In its recent judgment in State Bank of India vs Moser Baer Karamchari Union, the Apex court has reiterated the settled legal position of law pertaining to treatment of Employees’ provident fund, pension fund and gratuity Fund (“EPF Dues”) under the Insolvency and Bankruptcy Code, 2016 (“Code”). The primary reason for various interpretations of how PF dues are treated under the Code ensues from the overlapping nature of certain provisions within the Code itself, the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) and the Companies Act, 2013. The article traces the judicial trend in treatment of EPF dues under the code and analyses the reasoning put forth by various adjudicating authorities in deciding on the rights of the employees of the corporate debtor.
Purposive Interpretation of Section 36 of the Code
Section 36 (4)(a)(iii) of the Code excludes “all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund” from the liquidation estate of the corporate debtor thereby, excluding the same, from the purview of the waterfall mechanism as enshrined under Section 53 of the Code, which enumerates the order of priority in which the claims have to be settled against the assets of the corporate debtor. The EPF claims raised against the assets of the Corporate Debtor are often opposed by the liquidator or the successful resolution applicant (“SRA”) by largely relying on the term “workmen’s dues” under Section 53 (b) (ii)of the code which does not cover the EPF claims.
The Hon’ble NCLT Mumbai Bench in the case of Precision Fasteners v Employees Provident Fund Organization interpreted the term ‘workmen’s dues’ by tracing the legislative history of the term and purported the meaning by drawing a comparison between the old regime under the 1956 Act and the current Code. The court referred to Section 529 of Companies Act, 1956 which lists components such as wages or salaries, remuneration to approved holidays and sums due to any workman from a provident fund, pension fund, gratuity, etc. falling under the scope of the term ‘workmen’s dues’.
This definition was retained in Sections 326 and 327 of the Companies Act, 2013, providing for the overriding preferential payments. However, the legislature explicitly excluded the EPF dues from the liquidation estate under the Insolvency Code by virtue of Section 36(4)(a)(iii). Thus, under the new regime not only has the legislature extended the earlier law, but also fortified the rights of workmen with respect to EPF dues. This enables them to claim their EPF dues without being subjected to the waterfall mechanism under Section 53 of the Code. Such an interpretation perfectly aligns with the purpose and object of the EPF Act of protecting the rights of the employees for it being a social welfare legislation. This was aptly highlighted by the Apex court in the case of Employees Provident Fund Commissioner. O.L. of Esskay Pharmaceuticals Ltd., wherein it observed that “the EPF Act is a social welfare legislation intended to protect the interest of a weaker section of the society, i.e., the workers employed in factories and other establishments who have made significant contribution in economic growth of he country. The workers and other employees provide services of different kinds and ensure continuous production of goods, which are made available to the society at large.”
The current judicial trend in treating the EPF dues under the provisions of EPF Act and the Code is highly characterised by judicial protectionism towards the employees, which is in line with the legislative intent behind explicit exclusion of EPF dues under Section 36 (4)(a)(iii) of the Code. This position of law with regard to explicit exclusion of EPF dues from the liquidation estate has now been endorsed and concretized by the Apex court in Sunil Kumar Jain v Sundresh Bhatt by explicitly stating that ‘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’
No conflict between the Code and EPF Act
One of the major arguments often put forth by the liquidator or SRA, for application of IBC vis-a-vis the provisions of EPF Act is the overriding effect of the Code as encapsulated under Section 238 of the Code. However, the Hon’ble National Company Law Appellate Tribunal (‘Hon’ble NCLAT’) in Tourism Finance Corporation of India Ltd. vs Rainbow Papers Ltd.  has explicitly held that since no provisions of the Code and the EPF Act are in conflict, the application of Section 238 of the Code does not arise. The Apex court concurred with the reasoning set out by NCLAT and refrained from interfering with the judgment, ultimately dismissing the appeal. Therefore, as the provisions of IBC do not override EPF Act it becomes pertinent to note the relevance of Section 17B of the EPF Act.
Section 17B of the EPF Act creates an obligation on the transferee to pay the contribution and other sums due from the employer whenever an establishment is transferred. Therefore, by operation of Section 17B of the EPF Act, the successful resolution applicant is made liable to pay the provident fund which the corporate debtor owes to its employees.
Harmonious Construction of Section 36 and Section 18 of the Code
The Code is a single consolidated law which provides both the options to the creditors i.e., Corporate Insolvency Resolution Process (“CIRP”) or Liquidation, to successfully recover their dues from the corporate debtor. Interestingly, Section 18(f) of the Code allows an Insolvency Resolution Professional (“IRP”) to take control and custody of any asset over which the corporate debtor has ownership rights.. However, explanation to Section 18 of the Code, provides for some exceptions which do not fall under the scope of the term ‘assets’ of the corporate debtor, one of them being assets owned by a third party and EPF dues are nothing but the assets of the employees lying in possession of the corporate debtor.
The judiciary has, in unison, endorsed the view that EPF dues are assets of the employees which are in possession of the corporate debtor and, therefore, the same has been carved out of the liquidation estate under Section 36 of the Code during liquidation. While extending the same reasoning to Section 18 of the Code with respect to CIRP, it can be rightly deduced that the IRP cannot deal with EPF dues owed to the employees even during the CIRP. In Jet Aircraft Maintenance Engineers Welfare Association vs. Ashish Chhawchharia Resolution Professional of Jet Airways, the hon’ble NCLAT harmoniously construed Section 36 and Section 18 of the Code to conclude that EPF dues do not fall under the scope of the term ‘assets’ even during the CIRP and, therefore, the IRP cannot alienate or transfer such assets. The NCLAT observed “…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”.
It can be rightly asserted that the judiciary seems to confirm and uphold the social welfare character of the EPF Act through harmoniously construing the same with the provisions of the Code to protect and preserve the rights of the employees in relation to EPF dues. The courts and tribunals have placed the intent of the legislature at the highest pedestal while dealing with the issues pertaining to the treatment of EPF dues under the Code. While such an approach is noble in terms of its social character, however, Section 17B of the EPF Act goes against the well- established ‘clean slate’ theory, whereby, a successful resolution applicant is allowed to continue the business of the corporate debtor on a clean slate basis extinguishing past liabilities of the corporate debtor, if any.
For further information, please contact:
Sumit Attri, Partner, Cyril Amarchand Mangaldas
 Writ Petition (c) No. 421 of 2019.
 Section 36 (4) (a) (iii), Insolvency and Bankruptcy Code, 2016
 2018 SCC OnLine NCLT 27284
 (2011) 10 SCC 727
 (2011) 10 SCC 727, Para 22
 2022 SCC OnLine SC 467
 2022 SCC OnLine SC 467, Para 13
 2019 SCC OnLine NCLAT 91
 Section 17b, Employees’ Provident and Miscellaneous Provisions Act, 1952.
 Section 18(f), Insolvency and Bankruptcy Code, 2016
 Explanation (a) to Section 18, Insolvency and Bankruptcy Code, 2016
 2022 SCC OnLine NCLAT 418
 2022 SCC OnLine NCLAT 418, Para 76