Employees dues do not form part of the liquidation estate/ liquidation assets

Introduction:

The Legal Team of AAA Insolvency Professionals LLP has done a thorough analysis of a landmark judgment passed by NCLAT in the case of State bank of India v Moser Baer Karamchari Union & Anr. 

On 19th August, the NCLAT delivered a landmark judgment paving the way for thousands of aggrieved employees struggling to get their dues from the Companies going through liquidation.

What transpired in Court:

• Moser Baer Karamchari Union moved Court praying for directions to the Liquidator to exclude the amount due to them towards ‘Provident Fund’, ‘Pension Fund’ and ‘Gratuity trust Fund’ payable waterfall mechanism under Section 53.
• Earlier, NCLT Delhi in its order dated 19.03.2019 held that  Provident Fund’, ‘Pension Fund’ and ‘Gratuity trust Fund’ cannot be part of Section 53 of the IBC.
• SBI (Secured Creditor/ Appellant)  has appealed against the order of NCLT Delhi arguing that dues of employees including contribution to Provident fund, Pension fund and Gratuity fund should be included in liquidation estate as per Section 326 and Section 327 of the Companies Act.
• On the other hand, Resolution Professional submitted that Section 36(4)(a)(iii) of the IBC specifically excludes all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund from liquidation estate.

Question of law: Whether the provident fund, the pension fund and the gratuity fund come within the meaning of assets of the Corporate Debtor for distribution under Section 53 of the Code.

What Court held:

• In terms of Section 36(4)(a)(iii) of the Code, all sums due to any workman or employees from the provident fund, the pension fund and the gratuity fund, do not form part of the liquidation estate/ liquidation assets.
• Explanation (iii) below Section 53, for the purposes of the meaning of ‘workmen’s dues’, cannot derive the meaning as assigned to it in Section 326 of the Companies Act, 2013.
• 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/employees from  provident fund, the pension fund and the gratuity fund, the same funds cannot be included under Section 53 for distribution of assets.