India: NCLT directs PF to be paid before clearing creditors dues

October 24, 2018


The Government has been working to facilitate the conduct of business in the country, thereby permitting a rapid boost to the Indian economy. Attributable to multiple factors such availability of multiple resources, friendly regulatory mechanism, easy availability of labour, has contributed towards the growth of the industrial sector. Numerous efforts made by the employees of the business corporates have accelerated the pace of development in the nation.

Labour welfare

The Legislature provides an exhaustive framework in order to ensure that the sweat and hard-work put in by the employees is adequately compensated. Other than the basic remuneration, labour laws of India provide certain perks of employment including payment of bonus, gratuity, medical facilities, transport allowance, maternity benefits, etc. One of such benefits is the provision of the provident fund whereby an employee has to pay a certain percentage from his pay and an equal amount is contributed by the employer. The employee becomes entitled to this lump sum amount with interest which is handed over to him/ her at the end of his/ her services from the organization.

Protection of the Labour interest

In order to safeguard the interests on the employees of the insolvent companies, the National Company Law Tribunal- Mumbai Bench (hereinafter referred to as the “NCLT”) directed the priority of payment of provident funds against the unpaid dues of the creditor vide order dated September 12, 2018.[1]

In the matter aforesaid, relief has been sought against the custodian of the provident fund and pension fund of the corporate debtor – Precision Fasteners Ltd. in furtherance of the attachment of assets made under the provisions of Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. The Committee of the creditors approved the resolution plan and the corporate debtor went under liquidation.

NCLT observed that any amount due to the workmen/ employees from the provident fund/ pension fund or gratuity is not included within the purview of liquidation asset and under the operation of law, provident fund payable are the deemed assets of workmen/ employees. Also, the said amount is not covered under the general term of workmen dues.

It has been clarified that provident fund dues are excluded from the liquidation assets enabling the workmen/ employees to realize their savings as well as the employer’s contributions as a part of their fundamental right to life while the right of the creditors is merely a property right. Therefore, the dues in respect of provident/ pension/ gratuity shall not be considered as liquidation asset to be made the provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) applicable.

While IBC aims at maximization of the assets in a time-bound manner protecting the rights of the creditors against unscrupulous debtors, the regulatory bodies such as NCLT are working with the objective of balancing the interests of the creditors without jeopardizing the needs of the labour.


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