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EPF to have priority in case of winding up- Supreme Court

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Abhishek Singh

Employees Provident Fund Commissioner Vs. O.L. of Esskay Pharmaceuticals Limited

 

Date of judgment: 08.11.2011

 

Brief facts:

 

Messrs Esskay Pharmaceuticals Limited falls within the definition of ’employer’ under Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act“). On account of the company’s failure to pay the dues under the EPF Act, the competent authority passed orders under Section 7A of the EPF Act and held that it was liable to pay Rs. 14,96,751. The Company failed to discharge its liabilities under the said order.  In the meantime, winding up order was passed against the company and official Liquidator was appointed.

 

The Appellant then approached the official Liquidator for payment of the amount determined under Section 7A of the EPF Act, but the latter did not give any response. Aggrieved by this, the Appellant filed an application before the Company judge for issue of a direction to the Official Liquidator to pay the amount payable by the employer under the EPF Act. However, the Application was dismissed.  The Appellant filed an appeal before the High Court. The High Court ruled against the Appellant by holding that learned Company Judge did not commit any error by dismissing the application filed by the Appellant. The High Court ruled that statutory priority given to the dues of the employees under Section 11(2) of the EPF Act cannot override the priority given to the dues of workers and secured creditors under Section 529A(1) of the Companies Act.   Hence, the present appeal.

 

Issue:

 

Whether the provident dues under section 11 of the EPF Act be given priority over all other dues in view of Section 529A of the Companies Act, 1956 (“Act“) which provides that the workmen’s dues and debts due to secured creditors shall have pari passu priority over all other debts.

 

Section 529-A of the Companies Act provides that “notwithstanding anything contained in any other provision of this Act or any other law for the time being in force”, in case of a winding up, the workmen’s dues and debts due to secured creditors shall be paid in priority to all debts.

 

Section 11(2) of the EPF Act provides that amounts due under that Act from an insolvent employer shall be deemed to be a first charge and be paid in priority to all other debts “notwithstanding anything contained in any other law for the time being in force.

 

Observations :

 

  1. Section 11 of the EPF Act gives statutory priority to the amount payable to the employees over other debts.
  2. Section 11(2) of the EPF Act declares that the amount due from an employer towards contribution payable under the EPF Act will be the first charge on the assets of the establishment, and have priority over all other debts. Further, it lays down that notwithstanding anything contained in any other law, such dues shall be paid in priority to all other debts.
  3. Section 529-A of the Companies Act also contains a non obstante clause and declares that the workmen’s dues and debts due to secured creditors will be paid in priority to all debts.  but in construing the provisions thereof, it is necessary to determine the purport and object for which the same was enacted.
  4. Thus, both section 11(2) of EPF Act and section 529A of the Act contains non-obstante clause.  The Apex Court observed that it is a settled principle of interpretation that every part of the statute must be interpreted keeping in view the context in which it appears and the purpose of legislation.
  5. If two special enactments contain provisions which give overriding effect to the provisions contained therein, then the Court must consider the purpose and the policy underlying the two Acts and the clear intention conveyed by the language of the relevant provisions.  The interpretation of non obstante clause must be kept confined to the legislative policy. A non obstante clause must be given effect to, to the extent Parliament intended and not beyond the same.
  6. The Apex Court applied the above principles of interpretation in the present matter and looked into the purpose underlying the two enactments.  The Apex Court observed that:

 

 

 

i.         The EPF Act is a social welfare legislation intended to protect the interest of a weaker sections of the society. A legislation made for their benefit must receive a liberal and purposive interpretation keeping in view the Directive Principles of State Policy contained in Articles 38 and 43 of the Constitution.

 

 

 

ii.         In terms of Section 529 of the Act, as it stood prior to 1985 amendment, the dues of the workmen were not treated pari passu with the secured creditors.  This led to various instances, during liquidation of a company, where the workers were not left with anything after discharging the debts of the secured creditors. It was only with a view to bring the workmen’s dues pari passu with the secured creditors, that Section 529-A was enacted.

 

 

 

iii.         The 1973 amendment in the EPF Act intended to treat the dues payable by the employer as first charge on the assets of the establishment and to ensure that the same are recovered in priority to other debts. Whereas, the 1985 amendment in the Act  intended to create a charge pari passu in favour of the workmen on every security available to the secured creditors of the company for recovery of their debts. However, there is nothing in the language of Section 529A which may give an indication that legislature wanted to create first charge in respect of the workmen’s dues.

 

 

iv.         The Parliament by 1985 amendment to the Act defined the term ‘workmen’s dues’ and placed it at par with debts due to secured creditors. However, these amendments, though subsequent in point of time, cannot be interpreted in a manner which would result in diluting the mandate of Section 11(2) of the EPF Act which declares that the amount due from an employer will be the first charge on the assets of the establishment and will be paid in priority to all other debts.

 

Decision:

 

 

The effect of the amendment made in the Companies Act in 1985 is only to expand the scope of the dues of workmen and place them at par with the debts due to secured creditors and there is no reason to interpret this amendment as giving priority to the debts due to secured creditor over the dues of provident fund payable by an employer. Of course, after the amount due from an employer under the EPF Act is paid, the other dues of the workers will be treated at par with the debts due to secured creditors and payment thereof will be regulated by the provisions contained in Section 529(1) read with Section 529(3), 529A and 530 of the Act. While inserting Section 529A in the Act Parliament did not declare the workmen’s dues (which include provident fund dues) as first charge. The mere ranking of the dues of workers at par with debts due to secured creditors cannot lead to an inference that Parliament intended to create first charge in favour of the secured creditors and give priority to the debts due to secured creditors over the amount due from the employer under the EPF Act. This interpretation is consistent with the objectives of the EPF Act and the directive principles.

 

 

Comments: Besides the issue of interpretation of “non-obstante clause” in two similar enactments, this judgement is also welcome from socio-economic point of view.   It cannot be overemphasised that provident fund, gratuity and pension are instruments of social security post-retirement/superannuation be.  They are the hard earned savings of the workmen, the fruits of which are to be enjoyed when they retire from work life.  If during the liquidation of a company, these dues are not given priority, the workmen will lose their hard earned savings without any fault on their part.  This judgement is evidence in itself that the Apex Court has consistently interpreted social welfare legislations to advance the cause of the weaker sections of the society.


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