Employees’ Provident Fund dues of workmen should be paid in priority to all other debts by employer during liquidation: SC of India

In EPF Commissioner v. Official Liquidator of Esskay Pharmaceuticals Ltd., the SCI (G.S. Singhvi and H. L. Dattu, JJ.) examined whether priority given to the dues payable by an employer under Section 11 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (‘EPF Act’) is subject to Section 529A of the Companies Act, 1956 (‘Companies Act’) in terms of which the workmen’s dues and debts due to secured creditors are required to be paid in priority to all other debts.

Relevant extracts from the judgment:

  1. Any EPF contributions made by an employee creates  first charge over the assets of the establishment and should be paid in priority to all other debts: “18. An analysis of Section 11 of the EPF Act shows that it gives statutory priority to the amount payable to the employees over other debts … Section 11(2) contains a non obstante clause and lays down that if any amount is due from an employer whether in respect of the employee’s contribution deducted from the wages of the employees or the employer’s contribution, the same shall be deemed to be the first charge on the assets of the establishment and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority to all other debts. To put it differently, sub-section (2) of Section 11 not only declares that the amount due from an employer towards contribution payable under the EPF Act shall be treated as the first charge on the assets of the establishment, but also lays down that notwithstanding anything contained in any other law, such dues shall be paid in priority to all other debts.”
  2. Nature of EPF Act: “22. The EPF Act is a social welfare legislation intended to protect the interest of a weaker section of the society, i.e. the workers employed in factories and other establishments, who have made significant contribution in economic growth of the country. The workers and other employees provide services of different kinds and ensure continuous production of goods, which are made available to the society at large. Therefore, 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.”
  3. ‘Apparent Conflict’ between and Object of EPF Act and Companies Act amendments regarding workmen’s dues: Subsequently, the Court examined the purport of the creation of a priority payment of dues to workmen in light of both Section 11 of EPF Act and Section 529A of the Companies Act and the conflict in non-obstante clauses in both the provisions. Rejecting the argument that the subsequent legislation having the non-obstanteclause will take precedence over the other, it entered into an interpretative exercise to examine the object behind both the provisions and found that -
    • “36. … the object of the amendment made in the EPF Act was 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. As against this, the amendments made in the Companies Act in 1985 are 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. 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, … and debts due to the secured creditors.
  4. Interpretation when conflict between two special statutes: “38. … if two special enactments contain provisions which give overriding effect to the provisions contained therein, then the Court is required to consider the purpose and the policy underlying the two Acts and the clear intendment conveyed by the language of the relevant provisions.”
  5. Finally, finding that there was no conflict between both the provisions, the Court held that – the provision regarding payment of PF etc. to workmen in priority to all other dues already existed in Companies Act before the amendment to Section 11 of EPF Act, that created a first charge over the employer’s assets for any amount due in favour of employees’ contributions.
    • “43. … However, while inserting Section 529A in the Companies Act … [the] Parliament, in its wisdom, did not declare the workmen’s dues (this expression includes various dues including provident fund) as first charge. 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 Companies Act.”
This judgment clarifies various points of law with regard to interpretation of conflicting provisions in special enactments, and more importantly the preferential payment of workmen’s dues over all other debts during winding up of a company.

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