The Bombay High Court at Nagpur on Tuesday emphasized that revival of a company undergoing the corporate insolvency resolution process (CIRP) cannot be at the cost of its employees' security [Dalmia Cement v EPFO]..A Division Bench of Justices Avinash Gharote and Abhay Mantri held that provident fund dues, including the employer’s contribution, do not form part of the assets of the corporate debtor under the Insolvency and Bankruptcy Code, 2016 (IBC), and thus cannot be extinguished by an insolvency resolution plan. "No doubt, a Company, which is failing, would have the right to be revived, however, can it be said that the attempt at revival, is to be at the cost of the employees security, who have rendered services to the company, which services form the very basis for the existence of the company, which security they have an account of their provident fund and an attempt to revive such company/industry, should wipe off the provident fund of the employee? This could never have been the intention of the legislature, while enacting the IB Code, which is why the definition of ‘operational creditor’, as contained Sec.5(21) is restricted to Statutory dues payable to the Central/State Governments and Local Bodies as these can sustain the loss of such dues, however an employee, cannot sustain the loss of his provident fund and any such loss, is bound to have a crushing effect upon the employee," the Court said..The Court made the observation while ordering Dalmia Cement (Bharat) Ltd., which had acquired Murli Industries Ltd. under an approved resolution plan, to pay ₹25.23 crore towards unpaid Employees’ Provident Fund (EPF) dues for the employees of Murli Industries.Murli Industries Ltd was admitted to insolvency proceedings in April 2017 by the NCLT, Mumbai on an application by Edelweiss ARC. Dalmia’s resolution plan was approved by the Committee of Creditors and the NCLT in July 2019.As part of the plan, its cement division was revived, while other units were to be monetised. A subsequent scheme of arrangement approved by NCLT benches in Mumbai and Chennai transferred these units to two Dalmia group entities.The scheme expressly provided that employee liabilities, including provident fund dues, would be assumed by the transferee companies..However, Dalmia Cement and two group companies (petitioners) eventually moved the High Court challenging recovery notices issued by the Employees' Provident Fund Organisation (EPFO) pursuant to a 2020 order determining PF dues under Section 7A of the EPF Act.The petitioners argued that since the EPFO had failed to file a claim during the CIRP, its demands were extinguished in light of the Supreme Court’s ruling in Ghanashyam Mishra and Sons v. Edelweiss ARC (2021), where the Court held that claims not forming part of an approved resolution plan stand extinguished..The High Court, however, rejected this argument, holding that provident fund contributions are not extinguishable liabilities. Rather, they are statutory obligations held in trust for employees, the Court said. The Court clarified that the definition of “assets” under Section 18 of the IBC excludes property held in trust. It, therefore, observed that both the employer’s and employee’s contributions to the provident fund constitute the employee’s property..Citing an Explanation to Section 18(1), the Court added that the interim resolution professional cannot take control of such trust property, and the employer has no dominion over it. Therefore, the non-inclusion of such dues in the resolution plan does not absolve the corporate debtor or its successor (successful resolution applicant) from liability.The Court relied on Supreme Court rulings to emphasize that the EPF Act is a social welfare legislation enacted to protect workers, and interpreted the IBC in light of the mandate under Articles 38 and 43 of the Constitution of India.It held that the definition of “operational debt” under Section 5(21) does not encompass EPF dues, as they are not payable to the Central or State government or any local authority, but to the employees themselves. Thus, such claims lie outside the resolution framework, the Court held. Holding that EPF dues survive CIRP and must be honoured, the Court proceeded to dismiss the petition..Senior Advocate M G Bhangde, along with advocate R M Bhangde appeared for Dalmia Cement.Advocate RS Sundaram appeared for the EPFO..[Read Order]
The Bombay High Court at Nagpur on Tuesday emphasized that revival of a company undergoing the corporate insolvency resolution process (CIRP) cannot be at the cost of its employees' security [Dalmia Cement v EPFO]..A Division Bench of Justices Avinash Gharote and Abhay Mantri held that provident fund dues, including the employer’s contribution, do not form part of the assets of the corporate debtor under the Insolvency and Bankruptcy Code, 2016 (IBC), and thus cannot be extinguished by an insolvency resolution plan. "No doubt, a Company, which is failing, would have the right to be revived, however, can it be said that the attempt at revival, is to be at the cost of the employees security, who have rendered services to the company, which services form the very basis for the existence of the company, which security they have an account of their provident fund and an attempt to revive such company/industry, should wipe off the provident fund of the employee? This could never have been the intention of the legislature, while enacting the IB Code, which is why the definition of ‘operational creditor’, as contained Sec.5(21) is restricted to Statutory dues payable to the Central/State Governments and Local Bodies as these can sustain the loss of such dues, however an employee, cannot sustain the loss of his provident fund and any such loss, is bound to have a crushing effect upon the employee," the Court said..The Court made the observation while ordering Dalmia Cement (Bharat) Ltd., which had acquired Murli Industries Ltd. under an approved resolution plan, to pay ₹25.23 crore towards unpaid Employees’ Provident Fund (EPF) dues for the employees of Murli Industries.Murli Industries Ltd was admitted to insolvency proceedings in April 2017 by the NCLT, Mumbai on an application by Edelweiss ARC. Dalmia’s resolution plan was approved by the Committee of Creditors and the NCLT in July 2019.As part of the plan, its cement division was revived, while other units were to be monetised. A subsequent scheme of arrangement approved by NCLT benches in Mumbai and Chennai transferred these units to two Dalmia group entities.The scheme expressly provided that employee liabilities, including provident fund dues, would be assumed by the transferee companies..However, Dalmia Cement and two group companies (petitioners) eventually moved the High Court challenging recovery notices issued by the Employees' Provident Fund Organisation (EPFO) pursuant to a 2020 order determining PF dues under Section 7A of the EPF Act.The petitioners argued that since the EPFO had failed to file a claim during the CIRP, its demands were extinguished in light of the Supreme Court’s ruling in Ghanashyam Mishra and Sons v. Edelweiss ARC (2021), where the Court held that claims not forming part of an approved resolution plan stand extinguished..The High Court, however, rejected this argument, holding that provident fund contributions are not extinguishable liabilities. Rather, they are statutory obligations held in trust for employees, the Court said. The Court clarified that the definition of “assets” under Section 18 of the IBC excludes property held in trust. It, therefore, observed that both the employer’s and employee’s contributions to the provident fund constitute the employee’s property..Citing an Explanation to Section 18(1), the Court added that the interim resolution professional cannot take control of such trust property, and the employer has no dominion over it. Therefore, the non-inclusion of such dues in the resolution plan does not absolve the corporate debtor or its successor (successful resolution applicant) from liability.The Court relied on Supreme Court rulings to emphasize that the EPF Act is a social welfare legislation enacted to protect workers, and interpreted the IBC in light of the mandate under Articles 38 and 43 of the Constitution of India.It held that the definition of “operational debt” under Section 5(21) does not encompass EPF dues, as they are not payable to the Central or State government or any local authority, but to the employees themselves. Thus, such claims lie outside the resolution framework, the Court held. Holding that EPF dues survive CIRP and must be honoured, the Court proceeded to dismiss the petition..Senior Advocate M G Bhangde, along with advocate R M Bhangde appeared for Dalmia Cement.Advocate RS Sundaram appeared for the EPFO..[Read Order]
