Kumar Aryan is a third-year student at National Law University, Delhi and a Member of CLLRA and Jai Katiyar is a third-year student at National Law University, Delhi.
Introduction
The claims of workmen in a sick company have always raised significant questions of law, as the intention behind insolvency laws was always to protect the industries and make the market favourable for the flourishment of businesses. Before the application of the Insolvency Code (referred to as “the code” hereinafter) of 2016, the reconstruction of a sick company was adjudicated by the Board for Industrial and Financial Reconstruction formed under the Sick Industrial Companies Act. The primary objective of the act was to provide a way to revive sick industrial companies and release public funds. The BIFR in practice often became a way of prolonging the life of unviable companies for years at taxpayer expense. The codewas introduced to replace the failure of the BIFR, with the objective as stated in its preamble, to maximize the value of the assets of the corporate person under resolution and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues (This could include tax dues or EPF dues). This objective oftentimes clashed with the rights of workers.
In India’s case, the workers are treated as operational creditors and have a stake in the Committee of Creditors. The claims of worker’s compensation are also given priority under the waterfall mechanism. However, there are still many issues that remain in the grey area when it comes to claims of workers’ compensation in the assets of the debtor. Divergent decisions from different benches of the National Company Law Tribunal (NCLT) concerning the treatment of Provident Fund dues within the recently established Insolvency and Bankruptcy Code, 2016, coupled with the resulting uncertainty, not only perplex employees and interested parties but also, from a broader standpoint, endanger a fundamental principle of the legal system: the assurance of legal clarity. The strict interpretation of the law could lead to outcomes similar to what was observed in the Karpagam Spinners case. In this instance, the Regional Provident Fund Commissioner in Tirunelveli appealed to instruct the resolution professional to remove the categorization of Provident Fund dues under Section 53(1)(f) of the Code. However, the NCLT’s Chennai Bench rejected this appeal, stating that the Liquidator accurately recorded the verification and acceptance of the appellant’s claim. This ruling contradicts the explicit provisions outlined in the Code. In the landmark case of State Bank of India vs. Moser Baer Karamchari Union, the NCLAT clarified that the definition of ‘workmen dues’ cannot be inferred from the Companies Act, and thus, such dues are not considered part of the assets available for liquidation under Section 53 of the code.
Harmonious Construction of EPF and Insolvency Code
The Supreme Court in its recent judgement in the case of Jalan Fritsch Consortium v. Regional Provident Fund Commissioner (referred to as “Jet Airways case”), upheld that the gratuity and EPF dues payable to resigned or retired employees are ‘overriding legal obligations’ and therefore should take precedence over any other obligation. This interpretation read with the nonobstante clause i.e., section 238 of the Insolvency and Bankruptcy Code, 2016, creates a contradiction which can only be resolved if the provisions of both laws are harmonious and not in contravention of each other. The Hon’ble National Company Law Appellate Tribunal (‘Hon’ble NCLAT’) in Tourism Finance Corporation of India Ltd. vs Rainbow Papers Ltd. has explicitly held that since no provisions of the Code and the EPF Act are in conflict, the application of Section 238 of the Code does not arise.2 The Supreme Court concurred with the reasoning set out by NCLAT and refrained from interfering with the judgment, ultimately dismissing the appeal. Therefore, as the provisions of IBC do not override the EPF Act, it becomes pertinent to note the relevance of Section 17B of the EPF Act. Section 17B of the EPF Act mandates that the party receiving an establishment through transfer is responsible for settling the owed contributions and other amounts from the previous employer. As a result, the resolution applicant who effectively acquires the business, under the influence of Section 17B of the EPF Act, becomes accountable for covering the provident fund arrears that the company in question owes to its workforce. The Supreme Court in the case of Employees Provident Fund Commissioner. O.L. of Esskay Pharmaceuticals Ltd., wherein it observed that
“The EPF Act is a social welfare legislation intended to protect the interest of a weaker section of the society, i.e., the workers employed in factories and other establishments who have made significant contributions to the economic growth of the country. The workers and other employees provide services of different kinds and ensure continuous production of goods, which are made available to the society at large.”
The contradiction to the ‘Clean Slate Theory’
The idea of a “clean slate” can be seen to derive its potency from Section 31(1) of the IB Code which significantly stipulates that the approval of the resolution plan by the adjudicating authority renders the resolution plan binding on all stakeholders including the employees. This theory of “clean slate” has been accepted by the Supreme Court, which prevents any claim not mentioned in the resolution plan from disrupting the successful implementation of a plan after it has been approved. In the landmark case of Ghanashyam Mishra and Sons v. Edelweiss Asset Reconstruction Company (referred to as “Edelweiss”), the Supreme Court noted that introducing additional obligations on the resolution applicant after the plan’s approval could render the entire plan infeasible. The Court pointed out that unexpected financial burdens cannot be imposed onthe resolution applicant, especially those not outlined in their original resolution proposal. Allowing such surprises would disrupt the calculations upon which resolution applicants relywhen formulating their plans. The Court stressed the importance of granting a fresh and unburdened start to successful resolution applicants based on the terms of their approved plan.
However, the three-judge bench of Chief Justice DY Chandrachud and Justices PS Narsimha and JB Pardiwala in the Jet Airways case, said that “anyone stepping in would know that there are overriding labour dues. Unpaid labour dues always take precedence. Somewhere, there has to be finality. Sorry, we will not interfere.” Therefore, the court presumed awareness among the parties to the resolution process and used this presumption to differ from the settled precedent. This purposive interpretation by the court to prioritize the protection of labour laws over the success of a resolution process indicates that the court recognizes the welfare character of the state that is India.
Conclusion
From the recent judgments of the Supreme Court and NCLAT, it can be validly asserted that the judiciary appears to validate and support the social welfare essence of the EPF Act by interpreting it harmoniously with the Code’s clauses, to safeguard and maintain the rights of the workers concerning their EPF payments. The courts and tribunals have prioritized the legislative intent when addressing matters concerning the handling of EPF dues within the framework of the Code. However, it is also an indication towards the legislature to frame the code in a manner that the ongoing concerns and confusion regarding the interpretation of the code among the different decisions of NCLTs are resolved and the priority to the rights of workers are not left uncertain at the hands of the adjudicating authority.
Kumar Aryan is a third-year student at National Law University, Delhi and a Member of CLLRA and Jai Katiyar is a third-year student at National Law University, Delhi.
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