Site Loader
VirtualClasses

CASE SUMMARY
STATE BANK OF INDIA – Appellant
vs
MOSER BAER KARAMCHARI UNION & ANR – Respondent
(COMPANY APPEAL (AT)(INSOLVENCY) NO. 396 of 2019)
Order dated 19.08.2019 by
Justice S.J.MUKHOPADHAYA and Justice A.I.S. CHEEMA

1. Issue in Consideration
Whether the provident fund, pension fund and gratuity fund come within the meaning of liquidation estate of the ‘Corporate Debtor’ for distribution under Section 53 of the Insolvency and Bankruptcy Code, 2016 (“IBC”)?

2. Brief Facts of the Case

  • The secured creditors of the MOSER BAER INDIA LIMITED (“Corporate Debtor”) filed an application with the National Company Law Tribunal of Delhi (“NCLT”) under Section 7 of the IBC which was admitted vide order dated 14.11.2017 and the ‘Corporate Insolvency Resolution Process’ (“CIRP”) was initiated against the ‘Corporate Debtor’, wherein finally on 20th September, 2018, the order of liquidation was passed by the NCLT and the workmen stood discharged under Section 33(7) of the ‘I&B Code’.
  • The Liquidator, by e-mail dated 5th December, 2018, categorically denied the payment of the provident fund, the gratuity fund and the pension fund preferentially and included the same for the payments under the waterfall mechanism under Section 53 of the ‘I&B Code’.
  • Later the respondent filed an application before the NCLT to issue necessary directions to the Liquidator to exclude the amount due to them towards ‘Provident Fund’, ‘Pension Fund’ and Gratuity Trust Fund’ from the waterfall mechanism envisaged under Section 53 of the ‘I&B Code’ and pay them all above dues, as these will not constitute part of the liquidation estate under section 36(4)(a)(iii) of the IBC.
  • Thereafter the official liquidator filed an application with the NCLT for its directions and the NCLT held that the ‘Provident Fund Dues’, ‘Pension Fund Dues’ and ‘Gratuity Fund Dues’ cannot be part of Section 53 of the ‘IBC’.
  • Later, one of the secured creditors (i.e. State Bank of India) has challenged the order of NCLT before the National Company Law Appellate Tribunal, New Delhi.

3. Arguments

Appellant: The appellant argued that the distribution of assets of the ‘Corporate Debtor’ under Section 53 of the IBC, dues of employees as mentioned in sub-clause (c) of sub-section (1) therein includes the contribution of ‘Provident Fund’.

Respondent: It was argued by the respondent that as per Section 36(4)(a)(iii), it is clear that all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund, shall not be included in the liquidation estate assets under Section 36(1) of the IBC and cannot be used for recovery in the liquidation.

The respondent further argued that Section 36 (3) of the IBC defines the components of the liquidation estate and also lays down what forms the liquidation estate. Sub-section (3) therein is subject to sub-section (4) of IBC, 2016. And Sub-section (4) (a) (iii) of the IBC, 2016 specifically excludes from the liquidation estate, all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund. Therefore, it is submitted that the workmen have the first charge on the aforesaid funds.

4. Case Analysis

Section 53 relates to ‘Distribution of assets’(Click here for the full text of Section 53). The relevant extract of Section 53 is as follows:

53. Distribution of assets ─ (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely: –

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

Explanation. – For the purpose of this section-

(i) …; and

(ii) the term “workmen’s dues shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013 (18 of 2013).”

Explanation (b) of Section 326 of the Companies Act, 2013 is as follows:

“(b) “workmen’s dues”, in relation to a company, means the aggregate of the following sums due from the company to its workmen, namely:—

(i) …

(ii) …

(iii) …

(iv) 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;”

It was inferred by the appellant’s counsel, from the above, that the sums due to the workman from the provident fund or any other fund for the welfare of the workmen, maintained by the Company, be treated as ‘workmen dues’.

Section 36 of the IBC deals with ‘Liquidation Estate’ for the purpose of liquidation. As per Section 36(1), for the purpose of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the ‘Corporate Debtor’ and it reads as follows:

36. Liquidation estate.─

(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: –

(a) assets owned by a third party which are in possession of the corporate debtor, including –

(i) … ;

(ii) … ;

(iii) all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund;

(iv) … ;

 (v) … ;

… ”

Hence it can be drawn from Section 36(4)(a)(iii) that all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund, shall not be included in the liquidation estate and cannot be used for recovery in the liquidation. The term ‘workmen’s dues’ is mentioned in clause Section 53(1) (b) (i), which are the dues for the period of twenty-four months preceding the liquidation commencement date. In view of the aforesaid specific provisions, the explanation (iii) below Section 53, for the purpose of meaning of ‘workmen’s dues’, the Appellant cannot derive the meaning as assigned to it in Section 326 of the Companies Act, 2013.

5. Conclusion

There is a difference between the distribution of assets and preference / priority of workmen’s dues as mentioned under Section 53(1) (b) of the IBC and Section 326(1) (a) of the Companies Act, 2013.

While applying Section 53 of the ‘I&B Code’, Section 326 of the Companies Act, 2013 is relevant for the limited purpose of understanding ‘workmen’s dues” which can be more than provident fund, pension fund and the gratuity fund kept aside and protected under Section 36(4) (iii).

On the other hand, the workmen’s dues as mentioned in Section 326(1) (a) is not confined to a period like twenty-four months preceding the liquidation commencement date and, therefore, the Appellant for the purpose of determining the workmen’s dues as mentioned in Section 53(1) (b), cannot derive any advantage of Explanation (iv) of Section 326 of the Companies Act, 2013.

The NCLAT further held that Section 53(1) (b) read with Section 36(4) will have overriding effect on Section 326(1) (a), including the Explanation (b) (iv) mentioned below Section 326 of the Companies Act, 2013.

Finally, it was ruled that once the liquidation estate / assets of the ‘Corporate Debtor’ under Section 36(1) read with Section 36 (3), do not include all sum due to any workman and employees from the provident fund, the pension fund and the gratuity fund, for the purpose of distribution of assets under Section 53, the provident fund, the pension fund and the gratuity fund cannot be included.

Post Author: Team VirtuaLaw

Team VirtuaLaw focuses on writing articles of relevance in the field of law. It targets to simplify the complexity of regulations into infographics and summarised articles.

Leave a Reply

Your email address will not be published. Required fields are marked *

Subscribe to our website to receive email notifications as and when we come up with interesting articles.

You have successfully subscribed to updates from VirtuaLaw

There was an error while trying to send your request. Please try again.

will use the information you provide on this form to be in touch with you and to provide updates and marketing.