EPFO Claim Misclassified As Government Dues; NCLAT Directs Lender To Pay Dues In Textile Company's Liquidation

The National Company Law Appellate Tribunal (NCLAT) at Chennai has held that the provident fund dues of liquidation bound Harshavardhan Cotton and Synthetic Pvt. Ltd. could not have been treated as government dues during liquidation, even though the company had not maintained a separate provident fund account.

The tribunal said that, on the facts of the case, the amount claimed by EPFO had to be treated as a third-party asset and paid before the liquidation waterfall was applied.

A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain said the liquidator had misapplied the law.

"The Liquidator has erroneously placed the claim of the Appellant EPFO under Section 53(1)(e) of the code instead of treating it as a third-party asset under Section 36(4)(a), that the amount Rs. 6,34,816/-ought to have paid to the Appellant before the distribution under Section 53 was resorted to by the Liquidator and therefore, the said amount should be recovered from the financial creditor City Union Bank Respondent-2 herein under Regulation 43 of IBBI liquidation process regulations 2016 and paid to the Appellant"

The matter relates to Harshavardhan Cotton and Synthetic Pvt. Ltd., a company employing 181 workers and covered under the Employees' Provident Funds and Miscellaneous Provisions Act. Insolvency proceedings were initiated in March 2018 on an application by Bhadresh Trading Corporation. No resolution plan was received. The committee of creditors chose liquidation, which was ordered in December 2018.

During liquidation, claims of about Rs 16.79 crore were admitted. About Rs 9.20 crore was realised from receivables, as the company had no physical assets left, having been sold before commencement of the insolvency process. EPFO filed a claim of Rs 6.34 lakh for interest and damages on delayed provident fund contributions between 2007 and 2015.

The claim was admitted but treated as government dues. EPFO received nothing. The NCLT later allowed dissolution of the company on 17 November 2023.

Before the appellate tribunal, EPFO said the liquidator ignored settled law by placing provident fund dues in the government dues category. It said such amounts are excluded from the liquidation estate.

The liquidator argued that no priority could be given because the company had not maintained a separate provident fund, pension, or gratuity account. According to the liquidator, the absence of a dedicated fund meant the claim had to fall under Section 53—liquidation waterfall.

The tribunal rejected that reasoning. It said the absence of a separate account does not change the nature of the dues.

“It is not material whether these funds are maintained in a dedicated account as long as such amounts are held by the CD.” The bench added that the law presumes the company is holding these sums for its employees.

“Even if they are not classified in a dedicated account, it has to be presumed that the corporate debtor is holding these amounts and will have to pay the said amount to the workmen or employee at an appropriate time.”

Holding that the claim was wrongly pushed into the liquidation waterfall, the tribunal directed City Union Bank, the financial creditor that received the proceeds, to pay Rs 6.34 lakh to EPFO within 30 days, instead of reopening the liquidation process.

For Appellant: Advocate P.K. Panneer Selvam

For Respondent: Advocate M. Pavithra