ESI Amounts Are 'Trust Property', Not Part Of Corporate Debtor's Liquidation Estate: NCLAT New Delhi
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Rakesh Kumar Jain (Judicial Member), Justice Mohammad Faiz Alam Khan (Judicial Member), and Naresh Salecha (Technical Member), has held that Employees’ State Insurance (ESI) amounts are “trust property” and cannot be treated as part of the corporate debtor’s liquidation estate under the Insolvency and Bankruptcy Code (IBC).
Background
The appeal was filed by the Regional Director, ESI Corporation, challenging the order of the Adjudicating Authority (NCLT, Ahmedabad Bench), which had dismissed its plea to exclude ESI dues from the liquidation estate of M/s Gupta Dyeing & Printing Mills Pvt. Ltd. The liquidator had admitted ESI Corporation’s claim of ₹1.20 crore as an operational creditor. The NCLT, in rejecting the application, had observed that ESI dues were not covered under Section 36(4) of the IBC, except for provident fund, pension fund, and gratuity fund, and therefore must be treated like other operational debt. Aggrieved, the ESI Corporation appealed before NCLAT.
Appellant’s Submissions
The appellant argued that the Adjudicating Authority erred in ignoring Section 36(4)(a)(i) of the IBC, which provides that assets held in trust for third parties do not form part of the liquidation estate. It relied on the earlier NCLAT ruling in Nurani Subramanian Suryanarayanan v. Employees State Insurance Corporation (TA (AT) No. 212/2021, decided on 18.07.2024), where it was held that ESI contributions, collected by the corporate debtor, are held in trust under Section 40(4) of the ESI Act, 1948, and must be excluded from the liquidation estate.
Respondent’s Submissions
The liquidator opposed the appeal, contending that the claim was rightly admitted as that of an operational creditor. It relied on Supreme Court judgments in Moser Baer Karamchari Union v. Union of India (2023), Sunil Kumar Jain v. Sundaresh Bhatt (2022), and K. Kishan v. Vijay Nirman Company Pvt. Ltd. (2018), to argue that the dues cannot be granted any special treatment beyond what is expressly provided under IBC.
Observations of the NCLAT
The Tribunal noted that the issue was squarely covered by its earlier decision in Nurani Subramanian Suryanarayanan, where it had categorically held that ESI amounts collected from employers and employees are deemed to be held in trust under Section 40(4) of the ESI Act. Applying Section 36(4)(a)(i) of IBC, such amounts cannot form part of the liquidation estate. It further clarified that the judgments relied upon by the respondent were inapplicable as they did not deal with the treatment of ESI dues.
The NCLAT set aside the impugned NCLT order and allowed the appeal. It held: “The ESI amounts, contributed both by the employer and employee, lying with the company in liquidation, are held in trust under Section 40(4) of the ESI Act, 1948, and therefore do not form part of the liquidation estate for distribution under Section 53 of the IBC.” Accordingly, ESI dues were excluded from the liquidation estate, and the appeal was allowed with no order as to costs.
Appearance
For Appellant: Mr. Manav Goyal Mr. Vaibhav Manu Srivastava & Ms. Amrita Sony, Advocates
For Respondents: Mr. Kritiman Singh, Sr. Advocate with Mr. Sahil Sood, Advocates for R-1.
Ms. Shruti Shivkumar, Advocate for Bank/Intervenor.
Cause Title: Regional Director, ESI Corporation V. Manish Kumar, Bhagat Liquidator, Gupta Dyeing & Printing Mills
Case No: Comp. App. (AT) (Ins) No. 301 of 2024 & I.A. No. 1013, 4529 of 2024
Coram: Justice Rakesh Kumar Jain (Judicial Member), Justice Mohammad Faiz Alam Khan (Judicial Member), Naresh Salecha (Technical Member)
