NCLAT Rules ESI Contributions as Trust Assets, Excluded from Liquidation Estate
Appellate Tribunal affirms ESI dues held in trust, setting aside previous order under the Insolvency and Bankruptcy Code
In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) at its Principal Bench in New Delhi has pronounced that the Employees' State Insurance (ESI) contributions, which are held by the Corporate Debtor, should be treated as assets held in trust. These contributions do not form part of the liquidation estate under the Insolvency and Bankruptcy Code (IBC), 2016.
The ruling came in the case of "Regional Director, ESI Corporation v. Manish Kumar Bhagat, Liquidator, Gupta Dyeing & Printing Mills Pvt Ltd.", where the ESI Corporation had appealed against an order dismissing their application to keep ESI dues out of the liquidation estate of the corporate debtor. The appeal was heard by a bench comprising Justice Rakesh Kumar Jain, Justice Mohammad Faiz Alam Khan, and Naresh Salecha.
The Tribunal underscored that, in accordance with Section 36(4)(a)(i) of the IBC, the ESI contributions made by both the employer and employee are to be considered assets held in trust. These contributions, therefore, cannot be included in the liquidation estate of the corporate debtor. The Tribunal's decision aligns with the precedent set in the case of Nurani Subramanian Suryanarayanan, where similar issues were adjudicated.
The Tribunal highlighted that the liquidator had erred in treating the ESI dues as claims of operational unsecured creditors. Instead, these dues should have been excluded from the liquidation estate, acknowledging their distinct statutory status under Section 40(4) of the ESI Act, 1948.
Despite the liquidator admitting the claim of Rs. 1,20,80,940 under operational creditors, the Tribunal clarified that the liquidator's role and powers are guided by the IBC, which does not categorize ESI dues as workmen dues for liquidation purposes, unlike provident fund and gratuity.
The judgment also distinguished the present case from other Supreme Court decisions cited by the respondents, asserting that those cases did not address the issue of ESI dues specifically.
In conclusion, the NCLAT allowed the appeal, set aside the prior order, and reaffirmed the status of ESI contributions as trust assets, thereby not forming part of the liquidation estate. The parties involved were directed to bear their own costs, and any pending applications were closed.
Bottom Line:
Under the Insolvency and Bankruptcy Code, 2016, ESI dues contributed by the employer and employee lying with the Corporate Debtor are considered as assets held in trust and do not form part of the liquidation estate under Section 36(4)(a)(i).
Statutory provision(s): Insolvency and Bankruptcy Code, 2016 Section 36(4)(a)(i), Employees' State Insurance Act, 1948 Section 40(4)
