ESI Contributions Held in Trust Cannot Be Treated as Ordinary Operational Debt in IBC Resolution Plans, NCLAT Rules

M/s. Sri Lakshmi Srinivasa Jute Mills Private Limited (“Corporate Debtor”) had statutory liabilities towards ESI contributions for the period 2012–2018, amounting to ₹13,38,30,616, in respect of four units covered under the Employees’ State Insurance Act, 1948 (“ESI Act”).

The Corporate Debtor was admitted into CIRP on 16 March 2022, and the Employees State Insurance Corporation (“ESIC”) submitted its claim in Form B as an operational creditor.

A resolution plan submitted by M/s. Agrigo Trading Private Limited was approved by the Committee of Creditors with 100% voting share and subsequently approved by the NCLT on 1 September 2022 for an aggregate amount of ₹21,51,65,246.

Under the approved plan, ESIC’s admitted claim was classified as Government dues/operational creditor dues, with only 1%—₹13,38,306—provided for payment.

Whether ESI contributions payable by the Corporate Debtor, including employee contributions deducted from wages, were amounts held in trust for statutory beneficiaries and consequently excluded from the liquidation estate under Section 36(4)(a)(i) of the IBC?

Whether ESIC’s submission of its claim in Form B and its classification as an operational creditor prevented it from subsequently asserting the substantive exclusion under Section 36(4)(a)(i) of the IBC?

Whether the approved resolution plan could treat the ESI contributions as ordinary Government/operational creditor dues and provide for payment of only 1% of the admitted claim?

The Tribunal applied Section 40(4) of the Employees’ State Insurance Act, 1948, under which ESI contributions are required to be held and applied for the statutory purposes and beneficiaries contemplated by the Act, together with Section 36(4)(a)(i) of the IBC, which excludes from the liquidation estate assets owned by a third party but in the possession of the corporate debtor, including assets held in trust for third parties.

Such amounts consequently cannot form part of the liquidation estate or be distributed under the waterfall mechanism in Section 53 of the IBC.

The Tribunal relied principally on Nurani Subramanian Suryanarayanan, Liquidator of M/s. Care IT Solutions Pvt. Ltd. v. Employees State Insurance Corporation & Ors., TA (AT) No. 212/2021 and CA (AT) (Ins) No. 116/2020, decided on 18 July 2024, and Regional Director, ESI Corporation v. Manish Kumar Bhagat, Liquidator, Gupta Dyeing & Printing Mills Pvt. Ltd., Comp. App. (AT) (Ins) No. 301/2024, which held that employer and employee ESI contributions lying with the corporate debtor are trust amounts excluded under Section 36(4)(a)(i).

The Tribunal further held that the procedural filing of a claim in Form B could not alter the substantive legal character of the amounts.

The Tribunal held that the legal character of ESI contributions depended on the ESI Act and the nature of the funds, not on the form used to lodge the claim in the CIRP.

Since the contributions were statutorily collected and required to be held for the benefit of employees and other beneficiaries under the ESI scheme, they constituted trust amounts rather than assets beneficially belonging to the Corporate Debtor.

The specific reference in Section 36(4)(a)(iii) to provident, pension and gratuity funds did not exclude the independent operation of Section 36(4)(a)(i); the exclusion of ESI contributions arose from their status as third-party trust property read with Section 40(4) of the ESI Act.

Accordingly, the resolution plan could not treat the entire ESI claim as an ordinary unsecured operational debt subject to the Section 53 distribution framework and provide only 1% thereof.

The plan’s treatment therefore required reconsideration, limited to the amounts qualifying under Section 40(4) of the ESI Act.

The NCLT’s order dated 1 September 2022 was set aside to the extent that it approved treatment of ESIC’s ESI contributions as ordinary Government/operational creditor dues and provided for payment of only 1% of the claim.

The Resolution Professional and the Successful Resolution Applicant were directed to give effect to the Tribunal’s ruling in respect of ESI contributions falling within Section 40(4) of the ESI Act read with Section 36(4)(a)(i) of the IBC.

The precise amount qualifying for exclusion was directed to be determined from the statutory records and relevant contribution period in accordance with law.

Pending interlocutory applications were disposed of.