India: Insolvency & Bankruptcy Code: Government Entities Bound By Provisions Of Resolution Plan Thus Forbidden From Initiating/continuing Proceedings Not Forming A Part Of The Plan

Introduction

In a recent decision¹, the National Company Law Appellate Tribunal, Chennai Bench (NCLAT) held that the claims as provided in the resolution plan shall stand frozen and will be binding on the corporate debtor and its stakeholders, including the Central Government/State Government/local authorities. The NCLAT held that no person will be entitled to initiate any proceedings regarding a claim that is not part of the resolution plan approved by an adjudicating authority.

Facts

The NCLT, Chennai (NCLT) initiated corporate insolvency resolution process (CIRP) against GVR Infra Projects Limited (CD). As per the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC), the public announcement was made by the interim resolution professional (IRP) of the CD.

The Regional Provident Commissioner, EPFO (Appellant), filed its claim with the IRP in Form ‘F'. After the appointment of the Resolution Professional (Respondent No.1/RP), the IRP forwarded the Form ‘F' filed by the Appellant to the RP. The RP informed the Appellant to submit its claim in Form ‘B' again. The Appellant filed its claim in Form ‘B' again with the RP under protest, along with all supporting documents.

After verifying the claim, the RP informed the Appellant that the claim was admitted and will be paid when the successful resolution applicant takes over the CD. Upon further clarifications being sought, the RP informed the Appellant that as per the resolution plan of UV Asset Reconstruction Company Limited (Respondent No.2) approved by the NCLT, a major portion of the provident fund dues owed by the CD to the Appellant were waived.

Aggrieved by the order of the NCLT approving the resolution plan, which waived off a major portion of the provident fund dues owed by the CD to the Appellant, the Appellant filed an appeal before the NCLAT and claimed an increased amount as its claim.  

Contentions of the Appellant

The Appellant argued that the waiving off the provident fund dues was in violation of Section 11 of the Employees Provident Fund Act (EPF Act) which lays down the priority of charge of provident fund dues. Further, the same is in violation of Section 36(4)(a)(iii) and Section 30(2)(e) of the IBC which lays down the provident fund dues to be outside the ‘liquidation estate'.

It was argued that the NCLT failed to consider and appreciate the legislative intent behind the exclusion of the provident fund dues form the liquidation estate of the CD. The provident fund dues ought to be given priority over all other dues owed by the CD². The Appellant further relied upon Section 11 (non-obstante) of the EPF Act to argue that any dues from the employer in respect of employees contribution deducted from the wages of employees, shall be deemed to be a first charge on the assets of the establishment and that it shall have priority over all other debts.

Contentions of the Respondents

The claim filed by the Appellant in Form ‘B' was duly verified and admitted in full. The RP after taking into consideration all the claims of the stakeholders, including that of the Appellant, submitted its resolution plan approved by the NCLT³ and a Monitoring Committee was constituted, with the RP appointed as the Monitoring Agent.

Despite the treatment that has been accorded to the Appellant under the resolution plan, the Appellant raised its claim from its initial claim amount, which was without any basis/justification. The Appellant was aware that the dues for which the claim was filed with the RP cannot be enhanced at a belated stage.

The reliance of the Appellant on Section 36(4)(a)(ii) of the IBC would arise only when there is a formation of the liquidation estate, and that it shall not be applicable in the present matter as the CD did not go into liquidation and is currently under the process of implementation of the resolution plan. As per Section 31 of the IBC, the resolution plan is binding on the corporate debtor, stakeholders and all other statutory authorities (including the Appellant) to whom the CD owes any debt and that no preferential treatment can be given to any creditor.

NCLAT's decision

The NCLAT relying upon the Essar Steel⁴ judgment, observed that a successful resolution applicant cannot be suddenly faced with undecided claims after the resolution plan has been approved by the NCLT and hence the increased claim of the Appellant shall not hold any ground.

It was observed that the question of applicability of Section 36(4)(a)(ii) of the IBC shall not arise as the CD has not entered liquidation and neither has a liquidation estate been created. A comparison was drawn in regard to Section 14B of the EPF Act, where the Central Board may reduce or waive the damages levied in relation to the establishment (a sick company) in respect of a scheme for rehabilitation that has been approved by the BIFR; and the scope of IBC to justify the aspect of reducing or waiving off the damages levied by a sick industrial company or establishment. The NCLAT observed that this practice of waiving off the damages levied upon a sick industrial company/corporate debtor, was being performed by the Central Board under Section 14B of the EPF Act before the coming into effect of the IBC and reviving the process of rehabilitating a sick company.

Relying upon the Supreme Court judgment in Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited,⁵ the NCLAT held that the claims as provided in the resolution plan shall stand frozen and will be binding on the CD and its employees, members, creditors including the Central Government, State Government or any local authority, guarantors and other stakeholders. On the approval of the resolution plan by the NCLT, all claims that are not a part of the resolution plan stall stand extinguished and no person will be entitled to initiate or continue any proceedings regarding a claim that is not a part of the approved resolution plan. Accordingly, the NCLAT dismissed the appeal filed by the Appellant and upheld the decision of the NCLT that approved the resolution plan of Respondent No.2.

Footnotes

1 Regional Provident Commissioner, EPFO v. Vandana Garg & Anr. [Company Appeal (AT) (CH) (Ins.) No. 50 of 2021], decided on May 12, 2021.

2 Section 36 of IBC read with Section 11 of EPF Act.

3 Order dated July 20, 2020 in MA/1433/ 2019.

4 The Committee of Creditor of Essar Steel India Ltd. v. Satish Kumar Gupta [Civil Appeal No. 8766-67 of 2019].

5 Civil Appeal No. 1554 of 2021; 2021 SCC OnLine SC 313.

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