The Chennai Bench of the National Company Law Appellate Tribunal (NCLAT), in an order in early February 2023 in Mrs. C.G. Vijaylakshmi v. Shri Kumar Rajan, held that provident fund dues are not subject to the distribution mechanism under Section 53(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) and cannot be treated as secured debt within the liquidation waterfall. The Tribunal further observed that part payment of provident fund dues by the successful resolution applicant was unjustified.
Background
The question of how employees' provident fund dues are treated during insolvency proceedings has been a recurring issue in IBC jurisprudence. Section 36(4)(a)(iii) of the IBC excludes provident fund, gratuity fund, and pension fund from the liquidation estate, placing them outside the assets available for distribution to creditors. However, the practical treatment of provident fund arrears — particularly the employer's contribution — during the Corporate Insolvency Resolution Process (CIRP) and liquidation has generated conflicting approaches across NCLT benches. The Employees' Provident Funds and Miscellaneous Provisions Act, 1952 creates statutory obligations on employers, and Section 17B of the EPF Act makes successors-in-interest liable for provident fund dues.
Key Holdings
The NCLAT held the following:
PF dues outside Section 53 waterfall: Provident fund dues are not subject to the distribution mechanism prescribed under Section 53(1) of the IBC. By virtue of Section 36(4)(a)(iii), provident fund amounts are excluded from the liquidation estate and therefore cannot be treated as part of the claims to be distributed in the priority waterfall.
Not treatable as secured debt: The Tribunal rejected the contention that provident fund dues could be classified as secured debt for the purposes of the IBC distribution framework. PF dues occupy a special statutory position that transcends the conventional creditor hierarchy.
Part payment unjustified: The NCLAT observed that the successful resolution applicant's decision to make only partial payment of provident fund dues was not justified under the statutory framework, which mandates full compliance with EPF Act obligations.
EPFO's standing: The Employees' Provident Fund Organisation (EPFO) has standing to pursue its claims independently of the CIRP process, given the exclusion of PF assets from the liquidation estate.
Implications for Practitioners
This order reinforces the protected status of provident fund dues in insolvency proceedings and carries significant implications for resolution plan drafting. Insolvency professionals and resolution applicants must account for provident fund arrears as obligations that sit outside the Section 53 waterfall and must be satisfied in full.
For practitioners advising resolution applicants, the judgment clarifies that successful bidders cannot treat provident fund liabilities as ordinary unsecured claims subject to haircuts under the resolution plan. The EPF Act obligations survive the resolution process and must be budgeted separately.
Employment and labour law practitioners should note that this interpretation strengthens the EPFO's position vis-a-vis other creditors in insolvency proceedings. EPFO can pursue its claims independently and is not bound by the distribution percentages agreed in CoC-approved resolution plans.
Resolution professionals must ensure that provident fund arrears are clearly identified and disclosed during the CIRP, and that resolution plans explicitly address PF liabilities as a separate obligation distinct from the claims waterfall.