Provident Fund, Pension Fund, Gratuity Fund not part of corporate debtor’s liquidation estate for distribution under Sec 53 IBC, NCLAT

The National Company Law Appellate Tribunal (NCLAT) has held that Provident Fund, Pension Fund and Gratuity Fund payable to workmen are not part of the liquidation estate of the corporate debtor for the purpose of distribution of assets under Section 53 of the Insolvency and Bankruptcy Code, 2016..The judgment was passed by a three-member bench of Chairperson, Justice SJ Mukhopadhaya, Member (Judicial), Justice AIS Cheema and Member (Technical) Kanthi Narahari in an appeal preferred by the State Bank of India against an order passed by the National Company Law Tribunal, New Delhi (NCLT)..Pursuant to an application under Section 7 IBC, a Corporate Insolvency Resolution Process was initiated against the Corporate Debtor..Finally, an order of liquidation was passed by the NCLT and the workmen stood discharged under Section 33(7) of IBC. Subsequently, the Liquidator denied the preferential payment of the gratuity fund, the provident fund and the pension fund to the workmen and included the same for the payments under the waterfall mechanism under Section 53..As a result, Moser Baer Karamchari Union moved an application before the NCLT, praying for directions for the exclusion of the amount due to them towards Provident Fund, Pension Fund and Gratuity Trust Fund from the purview of Section 53..The Adjudicating Authority ruled in favour of the Union and held that the Provident Fund, Pension Fund and Gratuity Fund did not constitute part of the liquidation estate of the corporate debtor..Aggrieved by the order, State Bank of India who is a secured creditor moved the NCLAT in appeal..Placing reliance on the Explanation to the Section 53, SBI argued that ‘workmen’s dues’, which are mentioned under Section 53(1)(c), shall have the same meaning as assigned to it in Section 326 of the Companies Act, 2013 and would thus include Provident Fund..SBI also relied on Explanation (iv) and (iv) below Section 326 and Section 327 of the Companies Act, 2013 to state that all sums due to any workman from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the workmen, maintained by the Company is covered by term “workmen’s dues”..The Resolution Professional submitted that as per Section 36(3) read with Section 36(4) of the IBC, all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund were excluded from the liquidation estate. Thus, it was submitted that workmen had the first charge on these funds..After hearing the parties, the NCLAT noted that from Section 36(4)(a)(iii), it was clear that all sums due to any workman or employee from the provident fund, the pension fund, and the gratuity fund were not to be included in the liquidation estate assets and could not be used for recovery in the liquidation..Therefore, the question of distribution of the provident fund, pension fund or the gratuity fund in order of priority and within such period as prescribed under Section 53(1) did not arise, it added..The NCLAT further stated that since ‘workmen’s dues’ is specifically mentioned in Section 53(1)(b)(i) as dues for the period of twenty-four months preceding the liquidation commencement date, its meaning could not be derived through Section 326 of the Companies Act, 2013..While clarifying that there was a difference between the distribution of assets and preference/priority of workmen’s dues under Section 53(1) (b) of the IBC and Section 326(1) (a) of the Companies Act, 2013, the NCLAT stated that for Section 53 IBC, Section 326 was relevant for the limited purpose of understanding ‘workmen’s dues” which could be more than provident fund, pension fund and the gratuity fund kept aside and protected under Section 36(4)(iii)..It concluded,.“..as the provisions of the ‘I&B Code’ have overriding effect in case of consistency in any other law for the time being enforced, we hold that Section 53(1) (b) read with Section 36(4) will have overriding effect on Section 326(1) (a), including the Explanation (iv) mentioned below Section 326 of the Companies Act, 2013.”.In view of the above, the appeal was dismissed with the finding that the provident fund, the pension fund, and the gratuity fund do not come within the meaning of ‘liquidation estate’ for the purpose of distribution of assets under Section 53..SBI was represented by Senior Advocate Ramji Srinivasan with Advocates Ankur Mittal, Abhay Gupta, Sylona Mohapatra, Nikhil Ramdev..Union was represented by Advocates Swarnendu Chatterjee and Shriya Maini..RP was represented by Advocates Abhishek Anand and Tushar Tyagi..[Read Judgement]