Provident Fund/ Pension/ Gratuity is not part of Liquidation Estate

Guest Post: Adv. Nitin Kumar Kaushik (Kaushik Insolvency Professionals)

Numbers of Insolvency Professionals or Liquidators are facing the problem with respect to whether the Provident Fund/Pension Fund/Gratuity Fund is part of liquidation estate or not under Section 36 of the Insolvency and Bankruptcy Code, 2016 “IBC”. Generally, what happens, the Company had deducted the amount, in the form of provident fund or pension fund or gratuity amount, from the salary of the employee/workmen and then did not deposited or failed to deposit in the account of Employees Provident Fund Organisation “EPFO” or Pension Fund Organisation “PFO”. Thereafter, the government department i.e., EPFO or PFO attached the property of the Corporate Debtor in respect of dues of provident fund or pension fund or gratuity amount on the Corporate Debtor, even the attached property already mortgaged with any of the financial institutions or not.

In terms of Section 35(b)(d) of IBC, the Liquidator is empowered “to take into his custody and control all the assets, property, effects and actionable claims of the Corporate Debtor and also to take such measure to protect and preserve the assets and properties of the Corporate Debtor as he consider necessary”. Further, in terms of Section36 of IBC, the Liquidator has to form Liquidation Estate of the assets of the Corporate Debtor as mentioned in Section 36(3) of IBC. And as per Section 36(4)(a)(iii) of IBC “all sum due to any workmen or employee from the Provident Fund, the Pension Fund and the Gratuity Fund, shall not be included in the liquidation estate assets and shall not be used for recovery in the Liquidation”.  Thereafter, the Liquidator is bound to comprise the assets of the Corporate Debtor as Liquidation Estate and distribute the proceeds of the same as per Section 53 of IBC.

Now, the question is whether the property of the Corporate Debtor either movable or immovable as attached by the Government Department i.e., EPFO or PFO, are treated as Liquidation Estate or not, and whether the Liquidator is empowered to take custody of the said attached property in his control.

Recently, the Adjudicating Authority has resolved this issue and held that in section 36(4)(a) of IBC, 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. Further, in Section 36(4)(a) of IBC, the sub-clause (iii) and (iv) it is nowhere mentioned 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 employee, it makes no difference whether it has been maintained in separate account or not, in view of this deeming fiction, the workmen/employee need not prove that whether any sum has been explicitly vested with them or not.

Further, 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 provision of IBC will not be applicable for realization 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 IBC has treated it as an asset of the workmen lying with the Corporate Debtor and not an asset of the Corporate Debtor. The NCLT also clarified that if there is any deficiency to the Provident Fund, Pension Fund and Gratuity Fund, then the Liquidator shall ensure that the fund is available in the aforesaid account, even if their employer has not diverted the requisite amount.

Further held that, the right of all creditor over the assets of the Company is a property right, whereas workmen dues, more specifically PF dues of workmen, are interwoven with Right to life because the workmen all through their life save some portion of the hard earning for their later life after retirement, if such sum is interlinked on par with debts of the creditor 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 subordinate to right to life. Therefore, the Provident Fund/Pension Fund /Gratuity Fund is not part of the Liquidation Estate.

At last, the Adjudicating Authority directed the Liquidator to pay the Provident Fund or Pension Fund or Gratuity dues from the Liquidation Estate before distributing the Liquidation Estate of the Corporate Debtor to other claimants, to which, since the Liquidator has to sell the assets of the Corporate Debtor, the Government Department i.e. EPFO and PFO is directed to allow the Liquidator to sell the assets of the Corporate Debtor and pay off the PF/Pension/Gratuity dues in priority to all other claims payable by the Corporate Debtor in Liquidation.

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