ESI Contributions Held in Trust for Employees: NCLAT Chennai Excludes Them from IBC Liquidation Estate
Background and Context
The intersection of employee welfare legislation and insolvency law has long been a contested terrain in Indian jurisprudence. A significant ruling by the Chennai Bench of the National Company Law Appellate Tribunal (NCLAT) in Nurani Subramanian Suryanarayanan Vs Employees State Insurance Corporation & Ors. has now clarified an important question: whether unpaid ESI contributions deducted from employees' wages can be drawn into the liquidation estate of a corporate debtor under the Insolvency and Bankruptcy Code, 2016.
The Tribunal dismissed the appeal filed by the Liquidator of M/s. Care IT Solutions Pvt. Ltd., upholding the order of the National Company Law Tribunal (NCLT), Chennai Bench, dated 31 December 2019 passed in MA No. 268/IB/2019 in CP/1056/IB/2018. The ruling reinforces the protective character of the Employees' State Insurance Act, 1948 and its relationship with the exclusion provisions under Section 36(4) of the Insolvency and Bankruptcy Code, 2016.
The Core Dispute: What Was the Liquidator Seeking?
The Liquidator of M/s. Care IT Solutions Pvt. Ltd. approached the NCLT under Section 60(5)(b)(c) read with Section 25(a) of the Insolvency and Bankruptcy Code, 2016, seeking removal of an attachment that the Employees State Insurance Corporation (ESIC) had placed on immovable property belonging to the corporate debtor.
The Liquidator's objective was straightforward: by lifting the attachment, the property could be auctioned and the proceeds distributed among creditors as part of the liquidation process. The NCLT declined to grant this relief, and the Liquidator appealed to the NCLAT Chennai Bench.
The central legal question before the Appellate Tribunal was:
Can ESI contributions — deducted from employees' wages by the employer — form part of the liquidation estate of the corporate debtor, or are they excluded from it as assets held in trust for third parties?
The Liquidator's Arguments
The Liquidator advanced two principal contentions before the Appellate Tribunal:
Argument 1: Section 36(4) Does Not Expressly Cover ESI Contributions
The Liquidator argued that Section 36(4) of the Insolvency and Bankruptcy Code, 2016 specifically enumerates certain employee-benefit funds — such as provident fund, pension fund, and gratuity — that are excluded from the liquidation estate. Since ESI contributions are not expressly named in this provision, the legislature's deliberate omission must be respected. Courts, the Liquidator contended, cannot expand the statutory list through interpretation.
To bolster this position, the Liquidator referred to the deliberations of the Joint Parliamentary Committee on the Insolvency and Bankruptcy Code, 2015, and discussions in the Lok Sabha on 20 April 2016, arguing that the omission of the ESI Act from the exclusion list was intentional.
Argument 2: Section 94 of the ESI Act Supports Inclusion in the Liquidation Estate
The Liquidator further relied on Section 94 of the Employees' State Insurance Act, 1948, which reads as follows: