NCLAT Rules ESI Dues as Trust Property, Excluded from Corporate Debtor's Liquidation Estate

NCLAT Rules ESI Dues as Trust Property, Excluded from Corporate Debtor's Liquidation Estate

Introduction

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has held that ESI amounts are "trust property" and not part of the corporate debtor's liquidation estate. The appeal was filed by the Regional Director, ESI Corporation, against the decision of the adjudicating authority.

Factual Background

The liquidator had admitted the ESI claim of Rs. 1.20 Cr. by categorizing it as an operational creditor. The appellant contended that the adjudicating authority erred in ignoring the provision of Section 36(4)(a)(i) of the IBC, which lays down that assets in trust of any third party with the corporate debtor don't become part of the liquidation estate.

Procedural Background

The appellant relied on the decision of Nurani Subramanian Suryanarayanan vs. Employees State Insurance Corporation, wherein the appellate tribunal held that the amount of ESI lying with the corporate debtor in liquidation is in trust in view of Section 40(4) of the ESI Act, 1948. The respondent argued that the amount of the claim was admitted by the liquidator as an operational creditor.

Issues

1. ESI Dues as Trust Property: Whether ESI amounts contributed by the employer and employee are trust property and excluded from the corporate debtor's liquidation estate.

2. Applicability of Section 36(4)(a)(i) of IBC: Whether the provision applies to ESI dues.

Contentions of the Parties

Appellant's Contentions:

• The adjudicating authority erred in ignoring Section 36(4)(a)(i) of the IBC.
• ESI amounts are held in trust, and the corporate debtor is merely a trustee.

Respondent's Contentions:

• The amount of the claim was admitted by the liquidator as an operational creditor.
• The ESI dues should be treated as part of the liquidation estate.

Reasoning & Analysis

The bench of Justice Rakesh Kumar Jain (Member-Judicial), Justice Mohammad Faiz Alam Khan (Member-Judicial), and Naresh Salecha (Member-Technical) observed that the scenario at hand is squarely covered under the Nurani Subramanian case, wherein it was observed that the ESI amount, contributed both by the employer and employee, lying with the CD/Company in liquidation, is in trust in view of Section 40(4) of the ESI Act, 1948. Therefore, the provisions of Section 36(4)(a)(i) of the IBC shall squarely apply.

Decision

The NCLAT allowed the appeal, holding that ESI dues do not form part of the liquidation estate for distribution under Section 53 of the IBC.

Implications

The decision clarifies that ESI amounts are trust property and not part of the corporate debtor's liquidation estate, ensuring priority for employees' and employers' contributions.

In this case the appellant was represented by Mr. Manav Goyal, Mr. Vaibhav Manu Srivastava and Ms. Amrita Sony, Advocates. Meanwhile the respondent was represented by Mr. Kritiman Singh, Sr. Advocate with Mr. Sahil Sood, Advocates for R-1 and Ms. Shruti Shivkumar, Advocate for Intervenor.