Employee Rights In Insolvency

The Insolvency and Bankruptcy Code, 2016 ("IBC") was introduced for the purpose of consolidating the laws related to insolvency and bankruptcy in India. The intention to introduce IBC was to strike a balance between the creditors and the borrowers with regard to their rights and liabilities and to secure and strengthen the position of the creditors. With the introduction of IBC, the process of insolvency is conducted in a time-bound manner and the Resolution Professional aims at maximising the value of the assets of the Corporate Debtor, which subsequently benefits the creditors by maximising the recovery of their debt in a timebound manner.


The question that came up for determination in Alchemist Asset Reconstruction Limited vs Moser Baer India Limited was whether pension fund, provident fund, and gratuity fund form a part of the liquidation estate. In other words, do these funds become a part of the distributable assets? It may be noted that section 36 of the IBC deals with the liquidation estate. Liquidation estate comprises of assets over which the Corporate Debtor has ownership rights. Section 53 of the IBC defines the priority and the timelines in the distribution of the assets.

 

In the aforesaid matter, Alchemist Asset Reconstruction Limited vs Moser Baer India Limited, the National Company Law Tribunal ("Tribunal") held that pension fund, provident fund, and gratuity fund cannot be included in the assets of the Corporate Debtor to be liquidated for settling the claims of the creditors as mentioned in Section 53 of the IBC, and the said funds have been excluded from the purview of Section 53 of the IBC.

 

The brief facts of the case are that Alchemist Asset Reconstruction Limited, being one of the financial creditors, filed an application under Section 7 of the IBC before the Tribunal for initiating Corporate Insolvency Resolution Process ("CIRP") against Moser Baer, and the same was admitted by the Tribunal. Thereafter, an Expression of Interest to put forward a Resolution Plan was invited. However, since no Resolution Plan was received, the Committee of Creditors ("COC"), by a 100% voting share, decided to liquidate Moser Baer India Limited. Thereafter, the liquidator filed an application before the Tribunal to bring on record the COC's decision of liquidating the Corporate Debtor. The Tribunal, after taking on record the submission of the liquidator, passed an order of liquidation against the Corporate Debtor.

 

Subsequently, after the aforesaid order was passed by the Tribunal against the Corporate Debtor, the liquidator denied the preferential payment of the gratuity fund, provident fund, and pension fund to the workmen employed with the Corporate Debtor. By virtue of denying the preferential payment of the aforesaid funds to the workmen of the Corporate Debtor, the liquidator included the amounts which were due to the workmen towards their gratuity fund, provident fund and pension fund, within the purview of Section 53 of the IBC. Being aggrieved by the decision of the liquidator denying them their preferential payment of gratuity fund, provident fund and pension fund, the Moser Baer Karamchari Union i.e. the workmen, moved an application before the Tribunal, thereby, praying to exclude the amounts due to them towards their preferential payment of gratuity fund, provident fund and pension fund from the purview of Section 53 of the IBC.
 

The Tribunal, after hearing the application moved by the Moser Baer Karamchari Union at length, passed an order in favour of the Moser Baer Karamchari Union by excluding the preferential payment of gratuity fund, provident fund, and pension fund from the purview of Section 53 of the IBC. The Tribunal specifically specified in its order that the preferential payment of the aforesaid funds did not form a part of the Liquidation Estate of the Corporate Debtor.

 

Subsequently, aggrieved by the order of the Tribunal, State Bank of India ("SBI"), which is also one of the secured creditors of the Corporate Debtor, filed an appeal before the National Company Law Appellate Tribunal ("Appellate Tribunal") against the order passed by the Tribunal, praying for including the aforesaid funds within the purview of Section 53 of the IBC. The Appellate Tribunal upheld the decision of the Tribunal, and further stated that since 'workmen's dues' is specifically mentioned in Section 53 (1)(b)(i) of the IBC as dues for the period of 24 months preceding the liquidation commencement date, its meaning could not be derived through Section 326 of the Companies Act, 2013. Since SBI argued that 'workmen's dues' as specified under Section 53(1)(c) shall have the same meaning as assigned to it under Section 326 of the Companies Act, 2013, the Appellate Tribunal provided a clarification that Section 326 of the Companies Act, 2013 is only relevant for the purpose of understanding 'workmen's dues' whereas Section 36(4)(a)(iii) of the IBC clearly states that all sums due to any workman or employee from the pension funds, gratuity fund and provident fund shall not be included in the liquidation estate assets.

 

While concluding the judgement, the NCLAT held that :

 

"..as the provisions of the IBC have overriding effect in case of inconsistency in any other law for the time being enforced, we hold that Section 53(1)

(b)  read with Section 36(4) of the IBC will have overriding effect on Section 326(1)(a) of the Companies Act, 2013, including the explanation (i) mentioned below Section 326 of the Companies Act, 2013".

 

The appeal filed by SBI before the Hon'ble NCLAT was dismissed. It has been held by the Hon'ble NCLAT that the gratuity fund, provident fund and pension fund do not fall within the meaning of 'liquidation estate' for the purpose of distribution of assets as specified under Section 53 of the IBC.

 

Krishna Vijay Singh is a Senior Partner at Kochhar & Co., one of the leading and largest law firms in India with offices at New Delhi, Gurgaon, Bengaluru, Chennai, Hyderabad, Mumbai, Dubai, Riyadh, Jeddah, Singapore, Tokyo and Atlanta (USA). The firm represents some of the largest multinational corporations from North America, Europe, Japan and India (many of which are Fortune 500 companies) in diverse areas of corporate and commercial laws. Nachiketa Goyal is a Senior Associate at Kochhar & Co. His practice areas include labour & employment, general corporate commercial, commercial litigation and arbitration and legal advisory work. Nachiketa was admitted to Bar Council of India in 2014 and is a member of Delhi Bar Council, Gurgaon District Bar Association and Delhi High Court Bar Association.

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