Corporate Law Daily
Dear Reader,
Today’s newsletter analytically summarizes the top Corporate Law stories reported at?taxmann.com.
Introduction
The Insolvency and Bankruptcy Code (IBC) is a comprehensive law in India that aims to simplify and expedite the insolvency and bankruptcy proceedings in the country. It consolidates and amends all the existing insolvency laws to promote entrepreneurship, maximise the value of corporate debtor and help struggling companies to turnaround.
One of the stakeholders in a company that the IBC aims to protect are the workmen and employees. However, the IBC is silent on the treatment of various components of the salary and wages of employees and workmen and does not provide much guidance on how provident fund and gratuity dues should be treated during Corporate Insolvency Resolution Process (CIRP) under IBC. The EPF Act was created to promote social security for employees in companies, with the objective of following the Directive Principles of State Policy outlined in articles 38 and 43 of the Indian Constitution.
The EPF & MP Act includes provisions to safeguard the interests of employees when their employers fail to make mandatory contributions. However, when a company is undergoing a CIRP under the IBC, the priority of EPF dues takes on a different significance. This means that while the EPF & MP Act is designed to protect employee rights, its application during a company's insolvency proceedings can be complicated.
The Employees & Provident Funds and Miscellaneous Provisions Act, 1952, provides for the establishment of a provident fund, pension fund, and deposit-linked insurance fund for the benefit of employees. The Act makes it mandatory for employers and employees to contribute to the provident fund, and the contribution rates are fixed by the Central Government from time to time. The Act also provides for the constitution of the Central Board of Trustees, which is responsible for the overall management and administration of the funds.
Exclusion of Provident fund and Gratuity from Liquidation State
Section 36 of the Insolvency and Bankruptcy Code (IBC) contains provisions that exclude certain assets from the liquidation estate, and therefore these assets cannot be used for recovery in the liquidation process. One important exclusion mentioned in this section relates to the outstanding amounts owed to workers or employees, specifically those amounts related to their provident fund, pension fund, and gratuity fund. Section 36(4)(a)(iii) specifically states that all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation.
This implies that any money that an employer owes to its employees as part of these funds cannot be used to recover the debts owed by the employer during the liquidation process. The amount that an employer is obligated to pay into these funds is meant to be a safeguard for the employees' future, and as such, it is considered sacrosanct and protected from the effects of liquidation. It's important to note that Section 36 of the IBC provides several other exclusions as well, which must be carefully considered during the liquidation process. However, the exclusion of amounts owed to employees from these specific funds is an important one that ensures that workers' hard-earned savings are not put at risk during the insolvency proceedings of their employer.
In the case of State Bank of India v. Moser Baer Karamchari Union [2019] 108 taxmann.com 251 (NCL - AT) the question of whether provident fund, pension fund, and gratuity fund dues could be included in section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC) was considered. The Adjudicating Authority allowed the application on the grounds that these dues could not be part of Section 53 of the IBC. The case related to a liquidation proceeding, and the Adjudicating Authority directed the Liquidator to make payments for provident fund, pension fund, and gratuity fund in accordance with Section 36(4)(a)(iii) of the IBC. The National Company Law Appellate Tribunal (NCLAT) upheld the decision of the Adjudicating Authority, which held that provident fund, pension fund, and gratuity fund do not come within the meaning of liquidation estate. This means that these funds are not part of the assets available for distribution to the creditors of the company in liquidation.
Overriding Conflict
Section 238 of the Insolvency and Bankruptcy Code, 2016 (IBC) deals with the overriding effect of the IBC on other laws. This provision specifies that the IBC will have an overriding effect on any other law that is inconsistent with its provisions. It states that the provisions of the IBC will have effect,
"Notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law." This means that if there is any conflict or inconsistency between the provisions of the IBC and any other law or instrument, the provisions of the IBC will prevail. This is an important provision as it ensures that the IBC is given priority in cases where there is a conflict with other laws. However, there is no conflict in the provisions of EPF & MP Act and IBC.
In the case of Sikander Singh Jamuwal v. Vinay Talwar Resolution Professional [2022] 137 taxmann.com 238 (NCL - AT), the NCLAT held that there is no conflict between the provisions of Section 17B of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952, and the IBC. In this case, the tribunal directed the resolution applicant to pay the outstanding PF dues to the employees. Additionally, the NCLAT noted that since there is no conflict between the PF Act and the IBC, the question of the applicability of Section 238 of the IBC does not arise.
The NCLAT relied on the judgment of its earlier ruling in the case of Tourism Finance Corpn. of India Ltd. v. Rainbow Papers Ltd. [2020] 120 taxmann.com 265 (NCL - AT). In this regard. It was also noted that the outstanding provident fund dues are not considered to be assets of the Corporate Debtor, as clarified by the provisions of section 36(4)(a)(iii) of the IBC. Therefore, the ruling in Sikander Singh Jamuwal's case (supra) is significant as it clarifies that the payment of provident fund dues is a priority during the resolution process under the IBC.
Constitutional Effect
In the case of In Precision Fasteners Ltd. v. EPFO [2018] 97 taxmann.com 493 (NCLT-Mum.), the NCLT the observed that the EPF dues owed by the employer must be considered the first charge on the assets of the corporate debtor. The EPF Act is a social welfare legislation designed to protect the weaker sections of society, as enshrined in the Directive Principles of the Constitution of India. In contrast, the rights of other creditors over the company's assets are property rights, while workmen's dues, especially PF dues, are intertwined with the right to life under article 21 of the Constitution.
The Workmen save a portion of their hard-earned income for their later years after retirement. If these sums are equated with the debts of the company's creditors, secured or unsecured, it would dilute the most valuable and inalienable right of an individual in favour of a property right subordinate to the right to life. Workmen typically rely on their earnings after retirement, and if the realization of these dues is in jeopardy, how can they survive and sustain themselves in their old age. By that time, their lives have already become vestigial. They cannot rely on courts to recover these sums. The law cannot and should not be this way. The EPF Act has been strengthened from time to time, and under the IBC, PF, pension, and gratuity fund dues have been removed from the spectrum of liquidation estate assets by mandating that these dues be treated as an asset of the workman in the possession of the corporate debtor. Thus, they are not treated as a claim on par with other creditors. In fact, they are treated as an asset of the workmen that is held by the corporate debtor.
Jet Airways Case (Settling the Dust)
This case involves a situation where a resolution plan has been approved, and it is not a case of liquidation. As per the provisions of the 1952 Act, the Corporate Debtor is obligated to deposit the provident fund of its employees with the EPFO. However, the Corporate Debtor did not deposit any amount towards provident fund contributions after February 2019. Since the insolvency commencement date was on 20 June 2019, the Corporate Debtor was required to deposit the contribution towards the provident fund with the EPFO. The Resolution Professional admitted the claim of the workmen for a period of 24 months, which included the provident fund and gratuity amount. Under the Resolution Plan, the workmen received partial payments for provident fund and gratuity, subject to the liquidation value of the workmen.
The issues were whether the workmen and employees are entitled to receive the payment of provident fund, gratuity and other retirement benefits in full since they are not part of the liquidation estate under section 36(4)(b)(iii) of the Code and Whether the workmen and employees are entitled to receive their dues from the Corporate Debtor as per the provisions of the Code i.e. the minimum liquidation value envisaged under Section 30(2)(b) by referring to waterfall mechanism provided under section 53(1) of the Code.
The NCLAT held that the workmen are entitled to appropriate directions to be issued to the Successful Resolution Applicant to make payment for the provident fund and gratuity dues of the workmen, up to the date of insolvency commencement, less the amount already received under the Resolution Plan. The Corporate Debtor did not deposit the statutory dues with the EPFO, and therefore, the Successful Resolution Applicant is required to discharge the said statutory liability.
Section 36(4)(a)(iii) of the Code specifically pertains to liquidation, its purpose is also reflected in Section 18 of the Code, which outlines the duties of the IRP. If a Corporate Debtor maintains a fund for the payment of provident fund, gratuity fund, and other retirement benefits to its workers and employees, those funds are considered assets that the IRP is required to take control of. However, according to the Explanation to Section 18, the assets comprising provident funds, gratuity funds, or pension funds that belong to the Corporate Debtor but are for the benefit of employees are not to be taken control of by the IRP. Therefore, these funds cannot be included in the Information Memorandum as assets of the Corporate Debtor when inviting a Resolution Plan. It is the responsibility of the Corporate Debtor to fully utilize these funds for the payment of provident fund, pension fund, and gratuity fund to the workmen and employees.
The Resolution Professional has verified and admitted claims from workmen and employees for unpaid salaries, provident fund, gratuity, and leave encashment. The claims admitted by the Resolution Professional include the provident fund, gratuity fund, and leave encashment. However, it is clear that the Corporate Debtor does not maintain any provident fund for the payment of provident fund to its workmen and employees, as the only payment made into the EPFO account was in February 2019. Thus, the claims made by the workmen and employees must be satisfied as per the provisions of the Code, and the Successful Resolution Applicant must pay the balance of the dues for provident fund, gratuity, and other retirement benefits to meet their statutory obligations. Failure to pay these obligations would violate Section 30(2)(e) of the Code and could jeopardize the success of the Resolution Plan.
Conclusion
The employees and workmen are entitled to receive the full amount of provident fund and gratuity that is due up until the date when the insolvency commenced. The Successful Resolution Applicant is responsible for making these payments in addition to the 24 months' worth of workmen dues that are owed to the employees under section 53(1)(b) of the Code. It is important to note that even if the Resolution Plan proposes to pay a partial amount of provident fund and gratuity to the workmen, the Successful Resolution Applicant is still obligated to pay the remaining unpaid balance of provident fund and gratuity to the employees and workmen. Failing to make full payment of provident fund and gratuity would be a violation of section 30(2)(e) of the Code, which could lead to the plan being deemed non-viable. Therefore, it is imperative that the Successful Resolution Applicant have to perform their statutory obligations by making full payment of the provident fund and gratuity to the employees and workmen.
References
Insolvency and Bankruptcy Code, 2016
Employees' Provident Funds and Miscellaneous Provisions Act, 1952
Payment of Gratuity Act, 1972
The SEBI noticed that efficient and effective responses to and recovery from a cyber-incident by REs are essential to limit any related financial stability risks. For ensuring the same, Financial Computer Security Incident Response Team (CSIRT-Fin) has provided important recommendations to SEBI.
The compliance of the advisory shall be provided by the REs along with the cybersecurity audit. The compliance shall be submitted according to the existing reporting mechanism and frequency of the respective cybersecurity audit. The applicable recommendations in the form of advisory are enclosed in Annexure-A attached to the circular.
REs are advised to define the roles and responsibilities of the Chief Information Security Officer (CISO) and other senior personnel. Reporting and compliance requirements shall be clearly specified in the security policy.
The SEBI has also prescribed measures for Data Protection and Data breaches. Some of them are
(a)?REs are advised to prepare a detailed incident response plan.
(b)?Enforce effective data protection, backup, and recovery measures
(c)?Encryption of the data at rest should be implemented to prevent the attacker from accessing the unencrypted data.
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(d)?Identify and classify sensitive and Personally Identifiable Information (PII) data and apply measures for encrypting such data in transit and at rest
(e)?Deploy data leakage prevention (DLP) solutions / processes.
Further, a Strong password policy should be implemented. The policy should include a clause for periodic review of accounts of ex-employees Passwords should not be reused across multiple accounts or a list of passwords should not be stored on the system.
Also, the REs are also advised to go for ISO certification as the same provides a reasonable assurance on the preparedness of the RE with respect to cybersecurity. Due diligence with respect to the audit process and tools used for such audits needs to be undertaken to ensure the competence and effectiveness of audits.
The Hon’ble PM of India and Singapore witnessed the launch of cross-border linkage between India and Singapore using their respective Fast Payment Systems, viz. Unified Payments Interface (UPI) and PayNow. This linkage will enable users of the 2 fast payment systems in either country to make convenient, safe, instant, & cost-effective cross-border funds transfer using their respective mobile apps.
Currently, the SBI, IOB, Indian Bank and ICICI Bank will facilitate both inward and outward remittances while Axis Bank and DBS India will facilitate inward remittances. For Singapore users, the service will be made available through DBS-Singapore and Liquid Group (a non-bank financial institution).
Further, customers of the above participating banks can undertake cross-border remittances to Singapore using the bank’s mobile banking app / internet banking. To begin with, an Indian user can remit up to ?60,000 in a day (equivalent to around SGD 1,000).
In the UPI-PayNow linkage transactions, only person to person (P2P) remittances towards the purpose of “Maintenance of Relatives Abroad†& “Gift†under the Liberalised Remittance Scheme (LRS) are allowed, and the prescribed LRS limits would be applicable.
Also, at the time of making the transaction, the system shall dynamically calculate and display the amount in both the currencies for convenience of the user.
That’s it from us for today! Stay Tuned for more updates from?Taxmann.com.
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