Non-payment of full PF and gratuity dues to employees in a successful resolution applicant would be a non-compliance of the IBC

Recently, the National Company Law Appellate Tribunal (NCLAT) on February 8, held that non-payment of full provident fund (PF) and gratuity dues to workmen and employees by a successful resolution applicant under the Insolvency and Bankruptcy Code of 2016 (IBC) would be considered as non-compliance with the provisions of the IBC. Additionally, the judgment stated that non-payment of such PF and gratuity dues, or allocating only a partial amount for such dues, also breached the provisions of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act) and the Payment of Gratuity Act, 1972 (Gratuity Act).

The NCLAT was hearing a batch of appeals filed by workers and employees of Hindustan Newsprint Limited (HNL) challenging a January 2021 order of the National Company Law Tribunal, Kochi Bench. The workers and employees had sought the protection of their provident fund (PF) and gratuity entitlements during the insolvency resolution process of HNL, and the NCLAT was considering their appeals in this matter.

The Kochi Bench of the National Company Law Tribunal had approved a resolution plan for HNL under which only 35.13 percent of the workers' and employees' provident fund (PF) and gratuity claims were admitted.

The workers and employees, who had filed the appeals before the NCLAT, argued that the approved resolution plan was in contravention of the IBC as the resolution professional and the committee of creditors had ignored the provisions of the EPF Act and the Gratuity Act.

The resolution professional and the successful resolution applicant, KIIDC, who were the respondents, argued that the resolution plan for HNL had been approved after a proper application of mind by the adjudicating authority and that it was in compliance with all legal provisions. The respondents also argued that the IBC clearly stated that stakeholders cannot raise any claims if such claims were not part of the approved resolution plan.

The bench held that the adjudicating authority has the power to intervene if an approved resolution plan breaches any provisions of the Insolvency and Bankruptcy Code of 2016 (IBC). It also emphasized that workmen and employees are entitled to payment of the full amount of provident fund and gratuity until the date of the commencement of the insolvency and that such amount must be paid by the successful resolution applicant after the approval of the resolution plan.