Supreme Court: In a two civil appeals involving issues with respect to the payment of gratuity and provident fund of employees, prior to disbursement under Section 53 of the Insolvency and Bankruptcy Code, 2016 (‘IB Code’) in the liquidation process, the division bench of B.R.Gavai and Vikram Nath, JJ. quashed and set aside the National Company Law Appellate Tribunal (‘NCLAT’) order passed in Savan Godiwala v. Apalla Siva Kumar, 2020 SCC OnLine NCLAT 191 and restored the order passed by the National Company Law Tribunal (‘NCLT’) that the provident fund dues, pension funds and gratuity fund dues are not treated as a part of the liquidation estate and would not, therefore, be recovered by Section 53 of the IB Code which provides for waterfall mechanism.
On 14-11-2017, pursuant to an application under Section 7 of the IB Code, the ‘Corporate Insolvency Resolution Process’ was initiated against Moser Baer Pvt. Ltd. (Corporate Debtor), wherein finally on 20-09-2018, the order of liquidation was passed by the NCLT, and the workmen of Moser Baer stood discharged under Section 33(7) of the IB Code.
The Liquidator, by an e-mail categorically denied the payment of the gratuity fund, the provident fund and the pension fund preferentially and included the same for the payments under the waterfall mechanism under Section 53 of the IB Code.
In 2019, the ‘Moser Baer Karamchari Union’ filed an application with prayer that the directions be issued to the Liquidator to exclude the amount due to them towards ‘provident fund’, ‘pension fund’ and gratuity trust fund’ from the waterfall mechanism (payment of debts in order of priority) envisaged under Section 53 of the IB Code’ and pay them the same under the stated heads, as these will not constitute part of the liquidation estate.
The NCLT held that “provident fund dues, pension funds and gratuity fund dues are not treated as a part of the liquidation estate and would not, therefore, be recovered by Section 53 of the IB Code which provides for waterfall mechanism.”
Also Read: NCLT | Provident Fund dues, Pension Funds and Gratuity Fund dues cannot be recovered under the ‘Waterfall Mechanism’ | SCC Blog (scconline.com)
The ‘State Bank of India’, a ‘Secured Creditor’, has challenged the order in appeal, and the NCLAT via its order dated 19-08-2019 upheld the NCLT order. Later, the Supreme Court also affirmed the same in State Bank of India v. Moser Baer Karamachari Union, Civil Appeal No. 258 of 2020
Whether the provident fund, pension fund and gratuity fund come within the meaning of assets of the ‘Corporate Debtor’ for distribution under Section 53 of the IB Code?
The Court did not find any cogent reason to entertain the appeal in Civil Appeal No. 258 of 2020, and thus dismissed the appeal.
However, in Appala Siva Kumar v. Savan Godiwala, Civil Appeal No. 2520 of 2020, the Court said that order impugned in the present appeal, passed by the NCLAT, that “in a case, where no fund is created by a company, in violation of the statutory provision of Section 4 of Payment of Gratuity Act, 1972, in that situation also, the Liquidator cannot be directed to make the payment of gratuity to the employees because the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the liquidation estate”, is in ignorance of its earlier order dated 19-08-2019 which was affirmed in Civil Appeal No. 258 of 2020. Thus, the Court quashed and set aside the NCLAT order and restored the order passed by the NCLT.
[State Bank of India v. Moser Baer Karamachari Union, 2023 SCC OnLine SC 140, decided on 07-2-2023]
Advocates who appeared in this case :
For Appellant(s): Advocate-On-Record Ankur Mittal, Advocate Yashika Sharma, Advocate-On-Record Mayank Pandey;
For Respondent(s): Advocate-On-Record S. S. Shroff,. Advocate Vaijayant Paliwal, Advocate Charu Bansal, Advocate Abhishek Anand, Advocate Karan Kohli, Advocate Sahil Bhatia, Advocate Vaibhav Mendiratta, Advocate Jane Cox, Advocate-On-Record Prasanna S., Advocate Swati Arya, Advocate Rahil Fazelbhoy, Advocate-On-Record Swarnendu Chatterjee, Advocate Deepakshi Garg, Advocate Yashwardhan Singh, Advocate Megha Saha, Advocate-On-Record Ujjal Banerjee, Advocate Swapnil Gupta, Advocate-On-Record Abhinav Mishra, Advocate-On-Record for M/S. Mitter & Mitter Co.
*Apoorva Goel, Editorial Assistant has reported this brief.