The Chennai Bench of the National Company Law Appellate Tribunal (NCLAT) has held that ESI contributions deducted from employee’s wages and payable by the employer under the ESI Act, 1948 are held by the Corporate Debtor in trust for the beneficiaries and fall within the exclusion under Section 36(4)(a)(i) of the IBC. The Tribunal explained that the procedural act of filing a claim in Form-B does not convert a statutory trust amount into an ordinary operational debt of the Corporate Debtor.
The NCLAT clarified that Section 36(4)(a)(iii) of the IBC, which specifically refers to provident fund, pension fund, and gratuity fund, is not the source of the exclusion for ESI contributions; the exclusion flows independently from Section 36(4)(a)(i) read with Section 40(4) of the ESI Act. Hence, ESI contributions cannot be subjected to the waterfall distribution mechanism under Section 53 of the IBC, and a Resolution Plan that treats them as ordinary Government or Operational Creditor dues requiring only a fractional payout is liable to be set aside to that extent.
The Division Bench comprising Justice N. Seshasayee (Judicial Member) and Jatindranath Swain (Technical Member) observed that the issue was no longer res integra and stood squarely covered by its earlier decision in Nurani Subramanian Suryanarayanan, Liquidator of M/s. Care IT Solutions Pvt Ltd. v. Employees State Insurance Corporation [TA (AT) No. 212/2021], wherein the Tribunal considered the interplay between Section 40(4) of the ESI Act, 1948 and Section 36(4)(a)(i) of the IBC, and held that ESI amounts contributed by both employer and employee, lying with the Corporate Debtor, are held in trust and fall within the exclusion under Section 36(4)(a)(i) of the IBC. Such amounts cannot form part of the liquidation estate available for distribution under Section 53 of the Code.
The Tribunal held that the mere fact that ESIC submitted its claim in Form-B and that the claim was consequently described as an Operational Creditor claim cannot alter the substantive character of the amount. The form prescribed for submission of a claim is procedural in nature and cannot have the effect of converting an amount statutorily required to be held for the benefit of employees into an asset beneficially belonging to the Corporate Debtor. Consequently, the Respondents’ estoppel argument based on Form-B filing was rejected.
The Tribunal further held that the contention regarding Section 36(4)(a)(iii) specifically mentioning provident fund, pension fund, and gratuity fund does not advance the Respondents’ case. The exclusion flows from the independent operation of Section 36(4)(a)(i), when the statutory character of the ESI contribution is examined in light of Section 40(4) of the ESI Act, 1948. The ESI contributions, being amounts held by the Corporate Debtor in trust for the beneficiaries under the ESI Act, do not constitute part of the assets of the Corporate Debtor and cannot be subjected to distribution under the waterfall mechanism in Section 53 of the IBC.
Briefly, the Employees’ State Insurance Corporation (ESIC) filed an appeal against the approval of a Resolution Plan by the NCLT, Amaravati Bench, in the CIRP of M/s. Sri Lakshmi Srinivasa Jute Mills Private Limited. The Corporate Debtor operated four units covered under the ESI Act, 1948, and had accumulated unpaid statutory ESI contributions of Rs. 13.38 crores for the period 2012–2018. CIRP commenced on March 16, 2022, and Shri Maligi Madhusudhana Reddy was appointed as the IRP and later confirmed as the Resolution Professional (RP).
ESIC filed its claim in Form-B on April 07, 2022, as an Operational Creditor. The CoC approved the Resolution Plan submitted by M/s. Agrigo Trading Private Limited (the Successful Resolution Applicant) with 100% voting share on July 30, 2022, involving a total plan value of Rs. 21.51 crores. The NCLT approved the plan on Sep 01, 2022. Under the approved plan, ESIC’s admitted claim of Rs. 13.38 crores were treated as ordinary Government Dues/Operational Creditor dues, and only 1% was allowed. ESIC challenged this treatment.
