the moratorium declared thereafter and for the reasons stated in paragraph supra, the action of the Liquidator in conducting an auction on 12.02.2020 while the matter was pending before this Tribunal dealing inter-alia with the said property as well under attachment, is required to be set aside as the same cannot be sustained in view of the statutory first charge prevalent on the assets of the Corporate Debtor in relation to PF dues and not being discharged as provided under Section 11 of the EPF & MP Act, 1952 read with Section 36(4)(iii)(a)(iii) of IBC, 2016.

(iv) In case if the Liquidator is in a position to provide and pay off the amount due and claimed under the provisions of the EPF & MP Act , 1952 by the Respondent, including any amount found to be due since August 2019, to the satisfaction of the Respondent and in priority to all other debts, the Liquidator in this regard shall avail the provisions of EPF & MP Act, 1952 read with the Second Schedule to the Income Tax Act, 1961 and to enable the Liquidator to adopt such a course of action and for which purpose a period of two weeks shall be granted by the Respondent to the Liquidator, prior to auctioning of the properties under attachment for which a Proclamation of Sale Notice has been issued on 23.07.2019 failing which as a consequence, the PF Authorities are free to proceed as per the provisions of EPF & MP Act, 1952 for the recovery of PF dues as per the provisions of EPF & MP Act, 1952 in priority to all other claims. However, such an action thereafter shall be completed with in a period of 8 weeks failing which the Respondent shall re-locate the movables under attachment detailed in the Warrant of Attachment for the Liquidator to proceed with the Liquidation Process. Any surplus left after appropriation of PF dues by the PF Authorities/Respondent shall be duly lodged with the Liquidator, who will accept the same as part of Liquidation Estate Assets of the Company under liquidation.

31. Thus, with the above directions IA/370/2020, IA/31/2021 and MA/868/2019 are disposed off, accordingly.

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