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National Company Law Appellate Tribunal (NCLAT): The Bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice A.I.S Cheema, Member (Judicial) and Kanthi Narahari, Member (Technical) decided an appeal including the following question for consideration:

“Whether the Provident Fund, Pension Fund and Gratuity Fund come within the meaning of assets of ‘Corporate Debtor’ for distribution under Section 53 of the Insolvency and Bankruptcy Code, 2016?”

Following is the timeline in order to understand the issues pertaining to sections of Companies Act and Insolvency and Bankruptcy Code:

14th November, 2017-

Pursuant to an Application under Section 7 of Insolvency and Bankruptcy Code, 2016, the ‘Corporate Insolvency Resolution Process’ was initiated against ‘Corporate Debtor’.

20th September, 2018 –

National Company Law Tribunal, New Delhi passed a liquidation order stating that the workmen stood discharged under Section 33(7) of the Insolvency and Bankruptcy Code, 2016.

5th December, 2018 –

Liquidator, by email, denied payment of:

Gratuity Fund, Provident Fund and Pension Fund preferentially and included the same for the payments under ‘waterfall mechanism’ under Section 53 of the Insolvency and Bankruptcy Code, 2016.

January, 2019 –
‘Moser Baer Karamchari Union’ prayed that –

Directions be issued to the liquidator to exclude amount due to them towards:

  • Provident Fund, Pension Fund and Gratuity Fund from ‘Waterfall Mechanism’ under Section 53 of I&B Code, 2016 as these will not constitute part of liquidation estate.

19th March, 2019 –

National Company Law Tribunal, New Delhi held that provident fund dues, pension fund dues and gratuity dues cannot be a part of Section 53 of the I&B Code. State Bank of India, a secured creditor, challenged the order in this present appeal.

Contentions as placed by the parties:

The counsel on behalf of the appellant stated that, for the purpose of ‘distribution of assets’ of ‘Corporate Debtor’ under Section 52 of I&B Code, 2016 – dues of employees as mentioned in sub-clause (c) of sub-section (1) includes the contribution of ‘Provident Fund’.

To suggest the view that, ‘workmen’s dues’ shall bear the same meaning as given under Section 326 of Companies Act, 2013, appellant placed reliance on the same. Further, it also stated that explanation (iv) below Section 326 of Companies Act, 2013 relating to ‘Overriding Preferential Payments’ and it is mentioned that sums due to any workman from any of the above-stated funds maintained by the company are covered under the term ‘Workmen’s dues’.

Reliance was also placed on Section 327 of the Companies Act, 2013 related to ‘Preferential Payments’.

Resolution Professional’s counsel submitted that Section 36(3) of I&B Code, 2016 defines the components of liquidation estate and lays down what forms the liquidation estate.

Therefore, it was submitted that, workmen have the first charge on the aforesaid funds.

Thus, while concluding in consideration of the issue as was stated earlier in this appeal, Section 36 (Liquidation Estate) and Section 53 (Distribution of Assets) were mentioned for understanding the relevance with the present case.

Tribunal stated that, Appellant cannot derive the meaning as assigned to it in Section 326 of the Companies Act, 2013 including the explanation below it.

It further added that, Section 326 of the Companies Act, 2013 provides ‘Overriding Preferential Payments’.

Explaining the difference between the distribution of assets and preference/ priority of workmen’s dues under Section 53(1)(b) of I&B Code, 2016 and Section 326(1)(a) of the Companies Act, 2013. Applying Section 53 of the I&B Code, Section 326 of the Companies Act, 2013 is relevant for the limited purpose of understanding ‘workmen’s dues’ which can be more than the provident fund, pension fund and gratuity fund kept aside and protected under Section 36(4)(iii).

Another point stated by the Tribunal was that, appellant for the purpose of determining workmen’s dues under Section 53(1)(b), cannot derive any advantage of Explanation (iv) of Section 326 of Companies Act, 2013.

Provisions of I&B Code have overriding effect in case of inconsistency in any other law for the time being enforced. Therefore, it is held that Section 53(1) (b) read with Section 36 (4) will have an overriding effect on Section 326(1) (a), including the Explanation (iv) mentioned below Section 326 of Companies Act, 2013.

The finding of the adjudicating authority, that the aforesaid funds do not come within the meaning of ‘liquidation estate’ for the purpose of distribution of assets under Section 53, Tribunal found no ground for interference with the impugned order of 19th March, 2019. [State Bank of India v. Moser Baer Karamchari Union, 2019 SCC OnLine NCLAT 447, decided on 19-08-2019]

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National Company Law Tribunal, New Delhi: The Bench of M.M. Kumar, Chief Justice (Retd.), President and S.K. Mohapatra, Member (Technical) disposed of an application while making it clear that,

“Provident Fund dues, Pension Funds and Gratuity Fund dues are not treated as a part of the liquidation estate and would not, therefore, be recovered by Section 53 of the Code which provides for waterfall mechanism.”

Factual matrix of the case:

The present application has been filed by the workmen of Moser Baer India Ltd. which is going into liquidation. Workmen of the company have filed the present application in order to seek directions to be issued to the liquidator for excluding the amount due to them towards provident fund, pension fund and gratuity fund from the waterfall mechanism envisaged under Section 53 of the Insolvency and Bankruptcy Code, 2016 and pay them under the stated heads.

Further directions have also been sought to pay the dues to the workmen in accordance with Section 25FFF of the Industrial Disputes Act, 1947.

The Tribunal on keeping in consideration the facts and circumstances of the case, stated that, “there is a basic flaw in the reasoning adopted by the liquidator as under Section 36(4)(a)(iii), the expression ‘liquidation estate’ has been defined and clarified that – all sums due to any workman or employee from the provident fund, pension fund and gratuity fund, were not to constitute and included in the expression “liquidation estate assets”.  Coram also stated that, once the above mentioned three heads do not constitute a part of the liquidation estate, we fail to understand as to how Section 53 could be invoked along with its explanation. Therefore, the amount mentioned of the workmen dues cannot be a part of liquidation estate assets.

Relying on the case of Asset Reconstruction Company (India) Ltd. v. Precision Fasteners Ltd., the bench stated that liquidator has unnecessarily taken a perverse view. The order was concluded by stating that “If there is any deficiency to the Provident Fund, pension Fund and Gratuity Fund, then the liquidator shall ensure that the fund is made available in the aforesaid accounts, even if their employer has not diverted the requisite amount.” Tribunal disposed of the application and asked the needful to be done in 2 weeks preferably. [Alchemist Asset Reconstruction Co. Ltd. v. Moser Baer (India) Ltd., 2019 SCC OnLine NCLT 118, Order dated 19-03-2019]