ESI contributions not “workers dues” under IBC, not on same footing as Provident Fund dues: NCLT Ahmedabad

The National Company Law Tribunal (NCLT) at Ahmedabad recently clarified that contributions due from a company to the Employees State Insurance Corporation (ESIC) do not fall under the category of “workers dues” under the Insolvency and Bankruptcy Code (IBC)..A coram of judicial member Chitra Hankare and technical member Dr. VG Venkata Chalapathy concluded that dues to the ESIC would fall under the category of “statutory dues” to an operational creditor..As such, it cannot be treated on the same footing as Employee Provident Fund (EPF) dues (which rank higher in the IBC’s scheme when it comes to repayment of debts during the insolvency or liquidation process), the tribunal concluded.“Applicant (ESIC) dues are not considered as workmen dues because applicant is not a workman, it is a statutory body. Therefore the dues of the applicant are statutory dues and fall under the category of operational debt not as workmen dues,” the NCLT held..The tribunal was dealing with an application by the Regional Director of the ESIC at Ahmedabad, Gujarat. The ESIC had claimed that an entity undergoing the corporate insolvency resolution process, M/s Gupta Dyeing & Printing Mills Pvt Ltd (corporate debtor) owed the corporation ESI contributions to the tune ₹61.23 lakh, which came to be about ₹34.34 lakh on adding interest to the unpaid amount.The company eventually went into liquidation in December 2019 and the liquidator settled the claim due to the ESIC Fund. This action was challenged by the ESIC Regional Director before the NCLT, which was urged to restrain the liquidator from including the corporate debtor's ESI contributions in the liquidation estate..Among other arguments, the ESIC contended that for all practical purposes, ESI and PF dues should be treated equally as workers' dues.The liquidator opposed this argument, highlighting that the ESIC was a statutory corporation. As such, the liquidator argued that the dues payable to the ESIC were statutory dues, which rank lower when compared to workers' dues when the sale proceeds of a corporate debtor’s liquidated assets are distributed under Section 53 of the IBC..The tribunal agreed with the liquidator's position, opining that ESIC has to be treated as an operational creditor under the IBC and that funds due to it could be settled with other statutory dues.“There is no provision in the statute of ESIC for any charge or special status other than those provided in Section 45A of the ESIC whereby the applicant could have proceeded individually against the defaulter,” the tribunal added..The NCLT also noted that the IBC does not define ESIC dues in the category of assets that cannot be included in the liquidation estate under Section 36 of the IBC. In this regard, the tribunal found that only PF, pension funds and gratuity funds are included under Section 36(4)(iii) of the IBC.It proceeded to dismiss the ESIC’s application, opining that the liquidator had properly decided on the ESIC’s claim in line with the IBC’s provisions..The ESIC was represented by Advocate Sachin Vasavada and the liquidator was represented by Advocates Vishal Dave and Nipun Singhvi..[Read Judgment]