ESI Contributions Constitute Trust Property and Not Part of Corporate Debtor’s Liquidation Estate
- REEDLAW
- Oct 8
- 3 min read
REEDLAW Legal News Network reports: In a pivotal ruling, the National Company Law Appellate Tribunal (NCLAT) held that Employees’ State Insurance (ESI) contributions deducted from employees’ wages were held in trust by the Corporate Debtor and thus excluded from the liquidation estate. The Tribunal clarified that under Section 36(4)(a)(i) of the Insolvency and Bankruptcy Code, 2016, such statutory deductions, being trust property, cannot be treated as assets available for distribution during liquidation.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Rakesh Kumar Jain and Justice Mohammad Faiz Alam Khan (Judicial Members) and Mr. Naresh Salecha (Technical Member), while adjudicating a Company Appeal and connected Interlocutory Applications, held that the Employees’ State Insurance (ESI) contributions deducted from employees’ wages are held in trust by the Corporate Debtor and therefore do not form part of the liquidation estate under Section 36(4)(a)(i) of the Insolvency and Bankruptcy Code, 2016. The Tribunal emphasised that amounts deducted from employees’ salaries must be remitted to the statutory authority and cannot be diverted or retained by the Corporate Debtor or its liquidator.
The Appellant, being the Regional Director of the Employees’ State Insurance Corporation, had filed an appeal challenging the order of the Adjudicating Authority, which dismissed its application seeking exclusion of ESI dues from the liquidation estate of the Corporate Debtor. The Appellant had contended that the amounts deducted towards ESI contributions from the employees’ wages were held in trust and, therefore, did not form part of the liquidation estate under Section 36(4)(a)(i) of the Insolvency and Bankruptcy Code, 2016. The Adjudicating Authority had rejected this contention, observing that the Liquidator had correctly treated the Appellant as an operational unsecured creditor under the provisions of the Code and had proportionately admitted its claim. It was further held that ESI dues were not included within the definition of workmen’s dues under Section 53(1)(b) of the Code, except for provident fund, pension fund, and gratuity fund, and that there was no statutory provision granting ESI Corporation any special charge or priority.
Before the Appellate Tribunal, the Appellant argued that the Adjudicating Authority erred in not appreciating that the contributions deducted from employees’ wages are held in trust by the Corporate Debtor and hence cannot be treated as assets forming part of the liquidation estate. Reliance was placed on the decision of a coordinate Bench in Nurani Subramanian Suryanarayanan, Liquidator of M/s Care IT Solutions Pvt. Ltd. v. Employees State Insurance Corporation, wherein it was held that both employer’s and employee’s ESI contributions lying with the Corporate Debtor constitute trust property and therefore fall within the exception carved out under Section 36(4)(a)(i) of the Code.
The Appellate Tribunal accepted the Appellant’s contention and held that the issue was squarely covered by the earlier precedent in Nurani Subramanian. It was observed that the judgments relied upon by the Respondent were distinguishable as they did not deal with the treatment of ESI dues under the IBC. Consequently, the Appellate Tribunal allowed the appeal, set aside the impugned order of the Adjudicating Authority, and directed that the ESI contributions held in trust shall not form part of the liquidation estate of the Corporate Debtor. Each party was directed to bear its own costs, and all pending interlocutory applications were disposed of.
Mr. Manav Goyal, Mr. Vaibhav Manu Srivastava and Ms. Amrita Sony, Advocates, represented the Appellant.
Mr. Kritiman Singh, Sr. Advocate, with Mr. Sahil Sood, Advocate, appeared for the Respondent No. 1.
Ms. Shruti Shivkumar, Advocate, appeared for the Bank/Intervenor.
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