Non-payment of full provident fund and gratuity dues to employees, workers is violative of IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) recently held that non-payment of full provident fund (PF) and gratuity dues to workmen and employees by any successful resolution applicant would amount to non-compliance with provisions of the Insolvency and Bankruptcy Code of 2016 (IBC). .In a judgement passed on February 8, NCLAT Judicial member Justice M Venugopal, and Technical member Shreesha Merla held that non-payment of such PF and gratuity dues, or allocating only a partial amount for such dues also breached the provisions of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act) and the Payment of Gratuity Act, 1972 (PF Act).The NCLAT was hearing a batch of appeals filed by workers and employees of defunct Central public sector undertaking Hindustan Newsprint Limited (HNL), challenging a January 2021 order of the National Company Law Tribunal, Kochi Bench. The Kochi Bench had approved the resolution plan for HNL as per which only 35.13 percent of the appellants' PF and gratuity claims had been admitted. .The appellants argued that the approved resolution plan was in contravention of the IBC as the resolution professional and the committee of creditors had ignored the applicability of the EPF and Gratuity Acts. The NCLAT noted that Section 36(4) of the IBC mandate that any PF or gratuity amount due to a workman or employee must be excluded from the liquidation estate. "In the instant case, clause (iii) of sub-section 4(a) is relevant which is all sums due to any Workmen/Employee from the ‘Provident Fund’, ‘Pension Fund’ or the ‘Gratuity Fund’. Hence, sums due to any Workmen from the above ‘funds’ are excluded from the ‘Liquidation Estate’. Legislative intent is clear that any ‘sums’ due to any Workmen from aforesaid ‘fund’ are excluded and cannot be used for ‘recovery’ in the Liquidation," the tribunal said. The respondents, resolution professional and the Successful Resolution Applicant KIIDC, however, argued that the resolution plan had been approved after "proper application of mind by the adjudicating authority" and that it was in compliance with all the legal provisions. The respondents also argued that the IBC clearly stated that stakeholders cannot raise any subsequent claims if such claims were not part of the original approved resolution plan..The tribunal, however, said that an adjudicating authority has the power to intervene if an approved resolution plan breached any provisions of the IBC. It cited the case of Jet Airways, where the NCLAT and the Supreme Court had directed the airlines to pay the PF and gratuity dues in full to its employees. "Having regard to the ratio of judgement in the 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," the Tribunal said. "In the aforenoted Judgement, it is clearly observed that provident fund dues are not subject to distribution under Section 53(1) of the Code; that these dues cannot be treated as ‘Secured Debt’ and that part payment of dues by the SRA is unjustified keeping in view Section 14B of Employees Provident Fund and Miscellaneous Provisions Act, 1952. 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," it said. Thus, the NCLAT held that workmen and employees are entitled for payment of full amount of provident fund and gratuity till the date of commencement of the insolvency, and that such amount has to be paid by the successful resolution applicant consequent to approval of the resolution plan. Advocates KR Jinan, Abhilash Nediyalil Abraham, appeared for the appellant workers and employees. Advocates PV Vinod and PV Dinesh appeared for the Resolution Professional. Senior Counsel Arvindh Pandian, Shivshankar R Panicker, and Sirshti Thukral appeared for the Resolution Applicant, Kerala Industrial Infrastructure Development Corporation..[Read Order]