Treatment of Provident Fund Interest and Damages in CIRP: Supreme Court Clarifies Position Under IBC

1. Overview

The Supreme Court in Employees Provident Fund Organisation v. Rachna Jhunjhunwala (2026) 193 SCL 745; (2026) 188 taxmann.com 1076 (Supreme Court) has clarified how interest and damages under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) are to be dealt with when a corporate debtor is under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

The core issue before the Court was:

  • Whether amounts claimed towards interest under Section 7Q and damages under Section 14B of the EPF Act, which had not been determined or crystallized before commencement of the Corporate Insolvency Resolution Process (CIRP), must compulsorily be provided for in an approved resolution plan.

The Supreme Court held that:

  • While actual provident fund dues are carved out from the liquidation estate under Section 36(4)(a)(iii) of the IBC,
  • Uncrystallized interest and damages under Section 7Q and Section 14B of the EPF Act, where proceedings were not initiated and concluded prior to CIRP commencement, are in the nature of contingent liabilities.

Accordingly:

  • The Committee of Creditors (CoC), acting within its commercial judgment, may provide a lump sum buffer for such contingent liabilities,
  • But failure to make such a provision does not, by itself, invalidate the resolution plan, so long as the plan otherwise satisfies the statutory prescriptions of the IBC.

Relying substantially on the principle articulated in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019) 111 taxmann.com 234; (2020) 8 SCC 531 (Supreme Court), the Court emphasised that a successful resolution applicant must have clarity regarding the full extent of obligations it will assume under the approved resolution plan. Consequently, the appeal of the Employees Provident Fund Organisation (EPFO) was dismissed.

2.1 Relevant Provisions of the IBC

The judgment involved interpretation primarily of:

  • Section 30 of the IBC – dealing with submission and content of the resolution plan; and
  • Section 36 of the IBC – defining the liquidation estate and assets to be excluded from it.

2.1.1 Section 30 – Resolution Plan Requirements

Section 30 lays down:

  • The manner in which a resolution applicant submits a resolution plan,
  • The conditions and mandatory contents which the resolution professional and the Adjudicating Authority must examine, and
  • The requirement that the plan must comply with provisions of the IBC and be approved by the CoC in accordance with prescribed voting thresholds.

If a plan does not adhere to Section 30(2), the Adjudicating Authority can refuse its approval; however, its scope of review is limited and does not extend to re‑evaluating the commercial wisdom of the CoC.

2.1.2 Section 36 – Liquidation Estate and Exclusions

Under Section 36, the liquidator forms and holds the liquidation estate in trust for the benefit of creditors. This estate consists of the assets of the corporate debtor that can be used for distribution in liquidation.

Crucially, certain categories of assets are excluded from this estate and cannot be used for recovery, including:

  • Assets owned by a third party that are with the corporate debtor merely in possession, such as:
    • Assets held in trust for another,
    • Assets under bailment contracts,
    • Assets covered by contractual arrangements where only use, and not transfer of title, is contemplated;
  • All sums due to any workman or employee from:
    • The provident fund,
    • The pension fund, and
    • The gratuity fund; and
  • Other classes of assets that may be notified by the Central Government in consultation with an appropriate financial sector regulator.

The present controversy centred on how this exclusion for “all sums due…from the provident fund” interacts with interest and damages under the EPF Act that are not yet adjudicated or quantified at the time of commencement of CIRP.

2.2 Provisions of the EPF Act Considered

The Supreme Court analysed two major provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952:

2.2.1 Section 7Q – Statutory Interest

Section 7Q mandates that:

  • The employer is liable to pay simple interest at 12% per annum, or a higher rate as may be specified in the Scheme,
  • On any amount due from him under the Act,
  • From the date the amount became due until the date of actual payment.

The higher rate that may be specified in the Scheme cannot exceed the lending rate of interest charged by any scheduled bank.

In substance, Section 7Q imposes a statutory obligation to pay interest for delayed remittance of EPF dues.

2.2.2 Section 14B – Damages