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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Precision Fasteners Ltd. Vs. Employees Provident Fund Organisation - Once deduction has been made from the workman's wages, it is to be deemed as the asset of the workmen and not as an asset of the CD.

NCLT Mumbai (12.09.2018) in Precision Fasteners Ltd. Vs. Employees Provident Fund Organisation [MA 576 & 752 of 2018 in CP No. (IB) 1339 (MB) /2017] held as under;

• # 30.  . . the right of all other creditors over the assets of the company is a property right, whereas workmen dues, more specially PF dues of workmen, are interwoven with Right to Life because the workmen all through their life save some portion of the hard earnings for their later life after retirement, if Such sums are being interlinked on par with debts of the creditors of the company, secured or unsecured as the case may be, then it is nothing but diluting most valuable and inalienable right of a person on par with a property right subordinate to right to life.

• # 31 … .  It makes no difference as to whether it has been released from the Corporate Debtor or not, once deduction has been made from the workman'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.

• # 33. Now in alignment with the provisions of EPF Act, in section 36(4)(1)(3), the Code has gone ahead saying that the dues in respect to Provident Fund/Pension Fund/Gratuity Fund shall not be treated as part of the liquidation estate, as long as such dues are not treated as part of liquidation estate, the provisions of IBC will not be applicable for realisation  of such dues from the asset of the Corporate Debtor. The intriguing aspect lying in this scenario is that though it is a due payable by the Corporate Debtor, as to provident Fund/Pension Fund/Gratuity Fund dues are considered, the Code has treated it as an asset of the workmen lying with the Corporate Debtor.

• # 42. Therefore, 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.

 

Excerpts of the order;

# 20. If we come to clause (a) of this sub section — 4, it includes five kinds of assets as (i) (ii)(iii) (iv) (v) sub-clauses under the head of assets owned by a third party which are in possession of the Corporate Debtor, let us examine clause by clause to know the implications of each of the clauses and find out the commonality in bringing these five clauses under the head of assets possessed by the debtor without title over it.

 

# 21 On examination of sub section 4 (a) (i), it is evident that if any asset is lying in trust with corporate debtor for the benefit of third party, that asset shall be excluded from the liquidation estate, likewise regarding subsection — 4 (a) (ii), in bailment contracts, if goods have been 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 consideration before this Bench.

 

# 24. In this clause (a) of sub-section 4, the assets belonging to a third party remaining in the possession of the corporate debtor have been included in this clause (a), since it is an inclusive definition, it is obvious that the words used in an inclusive definition denote extension and cannot be treated as restricted in any sense, therefore, it is inappropriate to put a restrictive interpretation upon the terms of wider denotation. (vide Oswal Fats and Oils Ltd. vs. Additional Commissioner (Administration), Bareilly Division, Bareilly and ors.) [MANU/SC/0216/2010 - para 25]

 

# 25. Out of these five sub-clauses, regarding (i), (ii) and (iv), these three clauses deal with the assets in the possession of the corporate debtor without any title over such assets, as to sub- clause (iii) and sub-clause (v), it need not be seen as to whether title is vested with the corporate debtor or not, it is an operation of law that says when provident fund is payable to the workmen or employees, such payment dues have to be deemed as an asset of the workmen or the employees, it makes no difference whether it has been maintained in a separate account or not, in view of this deeming fiction, the workmen/employees need not prove that whether any sum (interest) has been explicitly vested with them or not. So is the case when an asset of the corporate debtor is notified by the Central Government in consultation with any financial sector regulator. By including subclauses (iii) and (v) along with sub- clauses (i), (ii) and (iv) of clause (a) of sub-section 4, an overarching interest and title has been created in favour of the workmen in respect to provident fund, etc. and in favour of the government in respect to the asset notified treating these two assets under sub-clauses (iii) & (v) as not included in the liquidation estate.

 

# 30. I believe that the right of all other creditors over the assets of the company is a property right, whereas workmen dues, more specially PF dues of workmen, are interwoven with Right to Life because the workmen all through their life save some portion of the hard earnings for their later life after retirement, if Such sums are being interlinked on par with debts of the creditors of the company, secured or unsecured as the case may be, then it is nothing but diluting most valuable and inalienable right of a person on par with a property right subordinate to right to life. Workmen normally fall back on their earnings after retirement, if realisation of such dues also put in jeopardy, how could they Survive and Sustain in their old age, they can't do anything in life, life becomes by that time already vestigial, can they rally around courts to realise these sums, 1 believe it can't be so and law cannot be so, and the law is also not so. May be for this reason alone, EPF Act has been strengthened from time to time, in addition to it, now under IBC, PF/Pension/Gratuity fund dues have been taken out from the spectrum of liquidation estate asset by giving a mandate that the PF/pension/Gratuity fund dues to the workman/employee shall be treated as an asset of the workman lying in the possession of corporate debtor. so, it is not treated as a claim on par with other creditors, it is in fact treated as an asset of the workmen lying with corporate debtor.

 

# 31 ……… It makes no difference as to whether it has been released from the Corporate Debtor or not, once deduction has been made from the workman'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.

 

# 33.Now in alignment with the provisions of EPF Act, in section 36(4)(1)(3), the Code has gone ahead saying that the dues in respect to Provident Fund/Pension Fund/Gratuity Fund shall not be treated as part of the liquidation estate, as long as such dues are not treated as part of liquidation estate, the provisions of IBC will not be applicable for realisation  of such dues from the asset of the Corporate Debtor. The intriguing aspect lying in this scenario is that though it is a due payable by the Corporate Debtor, as to provident Fund/Pension Fund/Gratuity Fund dues are considered, the Code has treated it as an asset of the workmen lying with the Corporate Debtor.

 

# 34. In view thereof, the overriding effect of section 238 of this Code will not have any bearing over the asset of the workmen lying in the possession of the Corporate Debtor because that asset is not considered as the part of the liquidation estate, moreover, to apply section 238 over any other law for the time being in force, the other law must be inconsistent with the provisions of the Code, since section has excluded the PF dues of the workmen from the liquidation estate assets treating it as an asset of the workmen lying with the corporate debtor, section 53 is not applicable to say that these 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.

 

# 42. Therefore, 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.

 

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Pratiksh Pramod Rai. Vs. Mylaw Learning Resources Pvt. Ltd. - Insolvency Application was not accepted by AA, as CD offered to settle the dues and pay the principle amount in absence of interest clause in the service agreement.

NCLT Mumbai (16.06.2021) in Pratiksh Pramod Rai. Vs. Mylaw Learning Resources Pvt. Ltd. [C.P. (IB) 195/MB/2019] held that;  

• It is evident that the Corporate Debtor has agreed to clear the principal outstanding amount and has tried to settle the issue amicably but the applicant was reluctant. That, it will be open to the applicant to move before a court of competent jurisdiction for realisation/recovery of their dues instead of initiating resolution process which will have adverse effect on a going concern. That, keeping in mind the basic objective of the IB Code as also considering the fact that the respondent company is a going company and initiation of insolvency process will adversely affect livelihood of number of employees and their family, in the interest of natural justice, the Adjudicating Authority cannot admit the application preferred by the appellant company.”

 

Excerpts of the order;

# 1. This Company Petition is filed by Mr. Pratiksh Pramod Rai (hereinafter called as “the petitioner” or as “operational creditor”) seeking to initiate Corporate Insolvency Resolution Process (CIRP), against Mylaw Learning Resources Pvt. Ltd. (hereinafter called as “the respondent” or “corporate debtor”) by invoking the provisions of sections 8 & 9 of Insolvency and Bankruptcy Code (hereinafter called as “Code”) read with Rule 6 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

 

# 2. The petitioner herein was an employee of the respondent and had started working initially as a consultant and later engaged as a full-time employee with the respondent. The petitioner was duly appointed with the respondent vide an Employee Agreement dated 01.04.2016. This agreement was entered into between the petitioner and Rainmaker Learning Resources Pvt. Ltd. whose name was changed to Mylaw Learning Resources Pvt. Ltd. w.e.f. 10.08.2016.

 

# 3. The petitioner herein has submitted that the operational debt is to a tune of Rs.22,69,127/- (consisting of Rs.20,19,970/- as principal dues in the form of unpaid accumulated salaries as on 31.03.2018 plus interest on delayed payment @12% p.a.). The petitioner submits that an amount of Rs. 20,19,970/- has been acknowledged by the respondent vide its email dated 30.03.2018 and also attached ledgers for the past financial years showing that these amounts have been reflected in the books of the respondent.

 

# 5. Thereafter, the petitioner had issued a demand notice dated 13.04.2018 as per Section 8 of the Code demanding the operational debt of Rs.22,69,127/-. The petitioner submitted the respondent replied to this notice on 23.04.2018 wherein the it has raised frivolous and illusionary dispute, without any documents/records to substantiate the same and that this dispute has been raised by the respondent for the first time and therefore, is a feeble dispute in terms of settled position of law. Later, on 02.05.2018, the respondent addressed an email to the petitioner proposing amicable settlement between the parties and on 18.05.2018, the petitioner received a letter from the advocates of the respondent seeking amicable resolution.

 

# 6. The petitioner therefore, submitted that he being an employee of the respondent is entitled to the outstanding operational debt and the substantial part of which has also been specifically admitted by the respondent. However, despite numerous requests and reminders from the petitioner, the respondent has failed to make payments towards outstanding operational debt. Also, the petitioner is unaware if the respondent has also defaulted in making payment of PF/TDS to respective government authorities in respect of the amount of outstanding dues.

 

# 8. The respondent submitted that not only during the course of the current proceedings, but also prior to the filing of this petition, the respondent was always willing to amicably settle the issues with the petitioner which has also been submitted before this Tribunal. The petitioner had even accepted this offer, and expressed his intent to formalize the settlement vide a written agreement. Various emails were exchanged between the parties in this regard, and the respondent had tendered a cheque for INR 20,19,970/- to the petitioner on 15.07.2019 during the course of the hearing. However, subsequently, the Applicant refused to accept the cheque and enter into any agreement with the respondent, and for this reason the settlement talks did not materialize. The respondent has annexed a copy of this cheque for the principal amount of the petitioner’s claim, which was offered by the respondent.

 

# 9. The respondent submitted that even after this petitioner was reserved by this Tribunal, the respondent and the counsel for the petitioner made positive efforts at their ends to reach to an amicable settlement. To this effect, a video conference meeting was held, and communications in pursuance to the meeting have been exchanged between the respondent and counsel for the petitioner. The parties agreed on the total amount towards settlement for the matter (INR 16,00,000) and to this effect and the respondent agreed to hand over post-dated cheques for April, 2021 and May, 2021 for this amount immediately upon signing of a mutually acceptable settlement agreement. However, these settlement talks have since not materialized into tangible terms/settlement agreement solely because the petitioner did not agree to the payment terms or allow for a settlement agreement to be drawn up. It is evident from the conduct of the petitioner that this petition has been filed by him only with an objective to harass the respondent company and individuals associated with it as he has no intention to settle the matter as he refused to formalize the terms and bring an end to the lis between the parties.

 

# 10. The respondent quoted Swiss Ribbons Pvt. Ltd. & Anr. v Union of India and Ors.- MANU/SC/0079/2019 wherein Hon’ble Supreme Court stated that a settlement can be entered into between the corporate debtor and the creditor at any stage before a committee of creditors is constituted under the Insolvency and Bankruptcy Code, 2016.

 

# 11. The respondent submitted that it is the petitioner who has consistently refused to enter into settlement, and end the lis between the parties right from the start and even before this Tribunal. The Respondent company only wishes to bring an end to the litigation, in the interest of its continuing viable business, and end the lis inter se between the parties, vide a formalized settlement agreement. In these circumstances, the respondent prayed that this Tribunal should reject the present application and not allow the future of the Respondent company to be jeopardized because of the mala fide actions of the petitioner.

 

FINDINGS

# 12. We have heard both the parties at length. We have also perused all the documents submitted by them. This matter has been posted for hearing before us on various dates. The corporate debtor has opposed the admission of this petition and prayed for its dismissal on the ground that it is ready and willing to settle this matter with the petitioner. The principal amount as claimed by the petitioner has been acknowledged by the respondent before us and has shown readiness to pay the same. Regarding the interest as claimed by the petitioner, the respondent has raised objection that there was no clause for interest in the agreement entered into between the parties.

 

# 13. It is clear from the facts of the case that in July, 2019 the petitioner has been handed over with a cheque for the principal amount of his claim but the petitioner had rejected the same. Further, he has also refused to accept settlement offered by the respondent. The respondent has time and again acknowledged his liability and is willing to pay the entire principal amount. Hence, it is evident that the petitioner is not interested in resolving the dispute or entering into any form of a settlement agreement in the present scenario. This conduct of the petitioner puts question on the bonafides of this petition. We believe that the petitioner has been trying to utilize this forum as a ‘recovery mechanism’ and proceed with protracted litigation to take revenge against the respondent as he was removed from the service.

 

# 14. Even though there is a debt and default on the part of the respondent, we believe that it is not the respondent who is responsible for filing or the pendency of this petition. The respondent has time and again stated that he is willing to pay the principal amount only as the amount of interest has not been mentioned in the agreement. Here, we believe that it is pertinent to take into consideration the financial position of the respondent and the repercussions if the respondent company is admitted into CIRP more so for a small claim of 22 and odd lakhs. There has been no argument/document shown by the petitioner to prove that the respondent company is not financially sound and therefore, should be admitted into CIRP. The objective of the Code is very clear to aid resolution of the organizations which are insolvent i.e. unable to pay their debts and are consistently defaulting. But in the present scenario, there is nothing on record to prove that the respondent is insolvent. On the contrary, the respondent is still willing to pay the principal amount. The respondent denies to pay the interest because of absence of any clause relating to the interest in the said agreement between the parties. Neither the respondent nor this Bench can deny the fact that there has been debt and default on the part of the respondent in making payment to the petitioner, but we believe that initiating CIRP against a solvent company, as in this case is the respondent, will prejudice the company and the people associated with it and this is clearly not the objective of the Code to put a solvent company under CIRP.

 

# 15. We would like to further clarify that, IBC is not intended to be a recovery forum. Here, we would like to refer to the case of White ‘N’ White Minerals Pvt. Ltd. v. Hilltop Concrete Pvt. Ltd. - MANU/ND/7446/2019 wherein the NCLT, Ahmedabad has held that: 

• “16. It is evident that the Corporate Debtor has agreed to clear the principal outstanding amount and has tried to settle the issue amicably but the applicant was reluctant. That, it will be open to the applicant to move before a court of competent jurisdiction for realisation/recovery of their dues instead of initiating resolution process which will have adverse effect on a going concern. That, keeping in mind the basic objective of the IB Code as also considering the fact that the respondent company is a going company and initiation of insolvency process will adversely affect livelihood of number of employees and their family, in the interest of natural justice, the Adjudicating Authority cannot admit the application preferred by the appellant company.”

 

# 16. That further, we would like to refer to the Order in the matter of SBF Pharma v. Gujarat Liqui Pharmacaps Pvt. Ltd. – MANU/NC/3404/2019 passed by the NCLT, Ahmedabad wherein it rejected the application for insolvency and held that the IBC Code prohibits and discourages recovery in several ways. This order was subsequently affirmed by the National Company Law Appellate Tribunal, New Delhi in SBF Pharma v. Gujarat Liqui Pharmacaps Pvt. Ltd. – 2019 SCCOnLine NCLAT 1440.

 

# 17. Taking all the above facts, circumstances of the case and observations made, we feel that it will be prejudice to the respondent if this matter is admitted and CIRP is initiated against the respondent. Also, this is not a Section 7 petition wherein only debt and default is to be established. Even though there is debt and default in the present matter on the part of the respondent, we feel that this is not the correct forum for the petitioner to recover the said amount from the respondent company when the company is completely solvent.

 

# 18. In the light of the above discussion and observation, this petition stands dismissed. All the pending applications herein, if any, also stands disposed of. No costs.

 

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Atlanta Infrastructure Ltd. Vs. Delta Marine Company & Ors. - It is trite to say that as a bank guarantee is an independent contact, there is a limited scope for interference.

SCI (19.07.2021) in Atlanta Infrastructure Ltd. Vs. Delta Marine Company & Ors. [Civil Appeal No. .2876 of 2021 ] held that;  

• It is trite to say that as a bank guarantee is an independent contact, there is a limited scope for interference in case of encashment of bank guarantee as enunciated by various courts including this Court from time to time. One of the reason for interference could be egregious fraud. The fraud must be relatable to the bank guarantee.

 

Excerpts of the order;

# 3. The fate of a suit against encashment of bank guarantee still hangs in balance after almost two decades! It is only as a result of the push given by this court that the suit culminated in a dismissal order on 8.11.2019. 

 

# 4. Respondent No.1, the original plaintiff, preferred an appeal before the learned Addl. District Judge, Khurda. On 18.11.2019, the appellate court passed an interim order restraining the release of payment of bank guarantee, which order was confirmed on 19.11.2020. On 6.1.2020, this court passed an order in SLP(C) No.6394/2017 directing disposal of the appeal within a period of three months from the next date i.e. 24.1.2020. Meanwhile, respondent No.1 moved an application under Order 41 Rule 27 of the CPC seeking admission of copy of the report of expert opinion dated 4.12.2019 under Section 45 of the Evidence Act. They sought to place on record some documents of the appellant with an objective of signature comparison. Such a request was rejected by the learned ADJ, Khurda vide order 18.02.2020. Respondent No.1 then filed an appeal CMP 285/2020 on 12.3.2020 against the said order and in terms of order dated 16.03.2020, notice was issued and further proceedings pending before learned ADJ were stayed.

 

# 5. The aforesaid fact was brought to the notice of this court on 27.10.2020. Noticing the mockery made out of the proceedings, for stay of encashment of bank guarantee, a report was called. On 2.11.2020, the High Court vacated the stay observing that the order of this court dated 6.1.2020 was not brought to the knowledge of the High Court. In terms of the impugned judgment dated 4.11.2020, the order dated 18.2.2020 of learned ADJ was set aside and the matter was remitted back to learned ADJ to consider the application under Order 41 Rule 27 CPC afresh at the time of hearing of the appeal.

 

# 6. On conspectus of the arguments of learned counsel for the parties, we find the impugned order unsustainable. The suit had been filed for a decree of permanent injunction restraining the appellant from encashment of bank guarantee and to the bank from making payment. A further prayer was also made for a decree of declaration of the agreement dated 16.2.2001 including the arbitration clause, null and void and unenforceable. The application under Order 41 Rule 27 CPC preferred by the respondent was predicated on a reasoning that some interrogatory had been put to the appellant which would show that a fraud was sought to be played on the Court. And that is the reason the opinion of the handwriting expert was sought for comparison of signatures on admitted documents marked as exhibits with the signatures made on the reply to the interrogatories and the vakalatnama. The report had been received only on 4.12.2019.

 

# 7. In our view, the argument of the respondent No.1 is fallacious. It is trite to say that as a bank guarantee is an independent contact, there is a limited scope for interference in case of encashment of bank guarantee as enunciated by various courts including this Court from time to time. One of the reason for interference could be egregious fraud. The fraud must be relatable to the bank guarantee. Learned counsel for the respondent No.1 admits that what he was trying to show is that the signatures of the officers of the appellant on documents do not match with the vakalatnama or some other documents which would in turn show that the appellants had been acting fraudulently in a different matter. However, this has nothing to do with the issue relating to the signatures of the representatives of the appellant, which they do not deny. We perceive this to be another endeavour on part of the respondent No.1 to unnecessarily keep prolonging the issue and somehow prevent encashment of the bank guarantee. 

 

# 8. In view of the aforesaid, we set aside the impugned order and dismiss the appeal filed by respondent No.1 before the High Court against the order of the first appellate court rejecting their application for production of additional documents. The appeal is, accordingly, allowed leaving the parties to bear their own costs.

 

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