UncategorizedEPF and IBC: Protecting Worker Rights during Corporate Insolvency

Introduction

A corporate entity’s collapse signifies a breach in the implicit social contract between an employer and employee and goes beyond a simple financial catastrophe. The picture of a shuttered industrial plant with rusty gates, quiet interiors, and a calendar stuck in time perfectly conveys how vulnerable employees are to business failure. Formal employment is more than just a means of subsistence for millions of Indians; it is the cornerstone of social dignity, retirement planning, and financial stability. The Employees’ Provident Fund (hereinafter referred to as “EPF”), created by the Employees’ Provident Funds and Miscellaneous Provisions Act of 1952, is a key component of this foundation. The EPF is a type of delayed wage that is legally incorporated into the job relationship and is more than just an employment benefit.

Workers’ social security claims, especially EPF dues, take on a crucial role when a business goes through the Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) or liquidation under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the IBC”). The IBC is a revolutionary economic reform that aims to maximise asset value, treat creditors fairly, and resolve financial crisis within a predetermined amount of time. However, its structure, particularly the moratorium, liquidation waterfall, and claim prioritisation, presents difficult issues regarding the treatment of employee benefits in relation to other claims.

The main question is whether statutory social security benefits can remain separate and protected or be absorbed into the IBC’s creditor hierarchy. While the IBC was designed as a creditor – centric code to enable swift revival or liquidation of distressed entities, it cannot operate in isolation from the broader mandate of social justice enshrined under Articles 21 and 23 of the Constitution of India. Judicial pronouncements such as in the GO First Airlines (Go Airlines (India) Ltd.) 2025 SCC OnLine NCLT 3 have begun to confront this dichotomy, but there remains a pressing need for greater legislative and jurisprudential clarity to ensure that workers’ entitlements are not subordinated in the race to maximise asset value. As India’s insolvency ecosystem matures, it must reconcile economic efficiency with equitable treatment, by safeguarding the deferred wages of workers and ensuring that no resolution plan or liquidation process can nullify the statutory and moral claims of those who form the backbone of enterprise.

EPF Dues in Insolvency

The Employees’ Provident Fund’s legal framework is based on the understanding that social security is a necessary part of work. Employers are now required to deduct and send employer and employee contributions to the fund as a statutory trustee under the EPF Act. This duty is neither optional, nor is it dependent on the employer’s financial standing. Earned in tandem with monthly salary, contributions to the Provident Fund are regarded as deferred wages and are kept in trust for the employee’s benefit. Under the Act, failure to comply with these requirements, whether via deliberate default, omission, or delay, carries penalties that include interest and damages. The Provident Fund Commissioner is authorised by Section 7A to carry out investigations and make legally binding decisions. The EPFO has the right to submit claims for outstanding debts when a corporate debtor joins CIRP. It’s crucial to differentiate these claims from regular debts, though. Commercial transactions do not give rise to claims made under the EPF Act, including those concerning employer payments, employee contributions that are withheld, and accumulated interest or damages. Under the IBC regime, they are shielded by particular exclusions and originate from a statutory trust. In Anuj Bajpai v. Employees’ Provident Fund Organisation, 2024 SCC OnLine NCLAT 886, the National Company Law Appellate Tribunal (hereinafter referred to as “the Hon’ble NCLAT”) firmly ruled that sums owed under the EPF Act should not be included in the corporate debtor’s liquidation estate.

The ruling upheld the idea that since these sums are kept in trust for workers, they are not the company’s property that can be disbursed to creditors.
A significant legal distinction is established by this court interpretation. Provident fund obligations are not subject to the same treatment under the IBC, which mainly handles financial and operational debts resulting from business agreements. The statutory and constitutional protections that the EPF Act affords employees would be compromised if such duties were included into the common creditor framework. Furthermore, it would undermine the fundamental tenet that social security benefits are unassailable and unaffected by changes in the market.

Theoretically and legally, contributions to provident funds are a type of accumulated compensation, or a “invisible paycheque” that builds up gradually during work and matures upon retirement or departure. In addition to breaking the law, failing to defend this right during bankruptcy proceedings also violates the normative trust that ties employers and employees together. It weakens the protective purpose of labour welfare law by turning a protected right into a contingent interest. By guaranteeing that workers’ social security claims are not only recognised but also given priority in both substance and procedure, the legislation must thwart such dilution.

Therefore, it is essential that EPF dues be regarded as inviolable even in cases of insolvency, especially when moratoriums or resolution plans are being developed. Their absence from the liquidation estate reflects a larger constitutional commitment to the dignity of labour rather than being only a procedural aberration. The handling of EPF claims during the approval of resolution plans and within the time frame of the IBC moratorium is still a contentious but crucial axis of Indian insolvency jurisprudence, as the following sections will examine.

Moratorium under the IBC, 2016

A moratorium is imposed under Section 14 of the IBC, 2016 as the first legal consequence of a corporate debtor being admitted into the CIRP  IBC , 2016. By stopping all current and future legal actions against the debtor, this statutory moratorium aims to preserve the status quo. Similar to a court order, it provides a stabilising pause to stop the corporate debtor’s resources from being further depleted while the Committee of Creditorsand Resolution Professionalwork to find a workable restructuring solution. The moratorium serves as a short-term buffer rather than a release from responsibility.

IBC Section 14(1)’s expansive wording has been construed to encompass quasi judicial processes brought about by welfare laws like the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. In KSS Petron Vineet K. Chaudhary v. Regional PF Commissioner, I.A. No. 1694/2020, I.A. No. 1086/2020 , I.A. No. 1089/2020 in CP (IB) No. 1202/MB/CII/2017; the Hon’ble NCLT  upheld that the moratorium extends to proceedings under Section 7A of the EPF Act, which establish the amount of statutory dues. If taken literally, this stops EPFO’s enforcement procedures and stops the payment of dues during CIRP. However, the substantive rights of employees and the employer’s fiduciary duties under the EPF Act are not negated or diminished by such a procedural delay.

The EPFO is still able to submit its claims to the Resolution Professional in spite of the ban. These assertions could be supported by current documentation, earlier evaluations, or preliminary computations. The moratorium does not negate the employees’ statutory rights; rather, it serves as a procedural embargo on adjudicatory action. Despite the temporary inability to enforce through Section 7A or recovery actions, the corporate debtor’s liability and the responsibilities arising under the EPF Act remain intact.

Importantly, only the corporate debtor is protected by the moratorium under Section 14. It excludes the company’s officials, directors, and personal guarantors. Therefore, EPFO may pursue legal action against the specific officers such as directors and promoters who are accountable for the default in cases where employee contributions have been withheld but not remitted. This guarantees that personal accountability is not overshadowed by corporate insolvency and maintains the integrity of the trust relationship as intended under the EPF Act.

It is the duty of Resolution Professionals to include all known liabilities, including EPF dues, in the information memo sent to potential resolution applicants during the moratorium. The fairness and legality of the settlement process may be jeopardised if such statutory responsibilities are not disclosed or are omitted, which can be considered a breach of duty. However, the IBC framework requires the EPFO to act promptly within the allotted time frames. Even if the underlying right is based on moral and statutory authority, it may be extinguished if claims are not filed within the allotted time.

Liquidation Waterfall and the Constitutional Ringfence for Workers

A corporate debtor’s lifecycle legally ends with liquidation under Section 33 of the IBC when the Corporate Insolvency Resolution Process is unsuccessful or resurrection is judged unfeasible. Under the direction of a liquidator, this stage is essential for resolving outstanding liabilities and goes beyond just disposing of assets. Section 53 of the IBC governs the allocation of proceeds, giving insolvency charges priority over worker and employee dues. However, this waterfall only applies to debts that are a part of the liquidation estate; social security dues that are protected by Section 36(4)(a)(iii) are not affected by this limitation.

This clause confirms that provident funds, pensions, and gratuity payments are trust assets held for employees by expressly excluding them from the liquidation estate. This legal protection has been strengthened by judicial clarification in Anuj Bajpai v. EPFO and Moser Baer Karamchari Union v. Union of India, W.P.(C) 1099/2019 which confirmed that such rights are non-negotiable and endure even in the event of the company’s liquidation. Workers do not experience insolvency losses like commercial creditors do; instead, their legal rights are protected and must be paid regardless of the availability of assets. A deeper constitutional spirit is reflected in this ringfencing: even though firms fail, the social security of people who created them must continue.

AMLEGALS Remarks

More than just a legislative overlap, the junction of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Insolvency and Bankruptcy Code, 2016 is a test of how a contemporary legal system strikes a balance between social justice and economic recovery. One thing becomes evident as jurisprudence develops: provident fund contributions and other employee benefits are statutory trusts that must endure the upheaval of insolvency rather than being discretionary burdens. This stance has been consistently upheld by court rulings, guaranteeing that worker welfare is not compromised in the name of business revitalisation.

In aligning commercial resolutions with constitutional morality, Indian insolvency law is maturing into a more equitable framework. The EPF Act’s protections must remain inviolable not only to protect workers’ savings but also to preserve the legitimacy of the insolvency regime itself. A successful insolvency process is not merely one that saves companies, but one that upholds the rights and dignity of those who built them.

– Team AMLEGALS

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