Treatment of Interest and Damages

While the Insolvency and Bankruptcy Code, 2016 (Code)1 exempts “all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund”2 from the liquidation estate of a corporate debtor — thereby excluding them from the realm of distribution under Section 533 of the Code, yet the manner of treatment of different components of claims under the Employees’ Provident Funds and [Miscellaneous Provisions] Act, 1952 (EPF Act)4 has been put forth for judicial scrutiny before various Benches of the National Company Law Tribunal (NCLT) as well as the Appellate Tribunal time and again.

It has been argued that while the principal contribution dues fall within the ambit of the above exemption, the dues pertaining to interest and damages levied under Section 7-Q5 and 14-B6 of the EPF Act are not “sums due to any workman or employee” and therefore, they do form part of the liquidation estate of a corporate debtor and are amenable to distribution under Section 53 of the Code. To put things in perspective, Section 7-Q of the EPF Act mandates that employers/corporate debtors must pay simple interest at a rate of 12% per annum (or higher, as specified) on any amount due under the EPF Act from the date it becomes payable until the date of actual payment. Section 14-B, on the other hand, empowers the relevant EPF authorities to recover damages from employers/corporate debtors who default on their contributions to the provident fund.

Settling the above question, albeit opposite to what has been held by the various Benches of the NCLT across the nation until now, the National Company Law Appellate Tribunal (NCLAT), in its very recent decision in Anuj Bajpai v. EPFO7 ruled that all dues under the EPF Act, including those pertaining to interest and damages, do not form part of the liquidation estate of a corporate debtor and are to be paid in priority over all the other debts. In other words, the said sums cannot be used for recovery in the liquidation of a corporate debtor and are outside the scope of distribution under Section 53 of the Code.

To support this interpretation, the NCLAT relied on the judgment passed by the Supreme Court in Maharashtra State Cooperative Bank v. Provident Fund Commr.8, amongst others. In the said judgment, the Supreme Court interpreted the expression “any amount due from an employer” appearing in Section 11(2)9 of the EPF Act which deals with priority of payment of contributions over other debts in case of insolvency or winding up of an employer. Stating that there was no reason to construe the said phrase narrowly so as to include only the principal dues under its ambit, the Supreme Court held that the phrase “any amount due from an employer” also includes interest payable under Section 7-Q along with damages under Section 14-B of the EPF Act.

Interestingly, the NCLAT, in its judgment in Anuj Bajpai case10, has equated the above phrase “any amount due from an employer” under Section 11(2) of the EPF Act, to that of the “sums due to any workman or employee” under Section 36(4)11 of the Code to include interest and damages within its ambit. This comparison is significant because, while principal provident fund contributions by an employer are required to be deposited into employees’ EPFO funds, which would be sums due to workmen or employees, the understanding regarding utilisation of the interest and damages recovered by the EPF authorities from the employer appears to be inconsistent. It becomes essential to determine whether these amounts are fully transferred to the employees or are utilised for any other purposes so as to accurately categorise them as “due to an employee” or “due from an employer” respectively.

In this regard, the landmark judgment of the Supreme Court in Organo Chemical Industries v. Union of India12 is pertinent. In the said case, while upholding the constitutionality of Section 14-B of the EPF Act, the Supreme Court also shed some light on the desired utilisation of the amount of damages levied under the said provision under different heads. It was observed by the Court that damages under Section 14-B serve a twofold purpose, being (i) damnification; as well as (ii) deterrence. Further, the Court held that, “In assessing the damages, the Regional Provident Fund Commissioner is not only bound to take into account the loss to the beneficiaries but also the default by the employer in making his contribution, which occasions the infliction of damages … the employees would, of course, get damages commensurate with their loss i.e. the amount of interest on delayed payments; but the remaining amount should go to augment the ‘fund’ constituted under Section 5, for implementing the schemes under the Act.”

Notably, it appears to be the view of the Employees’ Provident Fund Organisation (EPFO) that “interest under Section 7-Q is towards making good the loss incurred by the fund due to belated remittances, while penal damages under Section 14-B is a deterrent on employers from recurrence of belated remittances”.13 The question that emerges from this is whether the EPFO, in fact, allocates a portion of the damages for employee compensation, as expected by the Supreme Court, or if this reflects how the entire amount of damages levied under the EPF Act is actually utilised in practice — that is, as a penalty? And, if this is so, can these dues really be included as part of the “sums due to a workman or employee”?

Per contra, the position regarding utilisation of the interest amount levied under Section 7-Q appears to be uniform — i.e. to recompense the beneficiaries/employees for the loss of interest suffered on account of the delayed payments by the employers.14 Or maybe not.

Perhaps the NCLT Hyderabad Bench seems to have recognised the above distinction vis-à-vis the utilisation of the amount of interest and damages, in one of its decisions in Titan Energy Systems Ltd. (Liquidator) v. EPFO15. In the said matter, the liquidator had filed an application, seeking, amongst others, a direction from the NCLT to allow him to treat only the amounts payable under Sections 7-A16 (principal) and 7-Q (interest) of the EPF Act as sums due to any workman or employee, and to treat the damages levied under Section 14-B as dues of the Central Government under Section 53(1)(e)(i)17 of the Code. Seeking so, the liquidator contended that since the amount claimed by EPFO as damages was payable only to the EPFO and not to any single workman or employee, it was not justifiable to treat it as exempted under Section 36(4)(a)(iii)18 of the Code. Agreeing with the said contention, the Bench observed that penal damages levied under the EPF Act are collected by the EPFO and are not distributed to any of the workmen or employees of a corporate debtor. On this count, the Bench proceeded to hold that amount levied as damages fails to fall outside the liquidation estate in terms of Section 36 of the Code. In the same vein, the Hyderabad Bench passed an order in another matter19 noting that only the amounts levied under Sections 7-A and 7-Q of the EPF Act fall outside the liquidation estate and are to be paid in priority over the other dues. The damages levied under Section 14-B, however being payable to the EPFO, do not enjoy similar protection.

Similarly, the NCLT Mumbai, in EPFO v. Enviro Bulk Handling Systems (P) Ltd.20, raised a pertinent query to the EPFO seeking clarity on the allocation and utilisation of the amount collected under Section 14-B as damages — specifically, whether these funds were distributed directly to the employees or utilised for general administrative purposes? However, having failed to receive any concrete answer from the EPFO, the Bench concluded that even if the damages levied under Section 14-B of the EPF Act are utilised for the benefit of the employees in general, the same cannot be said to be sums payable to the employees and workmen and are to be considered as “government dues” under Section 53 of the Code.

In the same breath, various Benches of the NCLT across the country have considered both interest as well as damages as a part of the liquidation estate of a corporate debtor. Such a view has been taken by the Bench at Bangalore in Right Engineers and Equipments India (P) Ltd. (Liquidator) v. EPFO21, the Kochi Bench in EPFO v. Excel Glass Ltd. (Liquidator)22, the Hyderabad Bench in BS Ltd. (Liquidator) v. EPFO23 and SDU Travels case24, as well as the Mumbai Bench in Divyesh Desai v. EPFO25 and that of EPFO v. Vijay Kumar Iyer26, to name a few. The respective Benches in these cases observed that the amount claims towards interest and damages under EPF Act cannot be treated to be exempted like the principal provident fund dues under Section 36(4)(a)(ii) of the Code. This was because the said amounts are not payable to the employees of a corporate debtor, but to the EPFO. Consequently, it was held that these amounts do not fall within the scope of Section 36(4)(a)(ii) of the Code and are instead considered as government dues under Section 53(1)(e) of the Code.

However, the judgment of the NCLAT in Anuj Bajpai case27 is the law as it stands today. Thus, all dues levied under the EPF Act, including those pertaining to interest and damages, stand excluded from the liquidation estate of a corporate debtor and are to be paid in priority over all the other debts.


*Partner Designate at Saraf and Partners Law Offices. Author can be reached at: Anupm.prakash@sarafpartners.com.

**Associate at Saraf and Partners Law Offices. Author can be reached at: Kirti.talreja@sarafpartners.com.

1. Insolvency and Bankruptcy Code, 2016.

2. Insolvency and Bankruptcy Code, 2016, S. 36(4)(a)(iii).

3. Insolvency and Bankruptcy Code, 2016, S. 53.

4. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.

5. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, S. 7-Q.

6. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, S. 14-B.

7. 2024 SCC OnLine NCLAT 886.

8. (2009) 10 SCC 123.

9. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, S. 11(2).

10. 2024 SCC OnLine NCLAT 886.

11. Insolvency and Bankruptcy Code, 2016, S. 36(4).

12. (1979) 4 SCC 573.

13. Ministry of Labour and Employment, Government of India, Employees’ Provident Fund Organisation, No. C-III/4(25)2006/DL/NZ/ (Notified on 2-11-2015) accessible at: <https://www.epfindia.gov.in/site_docs/PDFs/Circulars/Y2015-2016/C3_Damages_Interest_021115.pdf>.

14. Arcot Textile Mills Ltd. v. EPFO, (2013) 16 SCC 1.

15. 2022 SCC OnLine NCLT 16424.

16. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, S. 7-A.

17. Insolvency and Bankruptcy Code, 2016, S. 53(1)(e)(i).

18. Insolvency and Bankruptcy Code, 2016, S. 36(4)(a)(iii).

19. Servomax India (P) Ltd. (Liquidator) v. EPFO, 2022 SCC OnLine NCLT 7999.

20. IA 2428/2021 in CP (IB)/1319(MB)/C-III/2017, order dated 28-2-2024 (NCLT).

21. IA No. 232/2022 in CP(IB) No. 320/BB/2019, order dated 20-7-2023 (NCLT).

22. IA(IBC)/127/KOB /2023 in IBA/258/CB/2019, order dated 2-8-2023 (NCLT).

23. IA No. 868/2022 and 1004/2022 in CP(IB) No. 278/7/HDB/2018, order dated 14-3-2023 (NCLT).

24. 2024 SCC OnLine NCLT 1904.

25. 2024 SCC OnLine NCLT 889.

26. Company Appeal 10 of 2023 in CP(IB) No. 292/MB/2017, order dated 12-3-2024 (NCLT).

27. 2024 SCC OnLine NCLAT 886.

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