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ABC Ltd. enters CIRP, and claims are invited from creditors. The Provident Fund (PF) authorities submit a claim for ₹5 crore related to unpaid PF contributions. Additionally, the GST Department and Customs authorities submit claims for ₹10 crore and ₹8 crore, respectively, for outstanding dues.
The Resolution Professional (RP) admits the claims but considers them as operational creditors for the purpose of participation in the Committee of Creditors (CoC). The statutory authorities argue that their claims should have priority over other operational creditors, given the nature of the dues.
The issue is further complicated by the fact that some of these dues accrued before the initiation of CIRP, while others accrued during the process. The statutory authorities insist on full recovery, citing that dues owed to them are essential for public welfare and social security.
1. Should statutory authorities like PF, GST, and Customs be treated as operational creditors, or do they hold a higher priority in insolvency claims?
2. How should the RP differentiate between dues incurred before and during CIRP?
3. What is the legal precedence on the treatment of claims by statutory authorities in insolvency cases?
4. Can statutory dues be waived or compromised in resolution plans, or are they sacrosanct?
Discussion Point 1 – Should statutory authorities like PF, GST, and Customs be treated as operational creditors, or do they hold a higher priority in insolvency claims?
Statutory dues are operational creditors only in terms of definition of operational creditors in the Code. The question of priority of dues is a separate question and it can be answered only by looking at the specific provision in the law under which statutory claim is due. If that law creates a statutory first charge, then the priority of a statutory due is determined accordingly. For example, Section 48 of Gujarat VAT Act, on which basis Rainbow Papers was decided. Section 82 of GST Act also provides for first statutory charge of its dues but it is subject to IBC as mentioned therein. It is important to look into the language of each law governing statutory due to determine its priority. Merely because a statutory charge may enjoy a high priority does not mean that character of due undergoes a change. It will still remain as an operational creditor.
Discussion Point 2 – How should the RP differentiate between dues incurred before and during CIRP?
The insolvency Commencement Date is an important date to determine whether it forms part of CIRP cost or not. All statutory dues relating to prior to ICD will not be considered as part of CIRP Cost and will be included in the category of operational creditors upon filing of the claim. This is true for all statutory dues except PF dues and other dues as covered under section 36(4) of the Code. Based on SC judgments, the full amount of PF dues must be provided for in the Plan due to Section 36(4). In one case, where order of NCLT was upheld by NCLAT, the damages under PF Act u/s 14B, which were determined/assessed after the Liquidation date were relegated to be paid in accordance with priority.
Discussion Point 3 – What is the legal precedence on the treatment of claims by statutory authorities in insolvency cases?
As far as PF dues are concerned, Hon’ble SC in Moser Bear clearly laid down that In case of the liquidation of a company under the IBC, the distribution of the assets shall have to be made as per Section 53 of the IBC subject to Section 36(4) of the IBC. This position has been reiterated in Jet Airways judgment also, whereby the Resolution Applicant was called upon to pay PF dues in a CIRP case.
Discussion Point 4 – Can statutory dues be waived or compromised in resolution plans, or are they sacrosanct?
The courts have not given special importance to statutory dues and have treated them like any other operational creditors with the sole exception of PF dues. In the case of PF dues, as stated earlier, it is considered very important, and the Resolution Applicant is expected to ensure full payment of PF dues in the Resolution Plan. In fact, there are many instances where tribunals have also expressed the view that partial payments or settlements in the Resolution Plan violate Section 30(2) of the Code.
Related Issues Raised
Yes, PF dues are payable even on unpaid wages. Such PF are also to be paid on priority. However, wages will have to be paid in accordance with Section 53.
RP has the duty to verify the claim based on records available because many a times, PF Department raises demand based on records of employees available with them and that may be few years old. This exercise must be undertaken, and the amount may be reconciled. RP’s may have to approach NCLT in case PF Department does not cooperate.
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