Tribunal Rules ESI Dues Held in Trust, Excluded from Liquidation Estate
In a significant decision, the National Company Law Appellate Tribunal (NCLAT) has set aside the earlier order of the National Company Law Tribunal (NCLT), which had approved a resolution plan treating Employees State Insurance (ESI) contributions of Sri Lakshmi Srinivasa Jute Mills as ordinary operational debts. The ruling emphasizes that such contributions, held by the corporate debtor, are amounts held in trust and therefore excluded from the liquidation estate, not subject to the usual distribution under the Insolvency and Bankruptcy Code (IBC).
The NCLAT bench, consisting of Justice N. Seshasayee and Jatindranath Swain, delivered the judgment on September 25, 2026, in response to an appeal filed by the Employees State Insurance Corporation (ESIC). The case revolved around a cumulative claim of Rs. 13.38 crore in ESI contributions owed by the corporate debtor prior to the initiation of Corporate Insolvency Resolution Process (CIRP).
The Tribunal found that the resolution plan, which allowed only 1% of the admitted ESI dues, failed to recognize the statutory nature of ESI contributions. According to the judgment, these contributions cannot be treated as ordinary operational debts because they are collected for the benefit of employees and are required to be deposited into the ESI fund as per the Employees' State Insurance Act, 1948.
The NCLAT cited its own precedents, including the decision in "Nurani Subramanian Suryanarayanan v. Employees State Insurance Corporation," which established that such contributions are held in trust and should be excluded from the liquidation estate under Section 36(4)(a)(i) of the IBC. Consequently, the resolution plan could not subject these contributions to the waterfall mechanism of Section 53 of the IBC.
The Tribunal's decision mandates the Resolution Professional and the Successful Resolution Applicant to reassess the treatment of ESI contributions in the plan. The exact qualifying amounts for exclusion from the estate will be determined based on statutory records and contribution periods.
This ruling reinforces the protection of employee-related statutory dues and clarifies their treatment under insolvency proceedings, ensuring that such funds are preserved for their intended purpose.
Bottom Line :
Insolvency and Bankruptcy Code, 2016 - ESI contributions payable under Employees' State Insurance Act, 1948, including employer's and employees' contributions held by Corporate Debtor, are amounts held in trust and excluded from liquidation estate under Section 36(4)(a)(i) of IBC - Such dues cannot be treated as ordinary Government/Operational Creditor dues merely because claim was filed in Form B - Resolution Plan granting only 1% of such admitted dues set aside to that extent.
Statutory provision(s): Insolvency and Bankruptcy Code, 2016 Section 36(4)(a)(i), Section 30, Section 53; Employees' State Insurance Act, 1948 Section 40(4).
