TREATMENT OF PF, GRATUITY AND PENSION DUES UNDER IBC – A GREY AREA REQUIRING CLARITY

Treatment of PF, Gratuity and Pension dues remains a grey area under the Insolvency and Bankruptcy Code, 2016. The Code does not have any explicit  provision for treatment of PF, Gratuity and Pension dues during CIRP proceedings. The Code has provision for treatment of PF, Gratuity and Pension Dues during liquidation proceeding  under Section 36 (4) , which reads as under:

36. Liquidation Estate:

(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation:

(iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund.

Section 36 (4) provides that dues to any workmen or employees from provident fund, pension fund and the gratuity fund do not form part of Liquidation Estate. It means that these dues belonging to workmen and employees will not be subject to distribution among the stakeholders.

Treatment of PF, Gratuity and Pension Dues During CIRP

The NCLAT in Jet Aircraft Maintenance Engineers Welfare Association  Vs. Ashish Chhawchharia Resolution Professional of Jet Airways (Company Appeal (AT) (Insolvency) No. 752 of 2021 )  has observed that in light of explanation to Section 18 of the Code PF Funds, Gratuity Fund and Pension Fund will not  be included in the Information Memorandum as assets of the Corporate Debtor. The relevant para is as under:

76. If a Corporate Debtor maintains a fund for payment of provident fund, gratuity fund and other retirement benefits to its workers and employees, that shall be an asset, but IRP is required to take control and custody of the assets over which the Corporate Debtor has ownership rights by virtue of Section 18(1)(f)(i). When we look into the Explanation to Section 18(1), the assets comprising of provident funds, gratuity funds or a pension fund and belonging to be maintained by Corporate Debtor, are assets on which employees and workmen have right although assets are in possession and control of the Corporate Debtor. The above mentioned assets, thus, are not to be taken control by IRP, after initiation of CIRP. Hence, the said funds, i.e., provident fund, pension fund and gratuity fund maintained by the Corporate Debtor, have to be utilized fully for payment of provident fund, pension fund and gratuity fund of the workmen and employees and thus, these assets cannot be included in the Information Memorandum as the assets of the Corporate Debtor, while inviting the Resolution Plan.

In Assam Tea Employees Provident Fund Organization Vs. Mr. Madhur Agrawal (Company Appeal (AT) (Insolvency) No. 262 of 2022 ) the NCLAT has reiterated  that provident fund dues are not assets of the Corporate Debtor and have to paid in full.

11. Submission of Learned Counsel for the Respondent that Appellant is an Operational Creditor and both Operational Creditor and Financial Creditor has taken haircut, also cannot be accepted. As held by this Tribunal in above case “Regional P.F. Commissioner” (supra), provident fund dues are not the assets of the Corporate Debtor and they have to be paid in full. Hence, the Appellant was clearly entitled for payment of full provident fund dues i.e. an amount of Rs. 2,10,13,798/-.

Hon’ble NCLAT in Mrs. C. G. Vijayalaxmi  Vs. Shri Kumar Rajan (Company Appeal (AT) (CH) (Ins.) No. 29 of 2021 & IA No.251/2021)  concurred with the view taken in Jet Aircraft Maintenance Engineers Welfare Association  and held that PF and Gratuity has to be paid in full as per provisions of EPF and NP Act.

28. Having regard to the ratio of the Judgement in ‘Jet Aircraft Maintenance Engineers Welfare Association’ (Supra) of this Tribunal, upheld by the Hon’ble Apex Court, this Tribunal is of the earnest view that ‘PF’ and ‘Gratuity’ is to be paid in full as per the provisions of EPF and NP Act, 1952 and payment of Gratuity Act, 1972. Since admittedly   the amounts paid are only 35.13% having treated them as ‘Secured Creditors’, we are of the considered view that indeed there was a violation of the provisions of Section 30(2) of the Code, with respect to the payment of ‘PF’ and ‘Gratuity’ only.

Treatment of PF, Gratuity and Pension Dues During Liquidation

The NCLT, Mumbai Bench in Asset Reconstruction Company Ltd. v. Precision Fasteners Ltd. (2018 SCC OnLine NCLT 27284)  has held that once deduction has been made from workmen’s wages, then it cannot be considered as asset of Corporate Debtor. The NCLT New Delhi Bench in Alchemist Reconstruction Co. Ltd. Vs. Moser Baer India Ltd.( 2019 SCC OnLine NCLT 118 ) has held that when funds do not form part of Liquidation Estate no question arises regarding its distribution under Section 53.

That NCLAT in  State Bank of India Vs. Moser Baer Karamchari Union and Another, (2019 SCC Online NCLAT 447) had observed that all sums due to any workman or employees from the Provident Fund, Pension Fund and the Gratuity Fund, do not form part of the liquidation estate/liquidation assets of the  Corporate Debtor’.

The Hon’ble NCLAT in Savan Godiawala Vs. Appalla Sivakumar (2020 SCC OnLine NCLAT)  191 has held that if no gratuity fund is maintained by the Corporate Debtor, the Liquidator cannot be directed to pay gratuity to workmen.

 The  Supreme Court in Sunil Kumar Jain Vs. Sundaresh Bhatt (Civil Appeal No. 5910 /2019 ) has observed that workmen/employees shall be entitled to provident fund, gratuity fund and pension fund and as per Section 36(4) of the IB Code, they are not to be used for recovery in the liquidation

13. Now so far as the dues of the workmen/employees on account of provident fund, gratuity and pension are concerned, they shall be governed by Section 36(4) of the IB Code. Section 36(4)(iii) of the IB Code specifically excludes “all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund”, from the ambit of “liquidation estate assets”. Therefore, Section 53(1) of the IB Code shall not be applicable to such dues, which are to be treated outside the liquidation process and liquidation estate assets under the IB Code. Thus, Section 36(4) of the IB Code has clearly given outright protection to workmen’s dues under provident fund, gratuity fund and pension fund which are not to be treated as liquidation estate assets and the Liquidator shall have no claim over such dues. Therefore, the concerned workmen/employees shall be entitled to provident fund, gratuity fund and pension fund from such funds which are specifically kept out of liquidation estate assets and as per Section 36(4) of the IB Code, they are not to be used for recovery in the liquidation.

In Moser Baer Karamchari Union vs Union of India and ORs (Writ Petition (C) No. 421 of 2019) the Petitioners has prayed for declaration of Clause 19 (a) of  Eleventh Schedule  of Insolvency and Bankruptcy code, 2016 and Section 327 (7) of the Companies Act, 2013  as unconstitutional on the ground that Distribution to workmen distribution under Section 326 & 327 of the Companies Act, 1956 is different in comparison to Section 53 of the Insolvency and Bankruptcy Code, 2016. It was argued by the Petitioner that workmen’s interest was better protected under Section 326 & 327 of the Companies Act, 1956.  The supreme Court dismissed the writ petition finding that adequate protection has been given to workmen under Section 36 (4) and higher priority under Section 53.

The Need For Clarity

It is evident from the above discussion that there are not adequate provisions in the Code or relevant regulations regarding treatment of PF, Gratuity and Pension Dues during CIRP or Liquidation of a Corporate Debtor. Although Judiciary has made efforts to fill the gap  the same is not sufficient.

Clarity is required particularly in cases where a Corporate Debtor does not maintain PF , Gratuity or Pension Fund; and wages and salary have not been paid to workmen and employees before the Insolvency Commencement Date due to financial constraints or otherwise. In such cases PF, Gratuity and Pension dues are in nature of liabilities rather than assets. Section 36 (4) will not be applicable in such cases as Section 36 (4) can only be applicable on assets in forms of PF Fund, Gratuity Fund or Pension Fund.  Appropriate amendments in the Code are required to provide clarity on these aspects.

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