ESI Contributions Are Trust Assets Excluded under IBC Sec 36(4)(a)(i) | NCLAT Sets Aside Plan Paying 1% ESI Claim : NCLAT

The National Company Law Appellate Tribunal (NCLAT), Chennai Bench, held that Employees' State Insurance (ESI) contributions payable by a corporate debtor constitute trust assets held for the benefit of employees and are therefore excluded from the liquidation estate under Section 36(4)(a)(i) of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal set aside the impugned order that had treated such statutory dues as ordinary operational creditor claims and permitted payment of only 1% of the admitted amount under a resolution plan.

Background & Facts

The Dispute

The dispute arose from the treatment of ESI contributions payable by M/s. Sri Lakshmi Srinivasa Jute Mills Private Limited (the corporate debtor) during its corporate insolvency resolution process (CIRP). The Employees State Insurance Corporation (ESIC) claimed Rs.13,38,30,616/- towards statutory ESI contributions for the period 2012-2018. The resolution plan approved by the NCLT, Amaravati Bench, allocated only 1% of this claim, i.e. Rs.13,38,306/-, treating the amount as an ordinary government/operational creditor dues. ESIC appealed contending that the contributions are trust monies and must be excluded from the liquidation estate.

Key Facts

• The corporate debtor operated four units covered under the ESI Act.
• Prior to commencement of CIRP, the corporate debtor had incurred substantial statutory liabilities towards ESI contributions for the period 2012-2018.
• Based on monthly contribution returns and statutory assessment notices, a cumulative amount of Rs.13,38,30,616/- was due and payable to ESIC.
• On 16.03.2022, the corporate debtor was admitted into CIRP by the NCLT, Amaravati Bench in CP(IB) No.73/9/AMR/2020.
• Shri Maligi Madhusudhana Reddy was appointed Interim Resolution Professional (IRP) on the same date.
• The IRP made a public announcement on 17.03.2022 inviting claims from creditors.
• On 07.04.2022, ESIC submitted its claim in Form-B before the IRP, claiming Rs.13,38,30,616/- as an operational creditor.
• The 1st meeting of the Committee of Creditors (CoC) was held on 18.04.2022, wherein the IRP’s appointment as Resolution Professional (RP) was approved with 100% voting share.
• On 24.05.2022, the RP issued a public announcement in Form-G inviting Expressions of Interest from prospective resolution applicants.
• Nine prospective resolution applicants submitted responses; on 18.06.2022 the RP issued the final list of eligible applicants, which included M/s. Agrigo Trading Private Limited.
• During the CIRP, the Recovery Officer of ESIC issued attachment notices dated 29.06.2022 in respect of the corporate debtor’s properties.
• By communication dated 30.06.2022, the RP informed ESIC that a moratorium under Section 14 of the IBC had been declared, prompting ESIC to withdraw the attachment notices.
• M/s. Agrigo Trading Private Limited submitted its resolution plan on 22.07.2022.
• The 4th CoC meeting held on 30.07.2022 approved the resolution plan through e-voting with 100% voting share.
• By order dated 01.09.2022, the NCLT, Amaravati Bench approved the resolution plan involving a total sum of Rs.21,51,65,246/-.
• On 13.09.2022, the RP informed ESIC that its admitted claim of Rs.13,38,30,616/- had been treated under the plan as government dues/operational creditor dues, against which only 1%, amounting to Rs.13,38,306/-, had been allowed.
• The first tranche of amounts under the resolution plan was disbursed to creditors on 25th and 26th October 2022.

Procedural History

• 16.03.2022: Admission of corporate debtor into CIRP (CP(IB) No.73/9/AMR/2020) by NCLT, Amaravati Bench.
• 17.03.2022: IRP’s public announcement inviting claims.
• 07.04.2022: ESIC files claim in Form-B for Rs.13,38,30,616/-.
• 18.04.2022: 1st CoC meeting; IRP confirmed as RP.
• 24.05.2022: RP issues Form-G announcement for EOI.
• 18.06.2022: Final list of eligible resolution applicants published, including Agrigo Trading.
• 29.06.2022: ESIC issues attachment notices.
• 30.06.2022: RP communicates moratorium under Section 14 IBC; ESIC withdraws notices.
• 22.07.2022: Agrigo Trading submits resolution plan.
• 30.07.2022: 4th CoC meeting approves plan with 100% voting.
• 01.09.2022: NCLT, Amaravati Bench approves resolution plan (IA No.183/2022 in CP(IB) No.73/9/AMR/2020).
• 13.09.2022: RP informs ESIC that only 1% of claim (Rs.13,38,306/-) is allowed under plan.
• 25-26.10.2022: First tranche of plan disbursed to creditors.
• 25.09.2026: Judgment of NCLAT, Chennai Bench delivered.

Relief Sought

ESIC sought to set aside the impugned order dated 01.09.2022, to direct the RP to consider its claim under Section 36(4)(a)(i) of the IBC (or alternatively as workmen’s dues), to re-determine and re-assess the dues of creditors after giving priority to ESIC’s claim, and to pass such further orders as may be deemed fit.

The Legal Issue

The central question was whether the Employees' State Insurance contributions payable by a corporate debtor, comprising amounts deducted from employees’ wages and required to be remitted to ESIC, constitute ordinary operational debt forming part of the liquidation estate, or whether such amounts are required to be excluded from the liquidation estate by virtue of Section 36(4)(a)(i) of the Insolvency and Bankruptcy Code, 2016.

Arguments Presented

For the Appellant (ESIC)

ESIC contended that its statutory contributions are trust monies held for the benefit of employees under the ESI Act and therefore fall within the exclusion contemplated under Section 36(4)(a)(i) of the IBC, which excludes assets owned by a third party but in possession of the corporate debtor, including assets held in trust for third parties. It argued that the mere filing of a claim in Form-B does not alter the substantive character of the amount, which remains third-party funds. ESIC further relied on Section 94 of the ESI Act, which confers statutory priority on contributions, and on precedents such as Nurani Subramanian Suryanarayanan, Liquidator of M/s. Care IT Solutions Pvt. Ltd. v. Employees State Insurance Corporation & Ors., where the Tribunal held that ESI contributions fall within the exclusion under Section 36(4)(a)(i) of the IBC. In the alternative, ESIC submitted that even if not excluded, the dues ought to be treated as workmen’s dues under Section 53(1)(a) and/or Section 53(1)(b) of the IBC. ESIC also complained that, despite its request to be kept informed of CoC meetings after 17.05.2022, it was not afforded an effective opportunity to object to the resolution plan.

For the Respondents (Corporate Debtor, Resolution Professional, and Successful Resolution Applicant)

The respondents argued that, having submitted its claim in Form-B, ESIC had rightly been treated as an unsecured operational creditor under the IBC, and that to claim a different status it ought to have filed in Form-F applicable to “Other Creditors”. They contended that Section 36(4)(a)(iii) of the IBC specifically mentions provident fund, pension fund and gratuity fund, and that ESI contributions are distinct insurance contributions and cannot be equated with those funds. The respondents further submitted that the ESI Act does not create a statutory first charge over the corporate debtor’s properties in favour of ESIC, and that the IBC’s overriding effect under Section 238 renders other statutes subordinate. They relied on Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India to assert that the differential treatment between financial and operational creditors is constitutionally valid, and argued that the resolution plan had already been implemented, creating substantial equities in favour of the successful resolution applicant that ought not to be disturbed.

The Court's Analysis

The Tribunal began by noting that the issue was no longer res integra, having been squarely covered by its own earlier decision in Nurani Subramanian Suryanarayanan, Liquidator of M/s. Care IT Solutions Pvt. Ltd. v. Employees State Insurance Corporation & Ors., TA (AT) No.212/2021, CA (AT) (Ins) No.116/2020, decided on 18.07.2024. In that decision, the Tribunal considered the interplay between Section 40(4) of the Employees’ State Insurance Act, 1948 and Section 36(4)(a)(i) of the IBC and held that the ESI amounts contributed by the employer as well as the employee, lying with the corporate debtor, are held in trust and consequently fall within the exclusion contained in Section 36(4)(a)(i) of the IBC. The amounts so held cannot, therefore, form part of the liquidation estate available for distribution under Section 53 of the Code.

The Tribunal reaffirmed this principle in its principal bench judgment dated 24.09.2005 in Regional Director, ESI Corporation v. Manish Kumar Bhagat, Liquidator, Gupta Dyeing & Printing Mills Pvt. Ltd., where it allowed an appeal on similar grounds. Applying that precedent, the Tribunal found that the mere fact that ESIC submitted its claim in Form-B and that the claim was consequently described as an operational creditor claim cannot alter the substantive character of the amount in question. The form prescribed for submission of a claim is procedural in nature and cannot convert an amount statutorily required to be held for the benefit of employees into an asset beneficially belonging to the corporate debtor.

The Tribunal rejected the respondents’ contention that, having filed in Form-B, ESIC is estopped from asserting the benefit of Section 36(4)(a)(i). It held that the procedural form does not override substantive rights under the ESI Act and the IBC. Furthermore, the argument that Section 36(4)(a)(iii) mentions only provident, pension and gratuity funds does not advance the respondents’ case, because the exclusion flows from the independent operation of Section 36(4)(a)(i) when the statutory character of ESI contributions is examined in the light of Section 40(4) of the ESI Act, as explained in the Nurani Subramanian decision and reaffirmed in the Regional Director, ESI Corporation case.

Consequently, the Tribunal concluded that the ESI contributions, being amounts held by the corporate debtor in trust for the beneficiaries contemplated under the ESI Act, will not constitute part of the assets of the corporate debtor and hence cannot be subjected to distribution under the waterfall mechanism contained in Section 53 of the IBC. The resolution plan could not have treated the amounts due to ESIC, which lay outside the estate of the corporate debtor, as an ordinary government/operational creditor claim so as to provide for payment of only a fraction thereof under the plan on the footing that the entire claim will have to be paid in accordance with the waterfall mechanism under Section 53 of the IBC.

"The ESI contributions, being amounts held by the Corporate Debtor in trust for the beneficiaries contemplated under the ESI Act, will not constitute part of the assets of the Corporate Debtor and hence cannot be subjected to distribution under the waterfall mechanism contained in Section 53 of the I&B Code."

Therefore, the treatment of the said amount in the approved resolution plan requires reconsideration.

The Verdict

The appeal is allowed. The impugned order dated 01.09.2022 passed by the National Company Law Tribunal, Amaravati Bench in IA No.183 of 2022 in CP(IB) No.73/9/AMR/2020, insofar as it approves the resolution plan treating the appellant’s ESI contributions as ordinary government/operational creditor dues and provides for payment of only 1% thereof, is set aside to that extent. The resolution professional/successful resolution applicant shall give effect to the present order in respect of the ESI contributions which fall within the scope of Section 40(4) of the ESI Act, 1948 read with Section 36(4)(a)(i) of the IBC. The exact amount, if any, qualifying for such exclusion shall be determined on the basis of the statutory records and the contribution period in accordance with law. The admitted claim amounts to Rs.13,38,30,616/-, of which only Rs.13,38,306/- (1%) was allowed under the impugned plan.

What This Means For Similar Cases

Statutory Employee Benefits Are Trust Assets

The judgment clarifies that contributions under statutes such as the ESI Act, which are intended for the benefit of employees and held in trust, are excluded from the liquidation estate under Section 36(4)(a)(i) of the IBC. Practitioners must now argue that such statutory dues are not ordinary operational debts and should not be subjected to the distribution waterfall.

• Identify whether the contribution is held in trust for a third party under the relevant statute.
• Assert exclusion under Section 36(4)(a)(i) of the IBC at the outset of CIRP proceedings.
• Monitor that the resolution plan does not dilute such trust assets without proper valuation.

Form of Claim Does Not Alter Substantive Rights

The Tribunal emphasized that filing a claim in a particular form (e.g., Form-B for operational creditors) is a procedural compliance and cannot change the substantive character of the amount. Consequently, creditors should not be precluded from asserting a trust-based exclusion merely because they used the operational creditor form.

• File claims in the appropriate form to preserve procedural rights, but simultaneously plead the substantive basis for exclusion.
• Be prepared to counter objections that the claim form estops the creditor from seeking a different treatment.
• Rely on precedent such as Nurani Subramanian to substantiate that the form does not override statutory trust nature.

Priority of ESI Contributions Under IBC

By relying on Section 94 of the ESI Act, which confers statutory priority, the judgment reinforces that employee-benefit contributions enjoy a preferential status in insolvency proceedings. This aligns with a broader trend of treating employee-related statutory dues as trust assets.

• Cite Section 94 ESI Act to argue for priority over ordinary governmental dues.
• In the alternative, plead treatment as workmen’s dues under Section 53(1)(a) or (b) of the IBC.
• Ensure that any resolution plan provides for full payment of such trust assets before distribution to other creditors.