The National Company Law Appellate Tribunal, in Regional PF Commissioner-II v. Harshavardhan Cotton (Company Appeal (AT) (CH) (Ins.) No. 455 of 2023), has held that all sums due to employees from provident funds — including principal contributions, interest under Section 7Q, and damages under Section 14B of the Employees' Provident Funds Act — must be treated as third-party assets excluded from the liquidation estate under Section 36(4)(a)(iii) of the Insolvency and Bankruptcy Code, 2016. The Tribunal directed recovery from financial creditor payments.
Background
The dispute arose during the liquidation of Harshavardhan Cotton, where the Regional Provident Fund Commissioner filed claims for outstanding EPF dues comprising unpaid employer contributions, interest accrued under Section 7Q of the EPF Act, and damages levied under Section 14B for delayed remittance. The liquidator classified only the principal EPF contributions as excluded from the liquidation estate under Section 36(4)(a)(iii) of the IBC, while treating the interest and damage components as government dues falling within the general waterfall mechanism under Section 53.
The PF Commissioner challenged this classification before the NCLAT, contending that all components of EPF dues — whether principal, statutory interest, or penal damages — constitute sums due from the provident fund and are therefore held in trust for employees. The Commissioner further argued that the existence of a separately maintained provident fund account should not be a prerequisite for exclusion from the liquidation estate.
Key Holdings
All EPF Components Excluded From Liquidation Estate: The Tribunal held that the entirety of sums due to employees from the provident fund, including interest under Section 7Q and damages under Section 14B of the EPF Act, must be treated as assets not forming part of the liquidation estate. Section 36(4)(a)(iii) of the IBC requires exclusion of all sums due to any workman or employee from the provident fund, without distinguishing between principal and ancillary statutory obligations.
Separate PF Account Not a Prerequisite: The NCLAT held that the existence of a separately maintained provident fund account is not a prerequisite for the exclusion of EPF dues from the liquidation estate. The statutory obligation to maintain and remit provident fund contributions exists independently of whether the corporate debtor maintained a segregated account, and failure to do so cannot diminish employee entitlements.
Liquidator's Classification Erroneous: The Tribunal found that the liquidator erred in classifying EPF interest and damages as government dues subject to the waterfall mechanism under Section 53 of the IBC. Such classification conflated the statutory character of provident fund obligations with general government dues, contrary to the legislative intent of Section 36(4)(a)(iii).
Recovery Directed From Financial Creditor Distributions: The NCLAT directed that the full EPF dues, including the interest and damages components, be recovered and disbursed from amounts otherwise distributable to financial creditors, recognising the priority of employee provident fund claims over the waterfall distribution.
Implications for Practitioners
Practitioners should note that this decision significantly broadens the scope of EPF-related exclusions from the IBC liquidation estate. Insolvency professionals acting as liquidators must now treat all statutory components of EPF obligations — not merely the principal contribution — as third-party assets outside the distributable estate. Any contrary classification is likely to be overturned on appeal.
For financial creditors, this judgment has direct implications on recovery prospects. The direction to recover EPF interest and damages from financial creditor distributions means that the effective pool available under the Section 53 waterfall stands further diminished. Creditors participating in Committee of Creditors deliberations should factor in the expanded scope of EPF exclusions when evaluating liquidation value.
Counsel for the Employees' Provident Fund Organisation should treat this decision as a strong precedent for resisting attempts by liquidators to relegate any component of EPF dues to the general waterfall. The ruling effectively establishes that the trust character of provident fund obligations extends to all statutory incidents of the employer's obligation, including penal and compensatory elements assessed under the EPF Act.
Source: Regional PF Commissioner-II v. Harshavardhan Cotton, Company Appeal (AT) (CH) (Ins.) No. 455 of 2023 (National Company Law Appellate Tribunal, January 2026). This article is based on a publicly available judicial decision. Veritect Legal Intelligence does not guarantee the completeness or continued accuracy of this information and recommends consulting the full judgment and seeking independent legal advice for specific matters.