Uncrystallised EPFO Interest, Damages Are Contingent Liabilities Under IBC: Supreme Court

The Supreme Court has recently held that interest and damages on unpaid provident fund dues, if not determined before the commencement of the Corporate Insolvency Resolution Process (CIRP), are contingent liabilities.

"Though PF dues are excluded from the liquidation estate under Section 36(4)(iii) of IBC, liability of CD towards interest and damages payable under Section 7Q and 14B of the 1952 Act, if not determined and finalized before CIRP commencement, would fall in the category of a contingent liability," the court ruled.

It added that if the Committee of Creditors (CoC), in its commercial wisdom, does not provide for such contingent liabilities in a resolution plan, that decision cannot be faulted.

A bench of Justice Manoj Misra and Justice Vijay Bishnoi dismissed the Employees' Provident Fund Organisation's (EPFO) appeal against a National Company Law Appellate Tribunal (NCLAT) judgment. The tribunal had upheld the resolution plan for Power Max (India) Pvt. Ltd. submitted by successful resolution applicant Shyam Enterprises.

Power Max (India) entered the Corporate Insolvency Resolution Process (CIRP) on May 1, 2023. EPFO filed a claim of ₹22.49 lakh, including ₹73,120 towards provident fund dues, ₹9.32 lakh as interest under Section 7Q and ₹12.44 lakh as damages under Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.

The Committee of Creditors (CoC) approved Shyam Enterprises' resolution plan with a 100% vote, and the National Company Law Tribunal, Kolkata, later approved it. The plan, however, provided only ₹73,120 towards provident fund dues. It did not include the interest and damages claimed by EPFO, leading the organisation to challenge the plan.

EPFO argued that provident fund dues excluded from the liquidation estate under Section 36(4)(a)(iii) of the Insolvency and Bankruptcy Code (IBC) could not be subjected to a haircut under the resolution plan.

Shyam Enterprises, on the other hand, argued that before the commencement of CIRP, no order under either Section 7A or Section 14B of the 1952 Act had been passed. Consequently, the dues towards interest and damages had not crystallised. It also submitted that the employer's provident fund contribution had been provided for under the resolution plan. Since the plan had been approved by the CoC with a 100% voting share and later by the adjudicating authority, it was not liable to be interfered with in the absence of any statutory violation.

The bench noted that provident fund dues are excluded from the liquidation estate under the IBC. It said liability towards interest and damages under Sections 7Q and 14B of the 1952 Act, if not determined and finalised before the commencement of CIRP, falls in the category of contingent liabilities.

The court said the CoC may, in its commercial wisdom, provide a lump sum amount to meet contingent liabilities arising from uncrystallised claims. It, however, clarified that the CoC cannot be faulted if it chooses not to make such a provision. The bench said this was in keeping with the objective of the CIRP, which is required to adhere to fixed timelines.

The bench also said requiring a prospective resolution applicant to account for uncertain or unquantified future claims would undermine the "clean slate" principle. If a prospective resolution applicant is kept guessing what it would have to pay to take over and run the corporate debtor, it may choose not to enter the fray at all. That, the court observed, would defeat the underlying object of the IBC.

The bench also observed that an adjudicating authority can decline to approve a resolution plan approved by the CoC only on the limited grounds specified under Section 30(2) of the IBC.

In the present case, the bench noted that the resolution plan provided for payment of the provident fund dues. Proceedings relating to interest and damages had not been initiated before the commencement of CIRP. There was, therefore, no blatant violation of the statutory mandate under the IBC, it held.

Finding no reason to interfere with the tribunal's order affirming the approval of the resolution plan, the apex court dismissed EPFO's appeal.

For Appellant: Dushyant Parashar, AOR, Manu Parashar, Dinesh Pandey, Advocates

Click Here To Read/Download NCLAT Order